A Guide To The Action At Eric Schmidt's Testimony, Part 2

This is part two of a two-part series. Read part one here.

Part 2 -- What I Would Want to Learn if I Could Ask Questions at the Senate Antitrust Subcommittee Hearings

Next month the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights will hear testimony from Eric Schmidt, Google's Executive Chairman and former CEO. The following provides a brief summary of what I expect to see the Subcommittee investigate with Mr. Schmidt when he testifies before them, and indeed what I would investigate if I were able to ask questions. In plain text the paragraphs below describe why these questions are of interest to me, to Google and its competitors, to companies that bid in Google's keyword auctions, to all of us who use search, and indeed to all consumers. [In italics and within square brackets I identify the legal issues these questions address, and thus why these questions are of interest to the Senate, to the Federal Trade Commission, and to the Department of Justice3.]

One Click Away?

My first priority would have to be to get an assessment of the "just one click away" argument that Google uses to argue that no abuse of competition law or of consumer rights is possible, since consumers are only one click away from changing search engines. If Google's enormous market share in search were based on its loyal users using only Google, then Google has tremendous market power. If 70% of searchers use only Google, than companies that do not achieve a high Google page position may not be found. In contract, if users truly act as if they are one click away from changing search engine providers, or if users compare search results from Google and other search engines a significant fraction of the time, then Google's power over corporations may be reduced. When we understand the behavior of consumers when searching, we have far more insight into Google's ability to influence shopping, to promote its own brands, or to demand higher payment for keywords.

If users do not act as if they are one click away from other search engine providers then it would be interesting to know why:

  • Has Google taken actions to lock users in to Google, through exclusive agreements with AOL, or The New York Times, or major universities? If so, what have they done and why have they done it? [If actions were taken to create or extend a monopoly then this is a potential Sherman Act Section 2 violation.]
  • Has Google taken actions to make it difficult for users to switch search Engines on Android or elsewhere? [If actions were taken to create or extend a monopoly then this is a potential Sherman Act Section 2 violation.]
  • Has Google taken action to interfere with competitors? Has it hindered Bing and Yahoo developing market share by denying them the ability to spider / index YouTube content? Naturally, if this it occurred it would make Bing and Yahoo search much less attractive than Google search. [If such actions were taken to create or extend a monopoly by interfering with competitors then this is a potential Sherman Act Section 2 violation.]
  • Has Google imposed conditions on websites or advertisers that prevent or discourage them from doing business with competitive search engines or with competitive advertising platforms? [If such actions were taken to create or extend a monopoly then this is a potential Sherman Act Section 2 violation.]
If consumers in fact do not switch search engines, then it becomes likely that companies that purchase keywords have little choice about whether or not to bid.

What Business is Google In?

I would next want to determine what business Google thought it was in, and what business its customers thought it was in. [If Google is eventually subject to antitrust litigation it will almost certainly involve vigorously argued disputes over relevant market and share of relevant market.]

Is Google just another channel for placing advertisements, with about 3% of the US market, or an online advertising channel, with perhaps 30% of the market? Or is it an online business that sells access to customers, through keyword auctions, with perhaps 70% of the US market4? If it is in the access business, then it has more than 90% of the European Market, close to 95% of the Australian market, and nearly total domination of the smart phone market globally. There is nothing inherently wrong with having a business that sells customer access. But that is very different from selling ads in a broad advertising market with a wide range of competing media such as radio, television, newspapers, and other forms of print media.

Antitrust investigations almost always begin by attempting to establish the relevant market for a company's products, before attempting to determine a company's share of that market. If the relevant market is search, then Google's share is overwhelming. If the relevant market is all advertising, then its share is inconsequential. There are precedents, such as the US Department of Justice's blocking of an agreement between Google and Yahoo!, that suggest that the relevant market is search, but Google will no doubt vigorously contest this.

If Google indeed has such dominant share of online search and therefore of online customer access, the following become important:

  • How did it achieve this share in paid search? Did it take actions to limit competitors' access to consumers, or to limit their access to websites that interact with consumers? Examples might include actions such as tying up exclusive contracts with prominent websites like AOL or the New York Times. [If actions were taken to create or extend a monopoly then this is a potential Sherman Act Section 2 violation.]
  • Does Google truly believe that paid search is a substitute for the brand strength that is created through traditional media advertising? Or do they view search as a complement for advertising rather than as a form of advertising? [If Google is eventually subject to antitrust litigation it will almost certainly involve vigorously argued disputes over the definition of the relevant market and over measurement of the company's share of the relevant market.]
  • Do the companies that purchase keywords actually believe that paid search is a substitute for the brand strength that is created through traditional media advertising? Or do they view search as a complement for advertising rather than as a form of advertising? [If Google is eventually subject to antitrust litigation it will almost certainly involve vigorously argued disputes over relevant market and share of relevant market.]

