Could Google Soon Face... Competition?

Antitrust action tends to force competition into the market, even without a victory.


Welcome to BIG, a newsletter about the politics of monopoly and finance. If you’d like to sign up, you can do so here. Or just read on…

I haven’t written an issue this month, because the election overwhelmed antitrust news, and because I’ve been working on a big research project related to the transition. Apologies. In this issue, I’m going to look at how antitrust action against Google and Apple has already started bearing fruit in the marketplace. I also have short blurbs on:

  • The merger in book publishing between Simon & Schuster and Bertelsmann.

  • How the Biden administration won’t be a repeat of Obama in antitrust.

  • A street sweeping roll-up by private equity.

  • A tactical helmet roll-up and sole source contract with the U.S. Army.

  • The Google case judge’s warning about too much economics in the case.

  • Big tech, Spotify and podcasts.

First, some house-keeping. I did a discussion with former FTC Commissioner Josh Wright, who in my view is the most significant and energetic leader of the law and economics movement on the right. Wright graciously read my book, and we spent an hour and a half talking about a number of topics, including Trump judges, antitrust law, and how the debate over monopolies has changed over the past ten years. Wright and I are ideological opponents, but he is both curious and fights for a social vision in which he believes. The discussion is wide-ranging and unusual, if a bit long. You can watch it below.

And now…

Why Is Apple Developing a Search Engine?

Last month, the Financial Times reported on how Apple is responding to the DOJ’s antitrust suit against Google.

Apple is stepping up efforts to develop its own search technology as US antitrust authorities threaten multibillion-dollar payments that Google makes to secure prime placement of its engine on the iPhone.

In a little-noticed change to the latest version of the iPhone operating system, iOS 14, Apple has begun to show its own search results and link directly to websites when users type queries from its home screen.

One of the keys to the Department of Justice antitrust suit against Google is Google’s payment to Apple to let its search engine serve as the default on iPhone Safari browser. The two companies share revenue on Google searches done on iPhones, iPads, and Macs, which reportedly amounts to $8-12 billion a year in the U.S.

This is a big deal. About half of Google’s search traffic in the U.S. comes from Apple; the arrangement is so important and lucrative for both parties that Apple CEO Tim Cook and Google CEO Sundar Pichai negotiated in personally. After one such meeting between the CEOs in 2018, an Apple official told his Google counterpart that "our vision is that we work as if we are one company." Losing this arrangement would be, according to Google officials, a “Code Red” scenario.

For antitrust enforcers, the reason this arrangement is so problematic is precisely the reason it’s so lucrative. Apple is being paid by Google to exclude competitors in search. The iPhone maker does so by placing Google search as the default in its various distribution channels, ensuring that other search engines have a much harder time accessing customers and thus challenging Google monopoly.

Google responded to the DOJ complaint by vehemently disputing the notion that defaults are a barrier to entry, arguing that consumers can easily change their settings if they find a better search option. Such an argument contravenes what multiple enforcement agencies, including those in Australia and England, have argued, which is that defaults are critical barriers to entry in terms of structuring consumer choice. It’s also something of a ludicrous point; Google pays billions to Apple for a reason, so clearly defaults are worth a lot of money, although Google argues that this is akin to paying for shelf space at a supermarket, and thus, they would argue, a marketing expense. (Whether it should be legal to pay for shelf space is a different question…)

But I think the most impressive piece of evidence on this score is the results of a natural experiment that happened when the Russian antitrust enforcers forced Google to change its defaults for Android. Google, as you can see below, had between 60-65% of the search market in Russia, as it was able to pre-install its own search tools on Android phones and block competitors. In August 2017, Russian enforcers forced Google to implement a well-designed choice screen, meaning that users of mobile phones were given a screen where they would select a search engine without being defaulted to using Google. Google search competitor Yandex immediately began gaining share, as the chart below shows.

At any rate, all of this is a way of saying that the arrangement between Apple and Google is profitable and clearly designed to fortify Google’s market power in search by preventing entry of other players. But it’s also a lot of money for Apple. The payment to Apple represents between 20-25% of the company’s entire annual profit. If the DOJ succeeds, it means that Apple will have to find a way to replace all of that revenue.

So how is Apple responding to the prospect that the deal is off? It is working on its own search engine to compete with Google. Now, I can imagine many problems with what Apple is doing. There’s no telling if the product will be good, or even launch. Siri is horrible, but it is used by millions of people because it is a default and tied into the iPhone product. And if Apple does go ahead with its own search engine and self-preferences it in its Mac and phone products, other search engines will still be unable to access iPhone customers. Still, the overall point is that an antitrust case is enough to force some competition into a market. Apple is developing a search product to compete with Google because it must. Forcing competition on the powerful, in other words, is effective.

