According to media reports, the US court has officially launched the trial of the antitrust case against Google initiated by the Department of Justice, and Google is facing its biggest antitrust trial in 25 years since its establishment. The US Department of Justice stated that Google pays over $10 billion annually to companies such as Apple and Samsung to maintain its position as the default search engine on computers and mobile devices. This practice excludes competitors and stifles industry innovation.
After reviewing the case indictment on the website of the US Department of Justice and Google’s defense statement, the author found that if this case occurred in China, according to China’s judicial practice, especially the rules established in the Qihoo 360 v. Tencent case, the court might dismiss the lawsuit, and even ChatGPT could give Google extra points.
China’s Anti-Monopoly Law is theoretically the same as that of the United States, so cases that China cannot win are also difficult for the United States. However, Google may face greater risks in another antitrust case against advertising services initiated by the US Department of Justice.
1. Case Summary
The US Department of Justice claims that Google has been a monopoly since at least 2010, currently controlling over 89% of the online search market. The company has abused its dominant position by signing exclusive agreements with smartphone manufacturers such as Apple, Samsung, and web browser service providers to make Google the default search engine on most devices, paying over $10 billion annually for these deals.
The complaint filed by the US Department of Justice alleges that these exclusive agreements also create barriers to entry for competitors, especially small innovative search companies that cannot afford the billions of dollars in entry fees. In the search engine industry, size is crucial, and Google’s agreements with Apple, Samsung, and other companies lock in their own size and deprive competitors of size, illegally maintaining their monopoly status.
Google denies these allegations, insisting that its dominance in the search field is due to its provision of better services than its competitors. Payments to partners such as Apple, Samsung, and web browser service providers are compensation for their work to ensure that their software receives security updates and other maintenance. In response, Apple CEO Tim Cook, who signed an agreement with Google, stated that Apple made Google the default search engine in Safari mainly because their search engine is the best.
Google’s response is excellent: it is worth noting that in 2014, Mozilla (a web browser service provider) chose Yahoo as its default search engine, but many users actually switched back to Google. In other words, although default settings are important (this is why we pay), they are easy to change. People can and do switch. In contrast, Microsoft pre-installed Edge browser on Windows and set Bing as the default search engine, actively increasing the difficulty of switching. Nevertheless, the vast majority of Microsoft users still choose to use Google for search. In fact, “Google” is the top search query on Bing worldwide. Contrary to the Department of Justice’s theory, people know they have a choice and they make choices.
2. Analysis of the Legitimacy and Legality of Default Search Engine Protocols.
This lawsuit is very interesting, but if it were in China, the plaintiff would not be optimistic in my opinion. Google’s act of spending a huge amount of money to purchase the default search engine position involves two types of monopolistic behaviors as mentioned in the Anti-Monopoly Law: violation of monopoly agreements and abuse of market dominance. However, the direct violation of these provisions cannot be found in China’s Anti-Monopoly Law.
First, let’s look at the provisions regarding monopoly agreements. There is no direct violation involving horizontal monopolies in Article 17, which prohibits operators with competitive relationships from entering into the following monopoly agreements: (1) fixing or changing product prices; (2) limiting the quantity of production or sales of goods; (3) dividing sales markets or raw material procurement markets; (4) restricting the purchase of new technology, new equipment, or the development of new technology or products; (5) joint boycott of transactions; (6) other monopoly agreements identified by the anti-monopoly enforcement agency under the State Council.
There is no direct violation involving vertical monopolies in Article 18, which prohibits operators from entering into the following monopoly agreements with trading counterparts: (1) fixing the resale price of goods to third parties; (2) setting a minimum resale price for goods to third parties; (3) other monopoly agreements identified by the anti-monopoly enforcement agency under the State Council.
There is no direct violation involving abuse of market dominance in Article 22, which prohibits operators with market dominance from engaging in the following behaviors: (1) selling goods at unfair high prices or purchasing goods at unfair low prices; (2) selling goods at prices below cost without justifiable reasons; (3) refusing to trade with trading counterparts without justifiable reasons; (4) limiting trading counterparts to only trade with them or designated operators without justifiable reasons; (5) bundling goods without justifiable reasons or attaching other unreasonable transaction conditions during transactions; (6) providing different treatment to trading counterparts with the same conditions in terms of transaction prices and other conditions without justifiable reasons; (7) other behaviors identified by the anti-monopoly enforcement agency under the State Council as abuse of market dominance.
