The U.S. government has sued Google (yes, Alphabet, the parent of Google), setting up a battle on the future of web search and digital advertising. The government articulated its position that Google has allegedly broken antitrust laws by undercutting competitors to remain the gatekeeper and the number one ICT utility of the 21st century in the domains of web search and digital advertising. Google controls 80% of the U.S. search market. The government noted that Google pays “mobile-phone manufacturers, carriers and browsers, like Apple Inc.’s Safari, to maintain Google as their preset, default search engine”.
The Justice Department has sued Google for allegedly breaking antitrust laws as it undercut competitors to maintain its status as gatekeeper for internet search and advertising. The department says the Alphabet-owned company, which controls at least 80% of search, pays “mobile-phone manufacturers, carriers and browsers, like Apple Inc.’s Safari, to maintain Google as their preset, default search engine,” according to The Wall Street Journal. The suit is the biggest U.S. challenge to a tech company over its dominance in two decades.
This is a very solid case despite what many journalists are writing. Some see this case as overly weak but I see it differently. The government is essentially saying that Google could have been a brilliant technology company, winning on search through innovations, triggering a virtuoso circle of positive continuum which platforms enjoy, but besides that, there is another element, and that element is not evidently legal.
That element is that Google pays companies like Apple, Firefox, etc to make Google their default search engine on their browsers. By doing that, other small competitors are denied opportunities to ever be known since Google is the “best” search today and by paying these companies, no competitor will ever have a chance since they are locked out in the gateways to the users. Simply, Google won on technology innovation but is using these exclusive default agreements to keep competitors out! And the government thinks that is not evidently right.
“Google, no doubt, is more powerful and omnipresent today than it was in 2004. And its deals make it difficult for competing search engines to break in. But it’s interesting that, in this situation, the DOJ focused on the rent payer vs. rent-seekers like Apple. With some credibly, Google could argue that it has no choice but to pay. Just look at the history”
Yet, you may argue why should Google be penalized if it has to pay Apple to be the default search on Safari, the Apple browser. Yes, the power is really with Apple, not Google. Apple generates about 20% of its profit from such payments from Google. If you look at it carefully, this is a circle: Google pays Apple, Google gets funds from advertisers, and sends some to Apple, provided Apple does not allow another company into the party. Apple is happy since it is guaranteed a solid inflow. Government thinks that is illegal.
Google search is the default search engine in Safari and for Siri on iPhone and iPad devices. According to the Journal, that has been a major source of revenue for both companies. In 2018, for example, Google is said to have paid Apple upwards of $9 billion to maintain the arrangement.
Although neither company has confirmed how much the deal is actually worth, the lawsuit indicates that it accounts for between 15% and 20% of Apple’s annual profits. That suggests payments of as much as $11 billion.
Of course, paying to be displayed better in a shelf should not be illegal. Unfortunately, in the digital space with winner-takes-all, some things which are harmless in the physical space may not be harmless in the digital space. This is the heart of the inversibility construct.
A few years ago, I was in Casablanca and rode in the same car with the CEO of DuckDuckGo, a search engine that “emphasizes protecting searchers’ privacy and avoiding the filter bubble of personalized search results”. I asked him how he would get over the challenges for people to know DuckDuckGo since all the major gateways have been prepaid by Google. He focused on the strong privacy which his product offers, and hoping that over time people will align for it. In reality, it is a tough order. Why?
The only product line in the world which is guaranteed non-default Google search but another search (Bing) is Windows systems, including laptops and desktops. Unfortunately, for those who are not in the party of Google, the number one search term on Bing is Google. What does that mean? Once people get their Windows systems up and running, and launch Internet Explorer with Bing default search, they use Bing search to look for Google, and once that setup is done, Bing is history on that machine.
So, Google should not worry – the government may be helping it on one thing: stop funding Apple’s 20% profit and discontinue wasting money paying others. Yes, Google does not need to be paying anyone because most will converge back to its product irrespective of the default search on the browsers, provided its search remains the best. This may not make the government happy as if it bans Google from paying for this self-positioning, it will not hurt the company that much.
Yes, Google will save the money it is shipping to these companies and still get nearly everything it is getting now. Google is the category-king and everyone knows about it. So, this suit should be good for investors: it will cure Google’s bad habit of wasting money where it is not necessary. That should happen irrespective of the legal winner or loser!
You see, I have not noted who will win this suit. The fact is this: it does not matter. There would only be one major search engine in the world due to the network effect phenomenon. It is irrelevant whether that company is under Alphabet or a separate company. Yes, over time, if cut-out, that branch will grow to dominate the search if it is the best product.
If you decide to break Facebook apart, one part will grow and dominate others. This is possible because of the positive continuum of network effect where the biggest keeps getting bigger and also better. I explained that in a recent piece in the Harvard Business Review. You can regulate Facebook but another company will come to take over its position because in this sector, it is winner-takes-all. Yes, the best wins. Why? The scalable advantage improves with lower marginal cost.