Monopoly & Silicon Valley
San Francisco is a sunny city in sunny valley in a sunny state, but there are parts of that city where the sunlight doesn’t show. In this part of the city, a game of monopoly plays out between big companies under the cover of darkness. And when you look beyond the cheerful colors on their logos, you notice that giant internet companies like Google are deeply collusive and anticompetitive.
Part of this has to do with the nature of Silicon Valley businesses. We all know that the network effects of internet businesses produce winner-take-most (or all) markets. And to be fair, I don’t begrudge companies for getting to scale first. What I object to, and what you should object to, is when these winners begin to use monopoly power in their original vertical to unfairly capture other new verticals.
When abuse of monopoly becomes the business norm, storm clouds begin to darken the garden of innovation. The new companies, which were once destined to flower with new ideas, wilt in the darkness instead.
In this post I highlight the history of anticompetitive practices by big computer technology firms, and then I lay out what I think are the most persuasive arguments for breaking up Google.
US vs Microsoft
Like Google and Facebook recently, Microsoft also once was sued by the US Government for antitrust violations. Filed in 1998, the blockbuster US vs Microsoft ended with a strong victory for the government.
At issue in the case was Microsoft’s monopolistic behavior to bundle its inferior Internet Explorer browser for free with Microsoft OS. Giving away Internet Explorer for free was Microsoft’s way of killing a newly dangerous competitor: Netscape. The reason Microsoft wanted to kill Netscape was actually a defensive one. Microsoft wanted to prevent the new applications from hurting its existing operating software monopoly.
Contextually, the internet was just reaching critical mass in the 1990s. Yet, it was becoming obvious that applications on the internet would allow people to do their work online. This was troubling for Microsoft. Microsoft feared that applications based on the Netscape’s Navigator would erode the relevance of its operating software monopoly. After all, if anyone could use any application on the internet, then any user might migrate to a different operating system. The logic makes sense, if I can use Google docs then why do I specifically need Microsoft OS for Word? The entire value of the Microsoft operating system flowed from the fact that so many developers had developed specific and unique applications for Microsoft. In the internet era, that advantage might disappear.
Microsoft eventually succeeded in killing off Netscape, but it was finally reigned in by the government. Competition slowly restored to the browser market, and that’s the reason we still have Chrome, Firefox, and Safari today. The expansion of internet applications paved the way for Mac OS to pick up more market share. More importantly, the antitrust action scared Microsoft from trying to monopolize other parts of the information revolution like search or social networking.
This counterfactual is important. If the government hadn’t intervened, Microsoft would have done the same thing to websites that it tried in browsers. It would have used its monopoly in OS, to get a monopoly in browsers, then a monopoly in search, and so on. Innovation would have died in the marketplace. Microsoft would have captured the entire internet, and they would have given us worse products for higher prices. The entire internet revolution was possible, in some part, because of this antitrust case that freed the future of the internet from the grips of Microsoft’s greedy hands. Specifically, Google was saved because of the strong antitrust enforcement action undertaken by the federal government.
Google’s Betrayal
United States vs Google is scheduled to begin trial in September of 2023. At issue in the case is the fact that Google has tried to monopolize internet search in a bunch of anticompetitive ways. Just as Microsoft wanted to kill Netscape as a defensive maneuver to protect its OS monopoly, so too has Google engaged in anticompetitive acts to kill entrants into search. This is the same Google which was once shielded from Microsoft’s monopoly. In the time since the Microsoft case, Google turned its back the very tradition of open markets which allowed it to flourish. Instead, Google sought to emulate Microsoft’s monopoly megalomania.
The key to the government’s case is the idea that in order to compete with Google, you need access to a massive amount of search data to build out an algorithm that can compete with Google’s. By making it business practice to foreclose places from which competitors can access that volume of search data, Google has made it impossible for a competitor to enter into Search. This attempt to monopolize search has led to harms to advertisers, consumer privacy, and most importantly, innovation in search.
Although the government’s case against Google has a ton of allegations, I want to focus on two in particular—
Allegation One: The Google-Apple Conspiracy
One place a competitor could get the sort of search query volume needed to build a competitor to Google’s search engine is from all the search queries in the Apple OS ecosystem. After all, how many people search on Safari, iPhone, Siri, or Macintosh computers? In fact, this seems to be something that people within Google recognize as a threat. As the New York Times reported in 2020, “Within Google, people believe that Apple is one of the few companies in the world that could offer a formidable alternative, according to one former executive.”