The essence of Google’s behavior is internal competition. The “other” clause in the above three may still be violated, but it is not a violation of the explicit provisions after all. In addition to illegality, legitimacy should also be considered. Personally, I feel that Google’s spending a huge amount of money to purchase the default search engine behavior is not particularly improper, because the essence of this behavior is internal competition, a kind of implicit exclusion. Google offers high prices for search engine entrances for Apple, Samsung, Mozilla, etc., high basic default search engine setting fees, and high advertising revenue sharing. By using its economies of scale and financial strength, it excludes competitors. Leading companies in all To C industries will do similar things, such as paying high supermarket shelf fees for fast-moving consumer goods to obtain premium locations. But they can still win in the market mainly by providing better service quality.
Microsoft’s Bing is also doing the same thing. Moreover, Google has not done anything extreme. The default agreement signed with Apple and Samsung does not prohibit users from using competitors’ services. Users can change the default search engine, and there is no malicious incompatibility like Microsoft did with Netscape browsers in the past. The basis for accusing it of serious impropriety is not sufficient.
Ironically, Microsoft is now doing the same thing on PCs because Microsoft has a monopoly on the Windows operating system. Therefore, when a new computer is turned on for the first time, users must open Microsoft’s browser, such as Edge or the old IE, which uses Microsoft’s Bing as the default search engine. However, if users do not like Bing’s service, the first thing they do after opening Bing is to search for Google. Therefore, even though Bing is the default search engine on PCs, its market share in the United States is only about one-tenth of Google’s.
3. The impact of the verdict of the 3Q War and ChatGPT on the Google case.
Although it also involves monopoly agreements, if this case were prosecuted domestically, the plaintiff would mostly choose abuse of market dominance as the main cause of action. However, the key issue is that Google has stronger technology and better services. Therefore, even if Google has market dominance in the general search engine market, this behavior may not be deemed as constituting abuse of market dominance if it can uphold both illegality and legitimacy.
Moreover, domestic courts have always been cautious in determining market dominance in the Internet field. In the classic case of Qihoo 360 v. Tencent for abuse of market dominance, like Google, Tencent, which had a market share of over 50% as an instant messaging software service provider, had much higher network effects and customer stickiness than Google’s search engine service, but it was not deemed to have market dominance.
This is because the Supreme People’s Court believes that according to the provisions of the Anti-Monopoly Law, even if the market share reaches the 50% threshold set by the Anti-Monopoly Law, it is still necessary to see whether the provider of goods and services has market dominance. In the Qihoo 360 v. Tencent case, Tencent did not have market dominance, so it did not have market dominance.
The first-instance judgment of the Qihoo case stated: “Regarding ‘customer stickiness’ and network effects… at the beginning of the development and operation of QQ products by Tencent and Tencent Computer, MSN was the largest instant messaging service provider in the domestic market. However, Tencent and Tencent Computer quickly expanded their business scale and attracted a large number of users by relying on distinctive products and high-quality services, ultimately surpassing MSN in market share in a short period of time. Therefore, it can be seen that network effects and user lock-in effects are not insurmountable barriers for instant messaging products and services.”
Qihoo v. Tencent case second-instance verdict: The first-instance court used Tencent QQ’s successful entry into the instant messaging service market with a relatively high market share as an example to argue that network effects and user stickiness do not significantly hinder market entry. There is no direct evidence in the first-instance evidence that can prove that MSN had a dominant market position in the instant messaging market in mainland China when Tencent QQ entered the market, and compared with the market environment at that time, the market conditions have changed. Therefore, the first-instance court’s argument lacks solid factual basis and persuasiveness.
However, the first-instance court did not solely rely on this to determine that the entry into the instant messaging service market was relatively easy, but made a final judgment based on a comprehensive analysis of various factors. The problems inherent in this argument do not affect the correctness of its final conclusion.