How Does Paid Search Really Work?

I would next want to understand how paid search worked. Virtually all of Google's revenues currently come from the auctioning of keywords to companies trying to improve their relative positioning in search results, and thus improve their access to consumers. I would hope to learn how Google uses its potential power over search in its strategies for pricing keywords.

  • How does the keyword auction really work? To what extent does Google vary the number of spots available, in order to limit supply, maximize uncertainty among corporate bidders, and maximize revenue? To what extent does Google coach companies on how to bid against each other, continuing the auction even after prices are determined? To what extent does the operation of the auction depend upon, demonstrate, and profit from market power? [Once again, there may be a potential Sherman Act Section 2 violation.]
  • To what extent does Google restrict the supply of spots offered for purchase, with or without informing bidders? Restricting supply to increase revenue and profits works only in the presence of a monopoly or a tightly disciplined cartel and might constitute both a demonstration of monopoly power and the successful abuse of that power. [Once again, this may be a potential Sherman Act Section 2 violation.]
  • Google's current explanation for their ranking algorithm is that it is Rank by Relevance. Is it true that the algorithm essentially ranks bidders by the product of their quality score times their bid, so that a company that Google views as high quality can get top spot with a relatively low bid while a poor quality company can get top spot with a higher bid. Google claims that this is to benefit consumers. To what extent does this differ from Rank by Revenue? To what extent does this differ from the revenue maximizing strategy that Google would pursue as a monopolist? [If Google does indeed follow a strategy closely related to what would be its monopoly pricing strategy, this may be an indication of monopoly power and of abuse of that power. This may indicate a Sherman Section 2 violation.]

I would also like to know, to what extent this algorithm allows Google to expose consumers to websites from low quality sellers with strong financial incentives and strong ability to bid for keywords, in order to achieve prime placement.

  • A seller of low-quality or counterfeit pharmaceuticals operating out of China would have almost no expenses and could easily afford to purchase a prominent spot. [This might constitute an FTC Act Section 5 violation.]
  • If the maker of very inexpensive chocolates paid a premium to list its candies as 70% cocoa instead of 11%, the FTC would certainly intervene. If a financially shaky corporation paid Moody's or S&P to upgrade it from a B to a AAA credit rating before issuing a tranche of bonds, the SEC would certainly intervene. To what extent is the behavior of paid search inconsistent with Google's mission statement? [This might constitute an FTC Act Section 5 violation.]
  • Perhaps of greatest interest to the FTC, to what extent does paid search mislead, confuse, or harm consumers? [To what extent does Google's algorithm for paid search constitute an FTC Section 5 violation? To what extent does it violate the Subcommittee's mission to protect consumers' rights?]

How Does Free Search Really Work?

I would next want to understand how free (organic) search worked. It would initially appear that there is no chance of antitrust abuse in a product that is given away free. However, if Google uses the "free-ness" of free search to maximize market share and then leverages free search to demand compensation in other ways then free search does provide the possibility of antitrust abuse. [The use of power created by market share in free search might create opportunities for Sherman Act Section 2 violations.]

  • For example, if, as alleged, the free-search ranking of a page can be altered by whether or not it accepts Google+ buttons, then monopoly power in free search can be used to interfere with competition and to unfairly benefit Google in other businesses
  • Likewise, if Google sales personnel push companies to bid on keywords, then market power in free search may lead to market power in paid search. For example, sales personnel could explain that participation in keyword auctions increases traffic and visibility, which of course it does. This increased visibility leads to increased usage, increased linkages, and increased visibility to Google's search engine, which of course it also does. That increase in visibility and increase in linkages will increase prominence in free search, since those are precisely the conditions rewarded with prominence in free search. [If this is used to pressure companies to bid on key words to survive in organic search, this may represent a Section 2 violation, or at least a clear abuse of market power.]
  • Once again, I would be interested in the extent to which Google manipulates free search to benefit its own offerings, and to what extent this is done in explicit contradiction of their online Mission Statement. Google's Mission Statement commits Google to fair and unbiased operation of search. That clearly is not compatible with preferencing its own subsidiaries. A company that labels its coffee as Fair Trade cannot then make exceptions for coffee from plantations that it owns, and a search engine that labels itself as fair and unbiased cannot make exceptions for the listing of companies or divisions or services that it owns. This may confuse or harm consumers. Indeed, when a company owns both a service provider and the mechanisms used to find service providers, the temptation to preference its own offerings may be almost irresistible. [This may be an FTC Act Section 5 violation. It may indeed violate the Subcommittee's mission to protect consumers' rights.]

