Smith Experts Explain Google Antitrust Implications

Newswise — Amid back-to-back court cases, Google has been facing unprecedented federal government allegations of illegally monopolizing the marketplace – for its system for monetizing advertising and as an internet search monopolist (as ruled by Judge Amit P. Mehta in early August).

Advertising Antitrust

In the current case, the DOJ alleges Google unlawfully maintained a monopoly over the digital advertising market through its dominance in ad-tech software used to buy and sell online ads. “The optimal remedy would aim to restore competition in the ad-tech market,” says Clinical Professor of Finance David Kass, a former antitrust economist with the Federal Trade Commission. “Potential remedies include (1) structural remedies (divestitures) including breaking up Google's ad-tech business, and separating its ad buying and selling businesses, (2) behavioral remedies (conduct restrictions, data access requirements), and (3) regulatory oversight (monitor compliance).”

For investors in Google, the eventual remedy “may have a significant negative impact on revenues and profits and add to the volatility in its stock price until this case is resolved,” Kass says. “However, investors in Google's competitors may benefit if the case leads to more innovation and growth opportunities and it could also benefit advertisers by lowering their costs. This case could lead to a substantial reduction in Google's control over the ad-tech market with competitors gaining market share.”

Search Antitrust

Google in the previous case was ruled to have a monopoly in the market for general search services and general search text ads. And Google’s distribution agreements – its contracts with other companies, such as Apple, making Google their default search engine – are exclusive and have anticompetitive effects. In other words, “they serve to keep competitors out of the market for search services and search text ads,” says Research Professor Kislaya Prasad, academic director of Smith’s Center for Global Business.

Google, now entering a remedy phase, faces potential outcomes ranging from restrictions on deals it has with the likes of Apple to the forming of separate companies for products like Google’s Chrome browser and its Android operating system.

“It is important to keep sight of Judge Mehta’s decision and the behavior that was found to be problematic,” Prasad says. “Google never really had a satisfactory answer for why it was willing to pay vast sums of money through revenue sharing agreements – in the vicinity of $20 billion – to make Google the default search engine on browsers and mobile devices,” Prasad says. “Perhaps the most problematic such payment was to Apple, because Android and iPhone are the main competitors for mobile devices, and this does seem like a payment to prevent Apple from creating its own search engine.”

A Deeper Dive

In the following Q&A, Prasad and Smith Associate Professor of Marketing Bobby Zhou, who co-authored a recent study on antitrust regulation of digital markets, further examine the implications for Google, its competitors and consumers.

Should or how best can Google’s search be fixed to restore competition?

Zhou: Ending exclusive agreements with device manufacturers and browsers such as Apple and Firefox to set Google to be the default search option. Terminating these agreements would allow other search engines to compete more fairly. Breaking Up Google’s business units, specifically, separates Google’s search business from its other services, such as advertising and YouTube. This would reduce the company’s ability to leverage its dominance in search services to benefit its other businesses. Implementing mechanisms that give consumers more choice in selecting their default search engine, such as prompts during device setup, can reduce Google’s dominance.

Prasad: I think a likely outcome is that courts forbid problematic distribution agreements. Browsers would then be able to offer other search services or give consumers a choice of search provider. Companies would still be free to offer Google, and even to make it the default. However, companies like Apple have more of an incentive to develop their own search engine when they are no longer getting revenue from Google in exchange for the search data originating from its devices that Google is getting. Other options – such as splitting up Google – seem unnecessarily extreme. Some have suggested that Android or Chrome could be spun off, and there is some talk that the Department of Justice is going to propose this. Even if there is merit to splitting up Google, I don’t see this as being necessitated by the logic of the case. At the other extreme, forcing a choice of search engines would be good, but doesn’t seem to go far enough if this is not also accompanied by restrictions on revenue sharing.

What is most ideal for consumers amid the possibilities?

Zhou: Ending exclusive agreements that make Google the default search engine on devices and browsers might benefit consumers the most. First, consumers would have more options to choose from, rather than being automatically directed to Google. This can lead to a more personalized and satisfying search experience. Second, breaking the default status can reduce Google’s ability to leverage its dominance in search to benefit its other services, leading to a more balanced and fair market (especially regarding the ad market).

Prasad: Although Google has been a remarkable innovative company, more competition for search services would be desirable. Consider for example, a consumer with a privacy focus must jump through many hoops to install a search engine such as DuckDuckGo, which focuses on user privacy. Moreover, Google’s contracts with browsers and mobile providers makes it in their interest to keep Google as the default. If users can more easily access different browsers, and these browsers can improve search quality by scaling, then users can be better matched to the browser that is best for them. If it is indeed the case that Google is making monopoly profits from general search text ads, then advertisers would also benefit from more competition in the search services market.

To what extent and how does this case compare to the antitrust suit against Microsoft two decades ago – especially in terms of setting a precedent for the broader tech industry?

Zhou: This case is likely to have a far greater impact on all major technology platforms. Two decades ago, Microsoft was primarily considered as a productivity tool and software service provider. Its Internet Explorer (IE) did not really integrate well with Office Suites or any other major functions of the Windows system. It was the size (market share) of its operating system and its bundling of IE that resulted in the antitrust lawsuit. However, Google's search is deeply woven with its online advertising business, its online content services (YouTube, YouTube Music, Google News, etc.) and even its office productivity suite (Google Drive, Google Docs, etc.). It is the complementarity across all of Google's services around search that makes Google's dominance in search so much more defensible and harder to disentangle. Furthermore, network effects have long been established within each one of the major technology platforms such as Apple, Meta, X, Android. This implies that all these platforms might draw similar scrutiny like that on Google moving forward. By comparison, none of the other firms were like Microsoft 20 years ago, so its legal impact as a precedent was relatively limited.

Prasad: There are many similarities. Most crucially, a key issue in both cases is the use of contracts whose effect is to exclude competitors. However, there is a more subtle issue at work here. As technology advances court cases serve to adapt laws – in this instance the Sherman Act – to suit the circumstances. This sets the standard for what behavior is, and is not, acceptable within the new technological paradigm. In that sense, the final resolution of the case will be a signal to other companies. It will affect their behavior and may also embolden the DOJ to prosecute more cases.

Further key implications?

Zhou: I want to highlight one unique aspect of Google: It is in the business of connecting consumers with relevant information. As a result, it can capture so much of consumers' attention (time), which is currently the most prized asset. As long as consumers are able to find the relevant information reasonably quickly on Google, given this habit, it will be challenging to use the argument of consumer welfare being negatively affected by Google's search dominance to break it up. Regulators need to evaluate this case holistically, looking across all the main services Google provides, to make a compelling case of a clean break up (separation) of Google (different business units).

Prasad: Google has said it will appeal whatever judgment may come. However, the finding that Google is a monopolist will embolden other companies to take Google to court. This has already happened with Yelp. Although they previously did not have success, they have now gone to court again with a complaint that Google unfairly disadvantages search services like Yelp in its results. Other such lawsuits may be forthcoming. A possible consequence – undesirable, in my view – is that Google is so distracted by lawsuits that it turns away from what it does best, and what has made it one of the world’s most valuable companies. Which is, to innovate and come up with remarkable products and services.