The possibility of Apple Search is not the only example of how the antitrust case is creating useful change in the market. Another example is Google’s shift with regards to accelerated mobile pages (AMP), which is a standard Google organized to force publishers to divert traffic to Google. The lever Google used to force adoption of this standard by publishers was to downgrade the placement of non-AMP pages. Ostensibly, the reason was that AMP pages load faster, and so there was a consumer benefit. But as The Markup reported:

Once a website sets up an AMP page, Google copies it and stores it on Google servers. When users click on the link for an AMP page in search results—or its news reading app—Google serves up that cached version from its servers.

“AMP keeps users within Google’s domain and diverts traffic away from other websites for the benefit of Google,” read a 2018 open letter signed by more than 700 technologists and advocates. “At a scale of billions of users, this has the effect of further reinforcing Google’s dominance of the Web.”

And lo and behold, facing an antitrust suit brought on in part by pressure from publishers, Google announced earlier this month it would stop privileging AMP compliant pages starting next May. Publishers won’t have to use the AMP format to get top placement by Google in mobile search. There are more examples of this phenomenon, and not just with Google. Apple, in response to pressure from the Epic Games antitrust lawsuit and popular outcries against its App store fees, just lowered its app store fee from 30% to 15% for smaller app makers.

These changes are merely a result of bringing antitrust, not winning them. Historically, facing an antitrust case, not just losing one, can have massive consequences. Business historian Alfred Chandler observed that the American software industry itself was a result of IBM choosing to unbundle software from hardware in 1967 as a result of antitrust scrutiny. And Tim Wu extended Chandler’s observations by pointing out that antitrust investigations and trials against IBM from 1967 to 1982, despite ending with the DOJ dropping the suit, ended up generating massive innovation in storage, processing, printing, modems and personal computing. In all likelihood, Microsoft and Intel would not have been able to become significant players without that suit.

I don’t want to overstate this phenomenon of changing markets without deliberate policy action to restructure corporations. Break-ups are really important in unleashing innovation; gasoline refining was one technological breakthrough that occurred in part as a result of the Standard Oil case. Economists John Kwoka and Tommaso M. Valletti have a useful paper on why break-ups just aren’t that hard. Moreover, without winning a case, the signaling function won’t work, and other CEOs won’t necessarily change their behavior based on observing what happened to someone else. Still, historian Richard Hofstadter once wrote made the point beautifully, writing that “anybody who knows anything about the conduct of American business knows that the managers of the large corporations do their business with one eye constantly cast over their shoulders at the antitrust division.”

Even a little scrutiny can go a long way.

Concentration Creep in Book Publishing: German conglomerate Bertelsmann, which owns America’s number one book publisher Penguin Random House, is trying to buy Simon & Schuster, the third largest. That Bertelsmann is even attempting the merger shows just how absurd our antitrust laws have become. The book publishing industry has consolidated heavily over the past twenty years, and the harm is evident. My experience here is relevant.

I published my book with Simon & Schuster, but before I sold the proposal to them I put the book proposal - which is basically the idea for the book without the full story fleshed out - up for auction. I got five bids when I put out my proposal. There were more than five editors who wanted to make a bid, it’s just that some of those editors were at imprints owned by the same conglomerate, and conglomerates don’t let their subsidiary imprints bid against each other. In other words, because of previous publishing mergers, the auction had an artificially low number of bidders, meaning that the price was likely lower than it should have been. This price is otherwise known as the ‘advance,’ which is a slug of money that I used to finance the roughly two year-long period of research and writing. So I probably got a bit less than I would have if there were more publishing houses.

Now, I loved working with Simon & Schuster, and I got enough money to do the research and write the book I wanted to write. But a lot of authors aren’t as fortunate. If Penguin and Simon & Schuster merge, then there will be fewer major bidders in book auctions, and that means authors, especially the non-famous ones, will have less money to finance work. Book quality and diversity will go down, and the market will shift further to superficial work that can be done without research, or to work that is financed by third parties like corporations engaged in public relations or people with inherited wealth. There are further harms here, like to printers who print books, or other input providers who sell into an increasingly concentrated industry. This kind of merger is straight-up illegal by any plain reading of the Clayton Act.

