How Mobile Supports Google's Online Dominance and Why EU Should Take Action

When the European Commission announced antitrust proceedings against Google in mid-April, the most interesting part was not the complaint about the company's sidelining of competitors in search results -- an issue that the Commission had been discussing for years. The real news was the formal investigation into whether, in the words of the Commission, Google's "conduct in relation to its Android mobile operating system as well as applications and services for smartphones and tablets has breached EU antitrust rules."

Most of the discussions of Google in terms of antitrust largely treat the company as merely a search engine; whole articles have been written defending Google against antitrust criticism without even mentioning the words Android or discussing the role of Chrome, Gmail and other software services in promoting Google's dominance. What the European Commission is acknowledging is that in a world where mobile is becoming the primary mode of access to the Internet for large numbers of people, controlling the dominant mobile operating system is crucial to Google's business model and has an anticompetitive role in the Internet ecosystem as its search engine.

As I outline in a new Data Justice policy brief, "How Mobile Supports Google's Online Adverting Dominance- And Why the EU Should Take Action", Android should not be analyzed for its dominance of the mobile operating system sector, since no company is really seeking to make money in that sector alone.  Rather, each is using control of the operating system to strengthen its revenue in its core profit centers, whether Apple strengthening hardware sales, Amazon strengthening its ecommerce position, Microsoft its Office and other applications sales. Google for its part makes essentially no revenue from users of either its Android operating system or its search engine, but each plays a role in giving Google dominance in Internet advertising, especially its Adwords keyword-based advertising -- often called search advertising, but which in fact delivers up ads to search engines, Gmail and a range of partner sites.

Control of Android not only places Google apps in prime real estate on user phones but also delivers the critical engine of Google's strength in advertising, namely detailed information on users. Such personal data is prized by advertisers and, as discussed below, gives Google a premium price per click on those ads compared to any actual or potential competitor in the keyword-based advertising sector. Control of Android for Google is therefore more akin to Microsoft's promotion of its free Internet Explorer browser and other middleware, which were designed not so much to dominate those particular software sectors but rather to reinforce its core operating system dominance at the time.

In examining how Android generates critical data about consumers for Google, regulators should recognize the consumer harm from allowing a company like Google to extract and create such comprehensive profiles of each user.  That harm, as discussed in the policy brief, includes not only any qualitative lost privacy, but the real economic harm of such a dominant player extracting such data at too little a price paid to users for that data and the economic harm that its advertisers can inflict on consumers through various forms of price discrimination that raise the costs of goods across the economy for consumers.

The History of Google Seeking Control of the Mobile Space

Even before the company launched Android, Google had committed to controlling the geolocation technology that allows mobile users (and companies like Google) to know exactly where they are at all times.  In 2007, Google launched the Street View project, ostensibly sending cars up and down streets around the world to photograph buildings to enrich its Maps service.  In reality, however, the other and more important purpose was to create an invisible map of wi-fi hotspots that combined with GPS technology would precisely pinpoint user locations.

This underlying purpose of the Street View project was only revealed when scandal erupted that Google not only was identifying the location of wi-fi hotspots but covertly downloading personal data by users of those hotspots in peoples homes, including personal emails that detailed people's medical histories, marital infidelities, and even sexual preferences.  Countries around the world denounced and fined Google for these invasions of privacy, but the whole enterprise reflected Google's insatiable appetite for data.

When Android was introduced, Android chief Andy Rubin along with other Google executives "emphasized that collecting location data from consumers' smartphones was 'extremely valuable to Google,' and detailed the trouble the company was having with data collection in the wake of a privacy blowup involving Google's Street View cars."  Google used its control of Android to pressure handset manufacturers to drop rival geolocation services rival skyhook in favor of Google's location services -- critical to Google in tracking user locations to feed its advertising engine.

While Google publicly talked about the need to maintain Android "compatibility", in internal emails unearthed in litigation, Dan Morrill of Google noted that pretending the issue was one of "compatibility" with the Android system was a clear fig leaf: "It's not like it isn't obvious to the OEMs [manufacturers of the smartphones] that we are using compatibility as a club to make them do things we want."

Those emails also laid out the strategy Google would use for maintaining dominance of geolocation services (and more broadly the overall mobile ecosystem) through minimizing notice to users, maximizing data collection and using Android as a "club" to keep manufacturers in line.

The Importance of Data

The reason the mobile space was critical to Google is that, as executives have admitted in less guarded moments, it is control of more data that gives Google's its dominance.   Google Research Director Peter Norvig has observed, "We don't have better algorithms than everyone else; we just have more data." There are clear indications from the analysis of Google's advertising operations and its overall business operations that indicate that Google see expansion of control of mobile data by the company as critical to the company's success.   The expansion of Google into Android, Chrome, Gmail, YouTube and the host of other ventures are not "side projects" but parts of an integrated business plan that reinforce its dominance in search advertising.

Android has and continues to play a key role in consolidating Google's hold as mobile becomes a key access point to the Internet for so many people -- and helps the company keep generating the user data that maintains its overall dominance.  What is critical to recognize is that data is the coin of the realm in driving profits in the online industry and Google has cornered a large share of the market in location data for the relatively inexpensive cost of its "free" Android service, a free service consumers pay for with extremely valuable personal data. 