But if that’s the case, why hasn’t Apple entered? My theory is that they’re being bribed.
The government’s case doesn’t say it outright, but Google has likely paid Apple to not enter. They share profits between them. In my theory, what Google gets in exchange is Apple not entering the search market. But what evidence supports this view?
It is a fact that Google pays Apple to be the default search option on Apple products. As the New York Times reports, “Apple now receives an estimated $8 billion to $12 billion in annual payments — up from $1 billion a year in 2014 — in exchange for building Google’s search engine into its products. It is probably the single biggest payment that Google makes to anyone and accounts for 14 to 21 percent of Apple’s annual profits.”
What is not yet proven, but I believe is very likely to be the case, is that paying Apple for default search engine status isn’t Google’s real goal. Instead, Google probably pays Apple a massive amount to stay out of search entirely. However, since an open agreement for Apple to not enter search would be illegal, Google instead calls its bribe a payment for default search engine status. This is a theory that the DOJ might be looking into because, in February of 2022, Reuters reported that top Apple executives are getting deposed.
In fact, former Google CEO Eric Schmidt has jokingly admitted this basic arrangement. As the New York Times reports, “‘If we just sort of merged the two companies, we could just call them AppleGoo,’ joked Mr. Schmidt, who was also on Apple’s board of directors. With Google search on the iPhone, he added, ‘you can actually merge without merging.’”
As the lawsuit corroborates, “For example, in 2018, Apple’s and Google’s CEOs met to discuss how the companies could work together to drive search revenue growth. After the 2018 meeting, a senior Apple employee wrote to a Google counterpart: “Our vision is that we work as if we are one company.”
I think this type of secret merger agreement is even more likely because Apple and Google have a history of illegal collusion. In the late 2000s, there was an agreement struck between Apple and Google to not hire each other’s workers. Basically, the two firms wanted to suppress wages. Eventually, this case made its way into court, and the two companies had to pay out a massive $400 million+ settlement to their employees.
CNET did a good job covering the wage-fixing conspiracy: “‘I would be very pleased if your recruiting department would stop doing this,’ Jobs wrote to Schmidt on March 7, 2007…Schmidt then sent the request on, saying ‘I believe we have a policy of no recruiting from Apple and this is a direct inbound request. Can you get this stopped and let me know why this is happening? I will need to send a response back to Apple quickly so please let me know as soon as you can.’”
Allegation 2: Predatory Pricing on Android
Just as Microsoft gave away internet explorer for free to kill Netscape and protect its OS monopoly. Google has been giving away Android for free to protect its search monopoly by preventing anyone else from getting the volume of search queries required from the mobile OS market to become a competitor.
Basically manufacturers like Samsung are able to use Android OS on their phones for virtually no cost, but they have to guarantee that Google will be the default search engine on these phones. Doesn’t this sound familiar?
This is a super cynical play because giving away Android for free kills the opportunity for new companies to develop a new mobile OS. When new companies can’t develop a new mobile OS with new search engines or search partners, Google is able to maintain its monopoly in search. Remember that the only other real player in the mobile OS market is Apple, and Google already paid them off. Taken together, a combination of bribes and predatory pricing defangs any threat of entry into search from a new company that can pick up scale from mobile search volume.
As the government’s case confirms, “Google’s strategy worked. Google has almost completely shut out its competitors from mobile distribution. As one executive for a competing search product recognized in frustration last year: “Google essentially [has] locked up ALL DISTRIBUTION” with its Apple deal and restrictive Android licensing terms, leaving the competitor’s product with ‘no mobile volume.’”
A Breakup?
I think there is a fairly straight forward case that breaking up Android from Google search would improve both products from society’s point of view.
If Android was spun out into a new company which had to stand on its own two feet, then this new Android company might sell rights for default search engine to a different player or even threaten entry into search itself. More importantly, it probably wouldn’t price itself as completely free to the manufacturers, and this would open up the ability for real competition in the mobile OS market. Real competition would improve the mobile OS market with new choices for consumers, and it would probably have a pro-competitive effect on search with new venues for competitors to pick up scale for entry into search.
Likewise, if Google search was spun out into a separate company from Android, it wouldn’t be guaranteed preferential treatment in the mobile OS market. Instead, it would have to compete for mobile search market share by providing even better search results with fewer ads and less privacy violations.
We haven’t seen a real breakup in a very long time. Google might be next.
Cartoon by Christopher Weyant