An Introduction to the Competition Law and Economics of “Free” with Damien Geradin

Benjamin Edelman and Damien Geradin. An Introduction to the Competition Law and Economics of ‘Free’.  Antitrust Chronicle, Competition Policy International.  August 2018.

Many of the largest and most successful businesses today rely on providing services at no charge to at least a portion of their users. Consider companies as diverse as Dropbox, Facebook, Google, LinkedIn, The Guardian, Wikipedia, and the Yellow Pages.

For consumers, it is easy to celebrate free service. At least in the short term, free services are often high quality, and users find a zero price virtually irresistible.

But long-term assessments could differ, particularly if the free service reduces quality and consumer choice. In this short paper, we examine these concerns.  Some highlights:

First, “free” service tends to be free only in terms of currency.  Consumers typically pay in other ways, such as seeing advertising and providing data, though these payments tend to be more difficult to measure.

Second, free service sometimes exacerbates market concentration.  Most notably, free service impedes a natural strategy for entrants: offer a similar product or service at a lower price.  Entrants usually can’t pay users to accept their service.  (That would tend to attract undesirable users who might even discard the product without trying it.)  As a result, prices are stuck at zero, entry may be more difficult, effectively shielding incumbents from entry.

In this short paper, we examine the competition economics of “free” — how competition works in affected markets, what role competition policy might have and what approach it should take, and finally how competitors and prospective competitors can compete with “free.” Our bottom line: While free service has undeniable appeal for consumers, it can also impede competition, and especially entry. Competition authorities should be correspondingly attuned to allegations arising out of “free” service and should, at least, enforce existing doctrines strictly in affected markets.

English Translation of FAS Russia Decision in Yandex v. Google

In September 2015, the Russian Federal Antimonopoly Service announced its decision that Google had violated Russian law by tying its mobile apps to Google Play and setting additional restrictions on mobile device manufacturers, including limiting what other apps they install and how they configure those apps and devices. These topics are of great interest to me since I was the first to publicly distribute the Mobile Application Distribution Agreements, and because I explored related questions at length in my 2015 article Does Google Leverage Market Power Through Tying and Bundling? and more recently my working paper Android and Competition Law: Exploring and Assessing Google’s Practices in Mobile (with Damien Geradin).

For those who wish to understand the reasoning and conclusions of Russia’s FAS, one key limitation is that the September 2015 decision is available only in Russian. While the case document library summarizes key facts, allegations, and procedural developments, that’s no substitute for the full primary source documents.

In the course of expanding my Android and Competition Law paper, I recently obtained an English translation of the September 2015 decision. The decision is unofficial but, as best I can tell, accurate and reliable. It suffers redactions, but the original in Russian has the same limitation. I offer it here to anyone interested:

Yandex v. Google – Resolution on Case No. 1-14-21/00-11-15 – resolution of September 18, 2015 – unofficial English translation

EC Statement of Objections on Google’s Tactics in Mobile

Today the European Commission announced a Statement of Objections to Google’s approach to Android mobile licensing and applications. Broadly, the EC’s concerns arise from Google’s contractual restrictions on phone manufacturers — requiring them to install certain apps, in certain settings, if they want other apps; preventing customizations that manufacturers would prefer; requiring manufacturers to set Google Search as the sole and default search provider.

These questions are near and dear to me because, so far as I know, I broke the story of Google’s Mobile Application Distribution Agreement contracts, the previously-secret documents that embody most of the restrictions DG Comp challenges. I described these documents in a February 2014 post:

Google claims that its Android mobile operating system is “open” and “open source”–hence a benefit to competition. Little-known contract restrictions reveal otherwise: In order to obtain key mobile apps, including Google’s own Search, Maps, and YouTube, manufacturers must agree to install all the apps Google specifies, with the prominence Google requires, including setting these apps as default where Google instructs. It’s a classic tie and an instance of full line forcing: If a phone manufacturer wants any of the apps Google offers, it must take the others also.