As EU Competition Commissioner Margrethe Vestager has argued, "Many people still don't realize that sites that appear to be free are actually paid for by the information you provide through your searches and behavior online."  Nothing may embody that principle more than Google's "free" Android operating system and the EU Commission is correct to make it a key focus for its antitrust investigations of Google.

Analysts may argue that all companies collect location data through their apps but this underestimates the advantage that Google has in controlling the underlying location services infrastructure in Android and through its multiplicity of core apps across the smartphone market.  A company like Yelp might track user locations when they "check in" to the app, but this provides a far less rich profile of mobile users than the nearly step-by-step tracking throughout the day that Google maintains on most Android phones.

And Google combines this location data with use of its apps, particularly Search and Maps, which compounds the data advantage it already has by adding the element of location to every use of those services.  This is reflected in Google's even greater dominance in mobile search advertising than its advantage in desktop search advertising.

The kind of personal information such as user locations collected by Google gives the company key data not about a particular sector but the attitudes of each individual towards multiple sectors of the economy. Data about users themselves, their preferences and interests, is the critical data input and Google both controls and continually generates new user data on a scale unmatched by rivals.  It is hardly a coincidence that in online advertising as a whole, including all sectors from display to search, that Google with the most user data is the unquestioned leader, while Facebook has been able to use its trove of social media data to vault itself into a strong if distant second place with its strength in display advertising.

The Harm to Consumers

Multiple studies show consumer objections to use of personal data for third party targeting of advertisements and mobile is just opening up more of their lives to surveillance.  Beyond the discomfort consumers may have with the invasion of their privacy, consumers should have concerns about how use of their personal data allow companies to engage in price discrimination and other predatory targeting of consumers in ways that indeed harm them financially

What do advertisers get for their money?  First, targeting ads around personal data does help advertisers effectively identify the customers most interested in their products.  However, the deeper gain for advertisers it is that such user profiling let's companies tailor prices for different customers, engaging in what economists call "price discrimination" to extract the maximum profit from each transaction, since consumers won't know a better deal is being offered to other consumers. Being able to sort consumers by various characteristics online allows companies to offer coupons and price offers that encourage those consumers to pay the maximum price each one individually is likely to pay.  The result overall is that average prices of goods sold through targeted advertising end up being higher than the average price with mass advertising were lower than with targeted online advertising.

Location data is critical to those kinds of price discrimination, as a 2012 Wall Street Journal investigation identified when they found that major companies including Staples, Home Depot, Discover and Rosetta Stone displayed different online prices based on the location of a potential customer.  Individuals in lower income locations actually were offered higher prices in general because retailers knew they had fewer competing local retail outlets available.   Another key example of this kind of price discrimination was the way subprime mortgage lenders -- the largest group of online advertisers at the height of the financial bubble -- offered different terms and conditions to different customers and helped destroy the financial wealth of a large segment of the working population in numerous countries,

For consumers, one result of this dominance is that Google not only extracts their data with little direct compensation but also has no need to even invest much of that surplus in the services they use.  While the technology press is understandably impressed by the endless parade of new Google ventures and investments, but notably these are all paid for by services not provided to the core users of its original search engine, which has become a cash cow throwing off excess funds for those additional ventures.  Google's own financial statements show that it collects tens of billions of dollars more each year in revenue based on its search users than it spends on services for them.   In this sense, Google has been very different from advertising-supported media of the past, from newspapers to television, where the vast bulk of advertising dollars generated have been plowed back into content serving those customers.

For consumers, the result of monopoly control is that, with little viable competition, Google feels little pressure to either strengthen user control of their data or to better compensate those users for its full economic value. And with Google continuing to collect user data at a price far below its economic value to advertisers, this just further feeds the company's accumulation of user data and advantage versus its existing or potential rivals.

Antitrust Action on Google's Mobile Ventures Will Help Restrain Its Overall Monopoly Problem

Given this reality, the most appropriate remedy in the mobile space may be a structural one, with regulators requiring that Google divest itself of mobile-related ventures such as Android and its geolocation services.  Part of Google's dominance comes from the sheer breadth of its user data where no other company knows so much about so many different aspects of users' online life.  Restricting Google more narrowly to search-related data would reduce that overwhelming power, while successor companies controlling only location-based data would have a similarly more limited dossier on users' overall online activity. 

Reducing Google's breadth and dominance of personal data collection online would, first, reduce privacy concerns of users overall by having less integrated profiles of users in any one set of corporate hands and would increase those users' bargaining position in the marketplace to demand compensation for the data they do share online.   With a critical mass of firms competing for users, this ideally would give rise to payments to users for access to their data and more competition to preserve data privacy for users who value their privacy more than any potential payments

Google's investment in mobile has been a tool to reinforce its search advertising monopoly. Requiring the company to divest from the mobile sector would be a significant step in helping to curb that dominance and help open up the possibility of rivals challenging it in that sector, while opening up the overall mobile space to more competition and innovation.