Gerrit De Vynck

Google’s search default deals threatened by US antitrust suit

The Department of Justice filed its highly-anticipated antitrust case against Google Oct. 20, focusing on payments Google makes to ensure its search engine is the default choice on millions of phones and computer internet browsers made by other companies. The payments are a little-known part of how Google does business. Cutting them off could disrupt a long-standing status quo that helps Google but also provides significant revenue to other companies. The biggest of those deals is with Apple Inc. Sanford C. Bernstein &Co. estimates Google pays around $8 billion per year to be the default search engine on the iPhone maker’s Safari mobile web browser. The lawsuit argues Google uses the massive cash reserves of parent company Alphabet Inc. — some $121 billion — to pay those giant fees, which would be out of reach for smaller competitors. Nearly 60 percent of all search queries happen in places where Google has a distribution agreement to be the default search engine, the DOJ said in its complaint. The agreements amount to a “web of exclusionary and interlocking agreements that shut out competitors,” Associate Deputy Attorney General Ryan Shores said on a conference call. “Google’s conduct is illegal under traditional antitrust principles and must be stopped.” Google immediately pushed back. “Today’s lawsuit by the Department of Justice is deeply flawed,” a spokeperson said in an e-mail. “People use Google because they choose to — not because they’re forced to or because they can’t find alternatives.” Google is willing to pay so much for the distribution deals because it’s confident it can make more money from the millions of queries consumers type into their browsers, iPhones and other devices. That’s because the company has packed the top of search results with advertising in recent years, increasing its ability to profit from users’ hunts for information. The distribution agreements also benefit the companies being paid to give Google’s search engine prominence. Even for Apple, $8 billion is a considerable revenue stream. Other big electronics makers like Samsung Electronics Co. Ltd., the world’s biggest mobile phone maker, benefit from them too. (Google and partners have not disclosed how much the company pays for these deals, but some details have occasionally leaked out through litigation or regulatory filings.) For some companies the payments can mean the difference between success or failure: Mozilla Firefox, one of the last remaining web browsers that competes with Google’s Chrome in the U.S. and Europe, relies on a distribution agreement with Google for search for much of its revenue. “The silver lining for Google, if those default search deals would eventually be ruled illegal by the courts, is that Google would no longer have to pay Apple a revenue share on search clicks that users would choose to make on Google,” said Colin Sebastian, an analyst with Baird. He estimates Google pays a total of $15 billion per year on all of its distribution agreements. The case could take years to be resolved, and major changes would only be ordered by a court if Google’s activity is proven to be illegal, or if the company agreed to a settlement with the government instead. Google also gains a subtler, but potentially more potent benefit from these paid default deals. The company’s search engine gets better the more it’s used. When a query comes in, Google’s technology monitors what result people click on and how they behave after that. If a user clicks back to the list, that suggests they were unhappy with their initial result. The system logs this and adjusts future results, perhaps demoting that specific answer and raising up an alternative suggestion. This happens millions of times a day, helping to keep Google’s search engine ahead. Rivals, with less money to pay for big distribution deals, find it hard to keep up with a virtuous feedback loop that operates at such a large scale. But if the U.S. government prevents Google from paying to be the default provider in so many places, competitors may have more of a chance. In Europe, regulators have forced Google to give Android users a choice of which browser they want as their default. The rules, which require rivals to pay Google through auctions, haven’t made a major impact on market share yet. If people had to choose which search engine to use on all sorts of phones and browsers, some might switch to a competitor, but most would probably stick with Google, said Mark Shmulik, an analyst at Sanford Bernstein. That could result in a situation where the money saved from canceled distribution deals is greater than the loss of revenue from people picking other search engines, ultimately helping Google instead of curbing it. The biggest risk for Google is if regulators go further and devise rules that specifically give an advantage to smaller competitors like Microsoft Corp.’s Bing or DuckDuckGo over Google, Shmulik said. Europe’s latest remedy has been criticized for not giving consumers enough choice over search engines and forcing competitors to pay Google for placement. The focus on search hits Google in its most visible and important business, but also leaves out possible attacks that may have been more damaging or disruptive to the tech giant. Investigators had examined Google’s advertising technology business at length, and industry watchers had speculated the government could try to force the company to sell off part or all of the division completely. Other critics argued that the company’s biggest parts should all be split up, hiving off search, advertising technology, its browser and the YouTube video service.