I offered the HTC MADA and Samsung MADA, both as they stood as of year-end 2010. So far as I know, these are the only MADA’s available on the web to this day; while Google now admits that MADAs exist (a fact unknown to the public before I posted these documents), no one has circulated any newer versions. Occasional news reports discuss new versions, most notably a September 2014 piece from The Information’s Amir Efrati reporting new and growing requirements embodied in "confidential documents viewed by The Information" but unfortunately not available to the public. So the documents I posted remain the best available evidence of the relevant restrictions.

While news reports and the EC SO offer some sense of MADA requirements, there’s no substitute for reading the plain language of the underlying contracts. I cited and quoted key sections in my 2014 piece:

"Devices may only be distributed if all Google Applications [listed elsewhere in the agreement] … are pre-installed on the Device." See MADA section 2.1.

The phone manufacturer must “preload all Google Applications approved in the applicable Territory … on each device.” See MADA section 3.4(1).

The phone manufacturer must place “Google’s Search and the Android Market Client icon [Google Play] … at least on the panel immediately adjacent to the Default Home Screen,” with "all other Google Applications … no more than one level below the Phone Top." See MADA Section 3.4(2)-(3).

The phone manufacturer must set “Google Search … as the default search provider for all Web search access points.” See MADA Section 3.4(4).

Google’s Network Location Provider service must be preloaded and the default. See MADA Section 3.8(c).

"Naked exclusion" and impeding competition

Competition lawyers offer the term "naked exclusion" for conduct unabashedly intended to exclude rivals, for which a dominant firm offers no efficiency justification. That diagnosis matches my understanding of these tactics, as the MADAs give no suggestion that Google is trying to help consumers or anyone else. Rather, the MADAs appear to be intended to push Google’s own businesses and prevent competitors from getting traction.

Consider the impact on competing firms. Suppose some competing app maker sought to increase use of one of its apps, say Yahoo seeking greater usage of Yahoo Maps. Yahoo might reasonably offer a bonus payment to, say, Samsung as an incentive for featuring the Yahoo Maps app on new phones sold via, say, AT&T. To encourage users to give Yahoo Maps a serious try, Yahoo would want its service to be the only preinstalled mapping app; otherwise, Yahoo would rightly anticipate that many users would discard Yahoo Maps and go straight to the familiar Google Maps. For $2 per phone, Samsung might be happy to remove Google Maps and preinstall Yahoo Maps, figuring any dissatisfied consumer could download Google Maps. And if some of that $2 was passed back to consumers via a lower price for purchasing the phone, consumers might be pleased too. Crucially, Google’s MADA prevents this effort and others like it. In particular, the MADA requirements prevent Samsung from removing any of the listed Google apps, Google Maps key among them. And if Samsung can only offer Yahoo the option to be a second preinstalled mapping app, it’s much less clear that Yahoo is willing to pay. In fact, based on Yahoo’s reasonable projections of user response, there may no longer be a price that Yahoo is willing to pay and Samsung is willing to accept.

The first key effect of the MADAs, then, is that they prevent new entrants and other competitors from paying to get exclusive placement. This impedes competition and entry, and streamlines Google’s dominance.

Meanwhile, the MADAs correspondingly reduce pressure on Google to provide market-leading functionality and quality. Some competing apps might be a little bit better than Google’s offerings, and a phone manufacturer might correctly assess that consumers would prefer those alternatives. But phone manufacturers can’t switch to those offerings because the MADA disallows those changes. This barrier to switching in turn discourages competing app makers from even trying to compete. After all, if they can’t get traction even when their apps are genuinely better, they won’t be able to raise capital and won’t develop the improvements in the first place.

Finally, the MADAs prevent Google from needing to pay to get and retain preferred placements and defaults. On desktop computers, search engines pay to be a browser’s default — giving additional revenue to a computer manufacturer, and reducing device cost. But MADAs allow Google to require that it be the default search provider, and require that its apps be preinstalled and prominent, all without payment to phone manufacturers.

Assessing Google’s responses

This week reporters conveyed to me Google’s responses to the EC’s SO. First, Google argued that it is merely requiring that its apps be preinstalled, not ruling out the possibility that other apps may be preinstalled too. That defense has three key weaknesses.