How Has Android been Leveraged?

We need to understand how has Google promoted Android. To what extent is Android being subsidized by profits from Google's near-monopoly position in search? To what extent have these subsidies been aimed at developing a near-monopoly position in online search or in online advertising?

  • Has the pricing strategy or the promotional strategy of Android been designed to obtain monopoly power in mobile search? Using the profits from one business to achieve monopoly power in a second business has the clear ability to deter market entry, limit consumer choice, and interfere with the competitive process. [This may potentially be a Sherman Act Section 2 violation.]

So What's Up with Motorola Mobility?

Finally, we need to understand how Google intends to market Motorola phones after the acquisition of Motorola Mobility. Will Google actually compete against Samsung and other providers of Android phones after the acquisition? Or will some sort of less-than-fully-competitive accommodation be reached? Pundits expected makers of Android phones to react with outrage at the announcement that Google intends to purchase Motorola Mobility and thus intends to compete with them in the cellphone business. Surprisingly, Samsung expressed delight. Why? Does Samsung believe that this deal is driven by Google's need to acquire patents, and thus to protect all sellers of Android phones? Or are other factors possibly also relevant to Samsung's reaction?

  • Is it even remotely possible that Google intends to divide up territories and has assured Samsung that it will not compete with Samsung in Samsung's core market regions? [If this occurred it would be a clear Sherman Section 1 violation.]

In Conclusion ...

Surely, recent events involving Google's support for illegal pharmaceutical smuggling provide justification for scrutiny. Legislation promoting fair competition and legislation protecting consumer rights may have been violated. Once again, this is not a presumption of guilt. But there are a lot of things we really should want to know about Google's activities and a great deal I would want to learn from Chairman Schmidt's testimony.

We want to know that Google's activities have been legal, of course. But with Google's power, and their willingness to use that power to advance their business interests, I am just as interested in ascertaining that their activities have been fair.

I would remember the following quote from Supreme Court Justice Scalia, in the case Eastman Kodak Co. v. Image Technical Services, "[w]here a defendant maintains substantial market power, his activities are examined through a special lens: Behavior that might otherwise not be of concern to the antitrust laws - or that might even be viewed as procompetitive -- can take on exclusionary connotations when practiced by a monopolist."

Eric Schmidt alludes to the creepy line that he uses to define the bounds of behavior he believes is appropriate for Google.

For those of you who missed it, here is what Mr. Schmidt said about the "creepy line."

"There is what I call the creepy line," he said, according to The Hill. "The Google policy on a lot of things is to get right up to the creepy line and not cross it."

Schmidt was asked by The Atlantic's James Bennet about the possibility of Google developing a kind of "implant" in the future.

"I would argue that implanting something in your brain is beyond the creepy line," he replied, according to The Hill's transcript, "at least for the moment, until the technology gets better."
It's reassuring to know that Mr. Schmidt considers Google brain implants to be "creepy", or to be creepy "at least for the moment, until the technology gets better." It's less reassuring that he did not find other activities, like Wi-Spy (recording wi-fi traffic while driving around video-recording for Google Street) or Doodle-4-Google (laying the groundwork for future identity theft) to also be over the line.

Given Google's power, it may be necessary to place that line far more conservatively than Google executives currently believe.

3 Throughout this post I will refer to Sherman Act and FTC Act violations. A Sherman Act Section 2 violation deals with actions taken to create, extend, or exploit a monopoly. A Sherman Act Section 1 violation deals with actions to coordinate the behavior of a cartel or oligopoly, for example, to divide territories so that each play has an effective regional monopoly. An FTC Act Section 5 violation deals with unfair business practices, particularly activities to deceive and harm consumers. This is described in slightly more detail in the companion post.

4 Numbers from Google presentation at Wharton, ca. 2010.