Google’s search business targeted in looming US antitrust case

Google’s search engine, one of the most-profitable businesses in history, is about to face its biggest challenge as the U.S. government readies an antitrust lawsuit accusing the company of crushing competition to protect and extend its monopoly. After a 14-month investigation, the Justice Department is homing in on whether Google skews search results to favor its own products and whether it uses an iron fist over access to users to shut out rivals, according to people familiar with the matter. Google, which controls about 90 percent of the online search market in the U.S., has long been a target of rivals that complain it’s used that power to snuff out competition across the internet. What started out as a college research project in the late 1990s now generates about $100 billion in highly-profitable revenue each year. The search engine decides the fates of thousands of businesses online and has funded Google’s expansion into email, online video, smartphone software, maps, cloud computing, autonomous vehicles and other forms of digital ads. European competition regulators have fined Google billions of euros for breaking antitrust laws. But U.S. enforcers have left the company mostly untouched since the Federal Trade Commission closed a probe in early 2013 with no action. Now, Attorney General William Barr is on the cusp of what could be the biggest U.S. monopoly case since Microsoft Corp. was sued by the government more than two decades ago. Barr has been a key ally in Donald Trump’s crackdown on technology giants. The U.S. president has railed against internet companies for allegedly censoring conservative viewpoints online. While some involved in the Google case expected it to be filed as soon as next week, that timing will likely be pushed back, possibly to the following week, according to two people familiar with the matter. State attorneys general and Justice Department lawyers have been discussing final preparations for the case this week in Washington. The people asked not to be identified discussing private matters. Senior Justice Department officials met with Google representatives this week to discuss two prongs of the investigation: search bias and search distribution, according to one of the people. Search bias is the allegation that Google skews results to favor its own properties, such as a shopping service, travel bookings and local business listings. Search distribution centers on agreements with device makers and other partners to provide Google search as a default to users. In 2018, Goldman Sachs estimated Google paid Apple Inc. $9 billion to get its search engine on Apple’s Safari web browser and other prime spots on Apple devices. It’s impossible for small search engine competitors to compete with Google’s deep pockets and outbid it for valuable placements like Apple’s browser, according to Gabriel Weinberg, CEO of DuckDuckGo, a privacy-focused search provider that has complained to the DOJ about Google. During a recent congressional hearing, Google executive Don Harrison argued that the company doesn’t dominate the markets it operates in. Google may lead when it comes to general searches, but for product queries and other commercial searches consumers are more likely to start on Amazon.com Inc., he noted. The Justice Department and states also are investigating Google’s conduct in the advertising-technology market, where Google owns many of the systems that deliver display ads across the web. Some Democratic attorneys general briefed on the case want the Justice Department to include ad-tech in the lawsuit and may file their own complaint after the November election, one of the people said. The Justice Department declined to comment. Competitors have complained that Google funnels excess search marketing dollars to its display ad network. That extra money can account for large portions of digital publisher revenue, making them less likely to drop Google for a rival ad-tech provider. U.S. investigators have asked detailed questions about how to limit Google’s power in the search market, according to DuckDuckGo. In Europe, regulators have forced Google to give consumers a choice over which search engine they use on Android phones. “We’re pleased it seems like the DOJ — unlike any other government in the world — is going to finally address the elephant in the room: Google’s obvious, overwhelming, and anti-competitive dominance in search,” a spokesman for DuckDuckGo said. “Consumers would benefit from a world without search defaults, where they could easily choose their preferred search engine.” Google has engaged in an array of practices aimed at maintaining its control over the search market and preventing competitors from gaining scale, said Gene Kimmelman, a senior advisor at Public Knowledge, which urged the Justice Department this summer to investigate Google’s conduct around search. Consumers have lost out as a result because rivals are effectively shut out from competing to build better search offerings, he said. “Search is the fundamental motivator for the pattern of behavior by Google, and all of it appears designed to maintain a monopoly,” Kimmelman said. A research paper published in June by the Omidyar Network, an organization that advocates for more aggressive antitrust enforcement against tech giants, outlined several scenarios where Google may have violated antitrust laws. The exclusive deal with Apple has helped solidify its monopoly by preventing competitors from reaching consumers, the paper argued. Google created a similar effect with its Android mobile operating system and agreements that effectively forced handset makers to pre-install Google’s search engine and browser on their phones. Those restrictions made Google the default search service and further prevented rivals from gaining market share, according to the Omidyar paper. The EU also fined Google over this. “This is a classic tale of a likely monopolization strategy premised on denying scale to rivals,” the paper said. The allegations echo those made against Microsoft in 1998 when the Justice Department and a group of states sued the software maker for antitrust violations. Back then, Microsoft forced computer manufacturers to bundle its Windows operating system with its Internet Explorer browser, making it harder for rivals such as Netscape to compete. Even though other browsers didn’t pose a direct threat to Microsoft’s monopoly in computer operating systems, the risk was that they could one day grow to challenge its dominance. The Justice Department could make a similar argument about Google today, said William Kovacic, a law professor at George Washington University and a former FTC chairman. “The arguments about demanding exclusivity as a way of excluding rivals are arguments that were very successful in the Microsoft case,” he said.
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