  • Some MADA provisions explicitly do require that Google functions be the sole or default in their spheres. Consider the requirement that Google Search be the default search provider for all Web search access points (MADA Section 3.4(4)) and the requirement that Google’s Network Location Provider service must be preloaded and default (MADA Section 3.8(c)). One can hardly overstate the importance of these two functions. Search is the most natural way to monetize users’ activities and is the natural gateway to other functions and services. Meanwhile, location providers are the crucial translation between a phone’s sensors and its inferences about the user’s geographic location — collecting and aggregating location data with exceptional commercial value though of course also special privacy consequences. In these two crucial areas, Google does exactly what its defense claims it does not — requiring not only that its services be installed, but that they be installed as the sole and exclusive default. We are fortunate to be able to read the MADAs (HTC, Samsung) to see these requirements embodied in contract language.
  • The possibility of a more intrusive restriction does nothing to deny the harm from the approach Google chose. Google sketches a different restriction on competition that would cause even larger harm — requiring not just preinstallation of Google apps but explicit contractual exclusion of competitors. But the possibility of a worse alternative does not mean Google’s approach is permitted.
  • Google’s argument runs counter to settled European competition law. Consider experience from prior EC proceedings against Microsoft. Microsoft always allowed OEM’s to install other web browsers and other media players. Nonetheless Microsoft faced EC penalties for requiring that OEM’s include Microsoft’s browser and media player. The law of the land, for better or for worse, is that dominant firms may not invoke this approach.

Second, Google told reporters that its tactics are necessary to protect the health of the Android ecosystem and to build and retain consumer trust. But this argument strains credibility. Would the Android ecosystem truly be less reliable or trustworthy if some phones came with, say, Yahoo Maps? The better assessment is that Google imposes MADA restrictions to advance its business interests. To evaluate these alternative understandings of Google’s conduct, one might depose Google employees or better yet read contemporaneous documents. Beginning in 2010, Skyhook litigation revealed some of Google’s internal email discussions in this area, revealing reveal that their purpose is competitive — "using compatibility as a club to make them [phone makers] do things we want." Further evidence against Google’s ecosystem/trust argument comes from Android’s other notable ecosystem weaknesses — from brazenly counterfeit apps to confusingly inconsistent user interfaces. Allowing those problems to fester for years, Google cannot plausibly claim significant consumer confusion or ecosystem harm from, say, a competing maps app clearly labeled as such.

Third, Google argued that dissatisfied phone manufacturers can always install core Android without any Google Mobile Services and hence without the MADA obligations. But this approach ignores commercial realities. In wealthy markets such as the EC and the US, few customers would accept an Android phone without Google Play, the app store necessary to install other apps. Without Google Play, consumers cannot get the Facebook app, the Pandora, Uber, and so on. Such a limited phone would be a nonstarter for mainstream users. Amazon’s Fire flop reveals that even Amazon, with a trusted name and distinctive positioning, could not offer a viable phone without Google Play access to install other apps. Conversely, consider how much more attractive users would have found Fire had they been able to use Google Play to get the benefit of third-party apps alongside the distinctive features Amazon provided. But Google’s MADA exactly prohibited that approach — converting a promising potential competitor into a weakling that quickly collapsed.

Looking ahead

One crucial next step is discussion of remedies — what exactly Google must do in order to correct the distortions its MADAs have created. Bloomberg reports Google reducing the number of apps phone manufacturers are required to preinstall and feature — but dropping losers like Google Plus is just tinkering around the edges.

The obvious first step is that Google should withdraw the MADA restrictions. With no more MADA, phone manufacturers could take the distinct Google apps that they want, and not others. Google has no proper reason to prevent a phone manufacturer from combining Google Play with, say, Yahoo Maps and Bing Search. Indeed, with Google’s search dominance increasingly protected from competition as Yahoo stumbles and Microsoft withdraws, these combinations are the most promising way to increase competition in mobile.

Next, it goes nearly without saying that Google should pay a substantial penalty. Billion-dollar fines have become routine in Europe’s competition cases against American tech giants, including for conduct far less brazen and less obviously calculated to impede competition. Anything less at this point would seem to be a slap on the wrist undermining the importance of the EC’s effort.

