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Eric K. Clemons

Eric K. Clemons


Microsoft Complaint Against Google: The Slowly Unfolding Google Antitrust Saga

Posted: 04/ 1/11 04:24 PM ET

There is of course, something delightfully ironic about one of the allegedly worst antitrust offenders of the 1990s taking to task one of the allegedly worst antitrust offenders of the 20-teens; and yet, that is exactly what is happening this week in the EU. The issues are complex enough that popular press reports may not convey exactly what is at stake here, or what the legal bases are for this complaint. In the absence of a more complete explanation, Microsoft's complaint appears not only ironic but inappropriate; as Google and its supporters accurately note, antitrust law is intended to protect the public, not to protect weak or failed competitors.

The article by Gabriele Steinhauser and Michael Liedtke in the Huffington Post accurately notes the complexity of the case, concluding with a terse quote from Federico Etro, an economics professor at the University of Venice, who said that he "... doesn't see this as merely another round in the jousting between two companies that don't like each other." He also said that "online search is very complex market, with multiple consumer and economic issues to sort out." While accurate, this does not provide much guidance in understanding what those issues are.

In contract, an article by Steve Lohr in the New York Times ends with a surprisingly anachronistic summary of the situation by Herbert Hovenkamp, an antitrust expert at the University of Iowa College of Law. He claimed "You do need to show consumer harm," and added "That becomes more difficult with search engines, where it is easy for consumers to switch to another search engine." The oversimplifications in this analysis provide an excellent basis for providing an introduction to the issues here, and to how the case will probably unfold.

Harm to the Competitive Process May Be Sufficient, Even Without Demonstrated Harm to Consumers

As I documented in an earlier article in TechCrunch and augmented in another in the Huffington Post on the nature of a possible antitrust case against Google, it is not always necessary to show consumer harm. It is sometimes sufficient to demonstrate harm to the competitive process, especially if it can be shown that this harm is the result of a deliberate attempt to achieve monopoly power. The Microsoft complaint does attempt to demonstrate deliberate attempts to achieve monopoly power, including but not limited to denying Google's Microsoft access to YouTube and Google's deliberate attempts to monopolize the search box on a wide range of websites. This last point is strengthened by Google's own SEC filings.

Concern with harm to the competitive process is considered important because even in the absence of past or present consumer harm, deliberately damaging the competitive marketplace enables future consumer harm. Microsoft's initial introduction of and cross subsidies of Word and Excel may have appeared to increase consumer choice, but the rapid failures of WordPerfect and of Lotus 1-2-3 ultimately reduced choice and left Microsoft with a profitable monopoly.

Harm to Consumers May Have Occurred

Google probably does have monopoly pricing power; with 95% of the European market it would be odd if it did not. Consumer harm probably has occurred as a result of Google's pricing power and probably can be demonstrated, but as Professor Etro notes, search is a complex market with multiple consumer and economic issues to sort out. If indeed Google's fees can be shown to be excessive because of a near-monopoly in search, and if the expenses resulting from these fees are indeed passed on to consumers, then European consumers are harmed by monopoly pricing. The chain from excessive cost of search to higher final prices is not as easily demonstrated as the price impact of a Value Added Tax, but no EU consumer would argue that the price impact of a VAT is illusory or insignificant just because it is not detailed as a line item at the time of purchase. Similarly, the price impact felt by consumers as a result of excessive search costs may perhaps be shown through careful analysis to represent the equivalent of a Distribution Tax, and through the same analysis the harm to consumers may be demonstrated. This is described in a longer, scholarly article on "Regulation of Digital Businesses with Natural Monopolies or Third Party Payment Business Models: Antitrust Lessons from the Analysis of Google."

The Essential Facilities Doctrine and Google's Possible Abuse of Power

As we noted in my papers references above, The Essential Facilities Doctrine may provide additional support to Microsoft's complaint. The essential facilities doctrine applies when a facility is unique, not easily duplicated, and essential to all firms in a particular marketplace or line of business. When American Airlines' Sabre and United Airlines Apollo Computerized Reservations Systems were found to be essential facilities and thus essential to all airlines attempting to sell tickets through travel agencies, American and United were forced to make these services available to other airlines under more equitable terms. If Google is denying Microsoft comparable access to YouTube for spidering its search, then Google is indeed limiting the value of Bing to consumers and interfering with Bing's ability to compete, in order to protect its huge market share. Other possible essential facilities violations may also occur in the pricing of travel services through Google, especially as Google seeks to acquire ITA and move into the travel industry directly, and as Google continues to preferences its own services. I have explained the relationship between prior essential facilities violations and Google's own business model both in scholarly works and in the Huffington Post.

Only One Click Away

Google has often made the argument that choice is only a single click away. Since users can change search engines with a single click, how can search engines possibly have the power to harm consumers? Many consumers, and many regulators in the US and abroad, seem quite willing to accept this. Unfortunately for Microsoft and other search providers who may wish to compete with Google, and unfortunately for hotels and airlines that may wish to reduce their dependence on and their fees to Google, this is neither true nor relevant.

If Google has superior access to Google's own facilities, and if Google has superior private information that supports integration of Android with these facilities, then consumers cannot switch without degradation of search services. Indeed, this is quite similar to some of the complaints that were lodged against Microsoft in its own antitrust litigation. This argument may be bolstered by the application of the essential facilities doctrine described above.

Second, and more interestingly, no matter how abusive Google may be or may later become in the prices it charges for keywords in sponsored search, consumers may see no reason to abandon Google. No matter how much of the cost of search is passed on to consumers, they don't see it, they are not aware of it, and they do not yet recognize this as a problem. This is the beauty of Google's third party payer business model: Consumers (party 1) use Google (party 2) to find hotels, airlines, and other providers of goods and services (party 3); as long as party 1 continues to use party 2, party 3 has no choice but to pay party 2. As long as party 2 does not charge enough to drive party 3 out of business, there are few limitations on what party 2 can charge. Party 2 is delightfully free of the pricing discipline of the market; nothing in party 2's prices directly or visibly affects the users; users see no reason to change search engines. As long as users do not change search engines, party 3 remains vulnerable and party 2's ability to charge party 3 remains unchanged. Indeed, party 2's ability to charge may be so high that party 2 is able to provide incentives to party 1 to preserve this power; in the case of Sabre and Apollo this included direct cash subsidies to travel agencies, while in Google's case it involves the more subtle provision of services like Gmail, Gdisk, and others. This does not mean that party 1 consumers are not harmed, merely that the harm is not visible to them.

Possible Threat to Democracy?

America's First Amendment guarantees freedom of the press, the right to speak, the right to be heard, and the right to hear a diversity of opinions. The West has long enjoyed a wide diversity of sources of opinion in its press, its broadcast media, and its online alternatives. A monopoly search provider cannot limit this diversity of source, but it may be able, now or in the future, to affect what is found and what is read. That is, diversity of source may be trumped by monopoly in search.