The key takeaway from the Google decision: Don’t Be Evil

How Google violated the Sherman Act by maintaining its monopoly power through exclusive distribution agreements

A critical choice: speaking truth to power 

Four years ago I made a critical choice in my professional life. The  Department of Justice approached me to ask if I would work with them as an expert on the smartphone industry in its investigation of Google for antitrust violations. It wanted to understand how Google used its power, in particular its conduct involving the Android ecosystem, and the implications for search services.

I said yes.

This week that decision was vindicated, with Judge Amit P Mehta’s landmark ruling in the first antitrust decision of the modern Internet era that Google has abused its monopoly over the search business.¹

This decision will likely (and hopefully) have far-reaching (and positive) effects on conduct in technology businesses.²

Before I elaborate, I must first thank all of the members of my team at Endeavour.Partners, both those who worked hundreds or thousands of hours with me on the case itself, and also all the other members of the team who supported us on other work, without even being allowed to know for years what we were working on.

This was a momentous decision for me and my firm for two primary reasons. First, it required me—and all of my colleagues—to commit  to putting this work first and foremost for at least a few years. Second, it would impose tight constraints on what other work we could do, to avoid not just a conflict of interest but the appearance of a conflict of interest (like Caesar’s wife).³

And it would likely incur the ire of one of the most powerful companies in the world.

I said yes because of a deep and profound belief in the power of technological innovation, and also in  the vital importance of this enormously powerful force being used in ways that are guided by a strong moral and ethical compass, concerned with the greater good.

And because I also believed that I could make a significant positive contribution on the basis of what is now thirty years of specialist expertise and relevant experience in the market realities of the smartphone ecosystem.

And because I founded Endeavour Partners twenty years ago in order to be able to “speak truth to power.”⁴

With great power comes great responsibility⁵

Google’s innovations in search transformed humanity’s access to information, the very foundation of being human.

When combined with the modern smartphone in 2008, over just a decade or so Google’s search engine made all of this information available to the overwhelming majority of adult humans on our planet, whatever they needed, whenever they needed it and wherever they were. This transformation is no less than a turning point in human history.

A few years ago, I wrote about the importance of a strong ethical focus in the context of artificial intelligence (AI) in “AI; A New Hope,” published by London Business School.⁶ This article has become even more salient with the advent of generative AI, and is being reflected in the forthcoming updated version of my course on The Business of AI.⁷ My colleagues and I  are also  working on a book about how we can deliver both widespread prosperity and at the same time save our planet by accelerating the pace and changing the direction of innovation, to mitigate its downsides and maximize the net benefits, taking into account factors such as negative externalities and unintended consequences.

Don’t Be Evil⁸

For me that meant that Google’s enormous power in search services, and over the Android ecosystem, should be guided by a deep concern for the greater good.

Unfortunately that was not what I had seen. Quite the converse.

Power tends to corrupt; absolute power corrupts absolutely⁹

Although Android’s inception seems to have been guided by noble intentions on the part of (at least some of) its founders, and by Google’s perfectly reasonable goals to avoid being foreclosed by competitors exploiting their power over distribution, all too soon Google went astray.¹⁰

The extraordinarily rapid epidemic adoption of the modern smartphone over its first few years quickly led to a significant shift in power.

Hundreds of millions of consumers became aware of the power and potential of the modern smartphone, triggering an explosion in demand. Although Apple was scaling its iPhone business as fast as it possibly could, its growth rate was constrained by its ability to scale up the supply chain for some key state-of-the-art components, such as its touchscreen displays. Android’s business model, and in particular the supply chain strength of some key smartphone vendors, such as Samsung, enabled it to capture most of the burgeoning market.¹¹

But each and everyone of those smartphone vendors relied upon access to the Android smartphone operating platform. And Google controlled that platform, and through it the destiny of the Android ecosystem.

Some senior people within Google saw the opportunity to exploit Google’s power over Android to strengthen Google’s position in search, despite the adverse consequences for smartphone vendors and for consumers.

How Google maintained its monopoly power through exclusive distribution agreements

Judge Mehta explained how Google pursued this path relentlessly to maintain its monopoly:

• As of 2019 about 2.3 billion Android devices were subject to [Mobile Application Distribution Agreements (MADA) that require all smartphone vendors] to preload all of [Google’s key] applications onto a new device¹²
•  [This] include[s] the Google Search Widget (or Quick Search Box) [which smartphone vendors must] preload and place on the default home screen of the device
• [Google’s] revenue share agreement[s (RSAs)] generally follow a tiered structure, in which…payment is tied to the degree of device exclusivity¹³
• It would be irrational for a profit-maximizing firm to sign a MADA but then forgo at least some revenue share under the RSA¹⁴
• Google controls the most efficient and effective channels of distribution for [general search engines]. It is the exclusive preloaded [general search engine] on all Apple and Android mobile devices¹⁵
• The bulk of [the DoJ’s] case focuses on the[se] search distribution contracts—the browser agreements … and the Android agreements (the MADAs and RSAs)—which Google allegedly uses to maintain its monopoly in the relevant markets.
• According to [the DoJ], the[se] contracts are unlawful exclusive agreements [which] effectively block Google’s rivals from the most effective channels of search distribution, namely the out-of-the-box default search settings¹⁶
• With the benefit of a full trial, the court can now conclude that the MADA is exclusive in practice.
• Its exclusivity arises from … contractual requirements [and] from two market realities [:] the Google Play Store is a must-have on all Android devices, … and (2) the industry-wide practice is to avoid excessive preloading of applications, or “bloatware,”¹⁷
• The RSAs…are… exclusive agreements¹⁸
• [T]he court concludes that Google has violated Section 2 of the Sherman Act by maintaining its monopoly in two product markets in the United States—general search services and general text advertising—through its exclusive distribution agreements

In short:

1. Smartphone vendors had to have Android to compete.
2. To get Android from Google they had to preload and place prominently Google’s search.
3. If they did this, Google would then pay them for its search services being exclusive.
4. This gave Google control of distribution of search services.
5. This enabled Google to maintain its monopoly in search services.

Now, to remedies.¹⁹

 

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