Most of all, a full remedy requires affirmative efforts to undo the harm from Google’s years of improper conduct. After Microsoft’s browser tactics were deemed unlawful, the company was for five years obliged to present a "ballot box" in which consumers affirmatively chose among the five most popular browsers — presented in random order with no default. It’s easy to envision a similar approach in mobile: Upon first activating a new smartphone, a user would choose among the top five maps apps, top five search engines, top five geolocation services, and so forth. These obligations would most naturally track all the verticals that Google has targeted through its MADA restrictions. As users saw these options, competing app makers would get a prominent opportunity to attract users at modest expense — beginning to restore the competition that Google has improperly foreclosed.

Finally, a remedy should undo the secrecy Google has imposed. I wrote in 2014 about the remarkable steps required to obtain the MADAs — documents whose very existence was purportedly confidential, and whose terms contradicted the public statements (and sworn testimony) of Google’s leaders. This secrecy prevented app developers, competitors and the general public from knowing and debating Google’s tactics and raising concerns for a prompt regulatory response. Furthermore, secrecy emboldened Google to invoke methods that would have been less attractive had they been subject to public scrutiny from the outset. As part of competition proceedings, Google should be compelled to publish key contracts, facilitating analysis and discussion by the interested public. Meanwhile, as John Gapper writes in the FT, it’s ironic for Google to claim that EU officials "could be better informed" when Google itself limits distribution of the most important documents.

Android and Competition Law: Exploring and Assessing Google’s Practices in Mobile

Edelman, Benjamin, and Damien Geradin. “Android and Competition Law: Exploring and Assessing Google’s Practices in Mobile.” European Competition Journal 12, nos. 2-3 (2016): 159-194.

Since its launch in 2007, Android has become the dominant mobile device operating system worldwide. In light of this commercial success and certain disputed business practices, Android has come under substantial attention from competition authorities. We present key aspects of Google’s strategy in mobile, focusing on Android-related practices that may have exclusionary effects. We then assess Google’s practices under competition law and, where appropriate, suggest remedies to right the violations we uncover.

Does Google Leverage Market Power Through Tying and Bundling?

Edelman, Benjamin. “Does Google Leverage Market Power Through Tying and Bundling?” Journal of Competition Law & Economics 11, no. 2 (June 2015): 365-400.

I examine Google’s pattern and practice of tying to leverage its dominance into new sectors. In particular, I show how Google used these tactics to enter numerous markets, to compel usage of its services, and often to dominate competing offerings. I explore the technical and commercial implementations of these practices, then identify their effects on competition. I conclude that Google’s tying tactics are suspect under antitrust law.

Google Inc. in 2014 (teaching materials) with Thomas Eisenmann

Edelman, Benjamin, and Thomas R. Eisenmann. “Google Inc. in 2014.” Harvard Business School Case 915-004, September 2014. (Revised June 2017.).(educator access at HBP.)

Describes Google’s history, business model, governance structure, corporate culture, and processes for managing innovation. Reviews Google’s recent strategic initiatives and the threats they pose to selected competitors. Asks what Google should do next.

Supplements:

Google Inc. in 2014 (Abridged) – Case (HBP 915005)

Google Inc. in 2014 — Role Supplement – Supplement (HBP 915017)

Teaching Materials:

Google Inc. in 2014 and Google Inc. in 2014 (Abridged) – Teaching Note (HBP 915011)

Google’s Tying and Bundling

Disclosure: I serve as a consultant to various companies that compete with Google. That work is ongoing and covers varied subjects, most commonly advertising fraud. I write on my own—not at the suggestion or request of any client, without approval or payment from any client.

Google often argues that “competition is one click away” — as if Google’s many successes result solely from competition on the merits. Let me offer a different perspective: After early success in search and search advertising, Google used its strength in those sectors to increase its likelihood of success elsewhere — even where competitors’ offerings were objectively preferable and even where consumers would have preferred alternatives had that choice been genuinely available.