One important caveat here is that Bertelsmann and Simon & Schuster are themselves under the thumb of a monopolist, Amazon, which has extreme market power in physical, audio, and electronic book distribution, and is as a corporation far more powerful than either. In some ways, the Bertelsmann and Simon & Schuster merger is defensive, an attempt to gain bargaining power against a monopolist bookseller. Previous publisher mergers were similarly attempts to gain leverage against chain stores Borders and Barnes & Nobles.

In other words, concentration in one part of the book industry begot concentration elsewhere. The right way to address this merger is to have the antitrust agencies block it, and then go after Amazon. It’s not fair that authors must sell on the terms laid down by increasingly powerful publishers, but this dynamic is driven by the far more unfair situation whereby publishers are dealing with the utterly ruthless trillion dollar powerhouse Amazon.

We Won’t Be Repeating the Obama Administration: Bill Baer, who was the head of the Antitrust Division under Obama, is heading up one of the antitrust review teams for the Biden transition. Baer didn’t do a great job under Obama, but he’s making some useful noises. “We should care too about under enforcement because it’s led to growing concentration in many markets, think agriculture, telecom, wireless, travel, pharma and beer,” he said at an American Bar Association conference. Meanwhile, Senator Amy Klobuchar is auditioning for the Attorney General spot, and saying a Google break-up should be on the table. Given this kind of new rhetoric, I doubt we’ll see a repeat of the lax era of enforcement. To give you a sense for how significantly the Democrats have changed, let’s remember that Sheryl Sandberg was a credible rumored candidate for Treasury Secretary had Hillary Clinton won.

A Street Sweeping Monopoly Roll-Up? Even as the political rhetoric against monopoly becomes more assertive, the economy is getting more concentrated every day. For instance, private equity giant Warburg Pincus has just bought up Sweeping Corp of America (SCA), a corporation that provides “power sweeping for highways, streets, industrial and commercial applications.” SCA was just founded in February of 2017, but it is now the largest company in the space because of acquisitions. In the last few years, SCA bought is rolling up the industry nation-wide, buying Sani-Tech JetVac Services, Sky Sweeping, Reilly Sweeping, USA Services of Florida, Inc. (“USA”), Hy-Tech Property Services, Inc, Contract Sweepers & Equipment Company, Envirosweep, Sweeping South, and Accusweep Services, among others. The consolidation continues in every crevice of the economy.

Tactical Helmet Roll-up by Avon Rubber: Avon Rubber just bought up “Team Wendy, a leading U.S. supplier of exceptional head protection systems for military, law enforcement, search and rescue, and adventure markets,” and this makes Avon a global leader following its “acquisition of 3M’s ballistic protection business and the Ceradyne brand earlier this year.” Avon just won a $93 million sole source contract with the U.S. Army.

Google Judge: Less Jargon in Antitrust, Please: I’m intrigued by the judge in the Google antitrust case. Judge Amit Mehta has expressed some hostility to overly complex and speculative economic jargon. “Federal judges aren’t economists,” he said. Instead, he’ll “look at how the economists’ formulas match up with real-world evidence.” This remark is similar to the appeals court decision in the AT&T-Time Warner case, in which the appeals court dismissed the excessively guess-work heavy and complex economic analyses. This mini-rebellion by some judges against silly theory-heavy and massively overpaid corrupt economic ‘experts’ is a very good thing, and is evidence that at least parts of the judiciary are shifting enforcement philosophies on burdens of proof in antitrust cases. That’s a big deal, and shows how much progress the anti-monopoly movement has made in reorganizing the debate and re-tethering antitrust to reality.

Big Tech and Podcasts: This is an excellent piece in the Washington Monthly on Spotify’s attempt to dominate the podcast market. Meanwhile, Spotify has so much power in music streaming that it is now forcing artists to pay to get better positioning in the algorithm used to pick songs for users. There are laws against payola, but they only apply to those with broadcast licenses. Nevertheless, this practice is obviously corrupt and wrong.

Private Equity and Bankruptcy for Profit: Here’s Moody’s on defaults.

Meanwhile, private equity sponsorship was present in 58% of defaults among non-energy companies, which defaulted mainly through distressed exchanges or skipped debt repayments.

I do not find this fact surprising at all, because private equity tends to load up portfolio companies with debt, and there’s a lot less resiliency. The big leveraged buy-out shops did very well this election cycle, alas.

Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

Happy Thanksgiving!


Matt Stoller

P.S. If you’re involved with the transition, feel free to email me with observations about dealing with market power in any regulatory agency, or anything else you think is relevant to monopoly. There are a good number of anti-monopolists in Biden-world, though it’s not always apparent.