Even Tencent’s PC-side instant messaging service does not have a dominant market position in China, so why can Google’s search engine service be deemed to have a dominant position? If this case were fought in China, would this point be unbreakable? In fact, there is still a way, and the key is to see how the relevant market is defined. The 3Q war was a thing of 2010, and the market has changed thirteen years later.
The mobile end is the mainstream battlefield for industry development, and compared with more open, compatible, and easily replaceable services on the PC end, the mobile end is more closed, exclusive, and has weaker service substitutability. Therefore, if the relevant market for Internet services is defined on the mobile end or at least includes the mobile end, it will be more likely to break through to prove market dominance than on the PC end.
If the lawsuit were in China, another variable would be ChatGPT. This year, artificial intelligence is the focus of development in the Internet industry, but Google’s artificial intelligence service Bard is much inferior to OpenAI’s ChatGPT. Microsoft has invested heavily in OpenAI to help it develop ChatGPT and has obtained exclusive cooperation rights for its search engine.
Microsoft’s Bing has embedded ChatGPT’s artificial intelligence service in its search engine, greatly improving the search experience and showing signs of challenging Google’s potential. If a court in China were to hear Google’s search engine antitrust case, this would also be an important factor for the court to determine market dominance: The competition in the search engine service market is relatively fierce and open, so even if Google has a relatively high market share, it may not have super dominance over the market.
4. Google’s risk is on the other side of the two-sided market.
If this case were to be tried in China, the level of attention would definitely be lower compared to the 3Q Battle. During the 3Q Battle, Tencent required users to choose between 360 and Tencent, so users were more aware of the situation. On the other hand, the impact of the Google case on consumers is more indirect. Although theoretically, monopolistic behavior can harm consumers’ ability to obtain competitive and innovative benefits from normal competition, search engines operate as a two-sided market where service providers do not charge consumers. Therefore, consumers have a weaker perception of the harm caused by monopolistic behavior.
A two-sided market, in simple terms, refers to a situation where one side provides basic services for free to attract attention, while the other side charges for value-added services to make money. This model is adopted by companies like Google and Facebook in the United States, as well as Baidu and Tencent in China. For example, when we use Baidu to search for content, the search service is one side of the two-sided market. Baidu does not charge us for this service. However, in the search results, Baidu displays advertisements, which represent the other side of the two-sided market. The advertisers in the search results have to pay Baidu for display fees, and if we click on the ads, the advertisers also have to pay Baidu for click fees. Advertisers who want their ads to appear at the top also have to pay bidding fees through an auction-like model. In terms of the basic business model of search engines, Google and Baidu are similar.
Now let’s talk about what related markets are. The market share mentioned earlier is defined within the related markets in antitrust cases. How related markets are defined is crucial for the success of antitrust cases. Since search engines operate as a two-sided market, this case involves two related markets: one is the general search services market in the United States. Google holds a monopoly position in this market. Currently, there are only four significant general search providers in this market: Google, Bing, Yahoo, and DuckDuckGo. According to publicly available data, Google currently has a market share of about 89% in the general search services market in the United States.
The other related market is the search advertising market in the United States. The advertising market consists of all types of ads generated by corresponding online search queries, including general search text ads (provided by general search engines like Google and Bing) and other specialized search ads (provided by general search engines and specialized search providers like Amazon, Expedia, or Yelp). Based on publicly available estimates of total U.S. search advertising spending, Google’s market share in the U.S. search advertising market exceeds 70%.
The reason why I introduced the concept of a two-sided market at the end is that my judgment is that the U.S. Department of Justice may not win this case. However, apart from this case, the U.S. Department of Justice also filed another antitrust case against Google at the beginning of 2023, accusing it of illegal monopoly in its advertising model. Google acts as both an agent for websites and an advertiser itself through its online advertising exchange. It’s like being both a broker like Goldman Sachs or Morgan Stanley and also doing the work of the New York Stock Exchange, leading to serious conflicts of interest.
The case may hit Google’s soft spot, and the focus of the case is on the other side of the bilateral market. Google’s illegal monopoly constitutes a conflict of interest and harms the interests of advertising customers and websites selling advertising space. This case is being heard in a local court in Virginia, and the prosecutor in charge of the Department of Justice has previously worked for Google’s competitors Microsoft, Yelp, and News Corp, and has a better understanding of Google, so the strategy may be more effective.
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