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Why is the Antitrust Division Investigating the Google Book Search Settlement?

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Google reached a settlement agreement with the Authors Guild and the Association of American Publishers in October 2008 aimed at ending lawsuits, brought in 2005, that challenged Google's unauthorized scanning of in-copyright books for its Google Book Search (GBS) project. As I explained last Monday, the settlement is audacious because it uses the legal jujitsu of the class action procedure to give Google a breathtaking license to all in-copyright books. The agreement authorizes Google to create a digital library of these books and to commercialize most of them. Google will compensate rights holders for commercialization of these books either directly if they signed up with the Google partner program or indirectly through a newly created Book Rights Registry (BRR) whose job is to distribute money to rights holders signed up with BRR.

The U.S. Department of Justice (DOJ) Antitrust Division announced in late April 2009 that it was investigating whether the settlement agreement is, as some critics charge, an agreement that will unreasonably restrain trade or create a monopoly that would enable Google to extract monopoly rents from the books and further entrench Google's dominance in the search market.

Antitrust analysis generally starts with a definition of the affected market. The market for digital books is currently rather small, but it is growing. Many predict that it will become a major market in the future. Clearly, Amazon and Barnes & Noble, as well as Google, can negotiate with rights holders of in-print books to make these books available in digital form (although the settlement would give Google the right to scan the books first and negotiate later). Google argues that Amazon and other digital booksellers can also license rights to sell digital books from the BRR. And of course, anyone can sell or give away public domain books.

Because the BRR will only have authority to license books registered with it, two categories of books are potentially unavailable for licensing to digital booksellers other than Google: books not registered with BRR and "orphan" books (that is, books whose rights holders cannot be located through a reasonably diligent search).

Antitrust critics of the settlement have expressed concern about the "monopoly" that Google will have over orphan books. Google argues that relatively few books are actually orphans because BRR will find their "parents" and sign them up, and besides, it supports orphan work legislation. Google has also said that anyone is as free as it was to scan books and settle any future lawsuits on similar terms.

My concerns about the competition-policy consequences of the settlement center on the market for institutional subscriptions. The settlement gives Google the right to have and make available the contents of a universal library of books. Anyone else could build a digital library with public domain books and whatever other books it could license from publishers or BRR. But no one else can offer a comparably comprehensive institutional subscription service because only Google has a license to all out-of-print books. Google's optimistic estimate is that only 10 percent of the books in the corpus will really be "orphans," but 10 percent is still roughly two million books. Suppose the real percentage of orphans is closer to 30 percent and another 20 percent of those whom BRR tries to sign up tell the BRR reps to get lost.

Google already has a five-year head start, an ability to integrate GBS with other products and services, and licenses in place with many institutions. Any firm contemplating a competitive product would quickly realize that it couldn't offer a comparably complete database of books. Google's head start may, moreover, provide sufficient time for network effects to kick in, which would further deter entry. Google is thus likely to have a de facto monopoly on institutional subscriptions. The license to out-of-print books that Google would get if the settlement is approved is a key and perhaps an insurmountable barrier to entry for other firms.

A monopoly over institutional licenses would allow Google to charge monopoly rents. Even if it doesn't plan to do this immediately, Google may come under pressure to do so over time because BRR has to agree on the price of institutional licenses. Publishers and authors registered with BRR may think they deserve ever higher returns.

So what are the options and what are antitrust authorities likely to do?

Google is hoping that the DOJ will decide that the settlement agreement, on balance, is likely to have more pro- than anti-competitive effects because it would inject new competition into the market for digital books. Even with orphan works, the DOJ could view GBS as beneficial because it will provide greater access to orphan books than in the past. The free public access terminal to GBS (one per public library) may also weigh in favor of approval.

Antitrust critics of the settlement hope that the DOJ will view the agreement as so deeply anti-competitive that it cannot be justified. This drastic response is unlikely unless the DOJ regards the settlement as a collusive use of the class action process to restructure the market for digital books in an anti-competitive manner and significantly raise barriers to entry. Rather than scuttling the deal altogether, though, DOJ could insist that the whole GBS corpus be licensed to others.

A third option is for the DOJ to articulate concerns about aspects of the settlement agreement with the greatest anti-competitive potential and announce its intent to monitor implementation of the agreement instead of challenging it now.

A fourth option is to condition DOJ's support for the settlement on changes to the agreement. DOJ could insist, for example, that the class of settling rights holders must grant a license to third parties such as Amazon to make orphan works available on comparable terms to the license granted to Google. Or it might require Google to drop the "most favored nation" clause under which the BRR cannot offer more favorable terms to others under certain conditions. DOJ could also insist that Google agree not to extend its scanning of in-copyright works beyond books.

Under the Bush Administration, the DOJ would likely have done nothing about the GBS settlement. But the Obama Administration takes antitrust seriously. We will know very soon what DOJ plans to do, for the judge presiding over the settlement agreement has asked DOJ to report on its antitrust analysis by September 18.

Pamela Samuelson is a Professor of Law and Information at the University of California, Berkeley. She can be reached at pam@law.berkeley.edu.

Coming up next: Google Wouldn't Price-Gouge, Would It?