For example, in September 2013 web sites buzzed with the news that users would be required to create Google+ social networking accounts to comment on YouTube videos. There was no obvious reason why a user should need to join Google’s social network in order to post a brief comment on a video. Indeed, for years users had routinely posted via separate YouTube accounts. Google claimed that improvements would increase the quality of YouTube comment discussions and to prevent spam, but there was no obvious reason why those benefits required using Google+. That said, critics quickly saw the strategic implication: Google+ was years late to the market; other social networking services were far better established and already enjoyed much more success. But Google could use its other powerful properties, YouTube among others, to increase the pressure for users to join Google+.

Nor was Google+ unusual in benefiting from Google’s other products. In the context of mobile phones and tablets, Google had established a series of restrictions requiring that if a manufacturer sought to install any Google service–such as Maps, YouTube, or the Google Play store for installing other apps from Google and others–the manufacturer must accept a variety of obligations. For example, the manufacturer must install all the Google apps that Google specified–even if the manufacturer preferred another app. Furthermore, Google required that apps icons be placed in the locations that Google specified, including multiple entries on the device’s prominent “home” screen. The device must use Google Location Services, not competitors’ offerings, even if competitors’ offerings were faster, more accurate, or more protective of privacy. And manufacturers must take all these actions for Google’s benefit without any payment from Google. As a result, competing apps had to struggle to reach users–resorting to soliciting user installations one-by-one, rather than faster and more predictable bulk installations by device manufacturers.

Most obviously, Google’s core search service systematically favors Google results. Search for a stock ticker symbol, and you’re encouraged to go to Google Finance. If a video is deemed relevant, it will almost always be from YouTube. And so on. Sometimes these services are just as good for consumers; sometimes, not. But for any user unwilling to spend extra time requesting other services–day in and day out, ad infinitum–Google’s offerings become the easy and obvious defaults in every affected sector. Yelp may be a little better or even a lot better. But when Google puts Google Local front and center, many users will go there instead.

Today I’m posting an article exploring a series of incidents where Google used similar methods–broadly, tying and bundling–to expand its dominance into additional markets. In each market, I present the details of Google’s approach, then assess concerns under antitrust law. Selected examples:

If a ___ wants ___ Then it must accept ___
If a consumer wants to use Google Search Google Finance, Images, Maps, News, Products, Shopping, YouTube, and more
If a mobile carrier wants to preinstall YouTube for Android Google Search, Google Maps (even if a competitor is willing to pay to be default)
If an advertiser wants to advertise on any AdWords Search Network Partner All AdWords Search Network sites (in whatever proportion Google specifies)
If an advertiser wants to advertise on Google Search as viewed on computers   Tablet placements and, with limited restrictions, smartphone placements
If an advertiser wants image ads Google Affiliate Network (historic)
If an advertiser wants a logo in search ads Google Checkout (historic)
If a video producer wants preferred video indexing YouTube hosting
If a web site publisher wants preferred search indexing Google Plus participation

My bottom line: Google’s use of tying portends a future of reduced choice, slower innovation, lower quality, and higher prices. To date, Google has focused its harshest terms on advertisers, but after paying Google some $60+ billion each year, advertisers recoup these expenses through higher prices to consumers. Meanwhile, if a broad class of opportunities are effectively off-limits to competitors because Google either has claimed those sectors or is positioned to be able to claim them whenever it chooses, the incentive to invest is sharply attenuated. These are exactly the practices that competition law seeks to prevent.

My full article:

Leveraging Market Power through Tying and Bundling: Does Google Behave Anti-Competitively?

(update: published as “Does Google Leverage Market Power Through Tying and Bundling?” Journal of Competition Law & Economics 11, no. 2 (June 2015): 365-400.)

Leveraging Market Power through Tying: Does Google Behave Anti-Competitively?

Edelman, Benjamin. “Leveraging Market Power through Tying: Does Google Behave Anti-Competitively?” Harvard Business School Working Paper, No. 14-112, May 2014.

I examine Google’s pattern and practice of tying to leverage its dominance into new sectors. In particular, I show how Google used these tactics to enter numerous markets, to compel usage of its services, and often to dominate competing offerings. I explore the technical and commercial implementations of these practices, then identify their effects on competition. I conclude that Google’s tying tactics are suspect under antitrust law.