Craziest Part Of Apple's Price Fixing Ruling: Publishers Knew They Were Encouraging Piracy, Didn't Care

from the because-of-course dept

For many years, despite claims from legacy copyright industry extremists who sought to blame everyone else for any piracy issues, we've pointed out that the reality is almost always that piracy is their own fault for failing to provide convenient, reasonably priced alternatives to the public. When they actually do that, piracy rates almost always drop significantly. And now we have even more proof that these legacy industry insiders know this and don't care.

You may remember that, two years ago, Apple was found guilty of price fixing for ebooks, in an effort to break Amazon's hold on the market and to artificially inflate the price of ebooks, creating significant consumer harm. Apple agreed to settle with the government last year, but dependent on how its appeals process went. Well, the Second Circuit appeals court was... unimpressed with Apple's appeal and has upheld the original ruling. The ruling (and the dissent) are interesting reads, but perhaps most interesting is the tidbit in which the big publishers admit that what they're doing will increase piracy, but they don't care because they so badly want to raise prices from Amazon's established $9.99 per ebook.

The most significant attack that the publishers considered and then undertook, however, was to withhold new and bestselling books from Amazon until the hardcover version had spent several months in stores, a practice known as “windowing.” Members of the Big Six both kept one another abreast of their plans to window, and actively pushed others toward the strategy. By December 2009, the Wall Street Journal and New York Times were reporting that four of the Big Six had announced plans to delay ebook releases until after the print release, and the two holdouts — Penguin and Random House — faced pressure from their peers.

Ultimately, however, the publishers viewed even this strategy to save their business model as self‐destructive. Employees inside the publishing companies noted that windowing encouraged piracy, punished ebook consumers, and harmed long‐term sales. One author wrote to Sargent in December 2009 that the “old model has to change” and that it would be better to “embrace e‐books," publish them at the same time as the hardcovers, “and pray to God they both sell like crazy.” .... Sargent agreed, but expressed the hope that ebooks could eventually be sold for between $12.95 and $14.95. “The question is,” he mused, “how to get there?”

In other words, the publishers were so focused on wanting to raise the price of ebooks, they were willing to embrace a solution that they knew both encouraged piracy and harmed long-term sales.

It really makes you wonder what kind of boards of directors these legacy publishers have, that they'd allow their companies to purposely shoot themselves in the foot, so they could raise prices and put in place windowing, even while recognizing all the harm it causes long term.

Filed Under: antitrust, ebooks, piracy, price fixing, windowing
Companies: apple

China's New Antitrust Rules Aim To Blunt Foreign Patent Threat

from the do-as-you-would-be-done-by dept

For years, the West -- particularly the US -- has been complaining about China's "lack of respect" for patents. And for years, Techdirt has been pointing out that China is actually a big fan of patents: its companies have been building up their own patent hoards at a rapid pace, and starting to deploy them against Western competitors. A report on Bloomberg Business explores how the Chinese government is also seeking to neutralize the threat of patents being used against its own manufacturers through the introduction of new antitrust rules:

The clampdown on patents has the potential to alter the balance of power in the global mobile-phone industry, which generated $412 billion last year, according to IDC. These new rules may weaken the ability of Apple, Microsoft Corp. and Qualcomm -- typically among the top 15 U.S. patent recipients each year -- to compete in China, the world's largest mobile-phone market, and other countries that follow.

There are two main elements to China's new policy, both of which will make it harder for Western companies to use key patents against Chinese competitors:

One involves patent values for technology included in industry standards, such as Wi-Fi. The other may require unique features -- like Apple’s slide-to-unlock feature, or Microsoft software that synchronizes calendars -- to be licensed by others if considered "dominant" or “essential.”

As the Bloomberg Business article rightly points out:

The Chinese ... are just formalizing what 100 years of legal precedent has done in the U.S. and Europe, and a lot will depend on how the governments implement the rules, antitrust lawyers said.

In other words, China will soon be "respecting" patents just as much as its Western counterparts -- and doubtless deploying them just as aggressively for competitive advantage.

Follow me @glynmoody on Twitter or identi.ca, and +glynmoody on Google+

Filed Under: antitrust, china, competition, patents

How Much Of Europe's Regulatory Interest In Silicon Valley Is Just Jealousy Over Successful Foreign Companies?

from the real-or-imagined dept

A month ago, the EU brought down the antitrust hammer on Google -- with somewhat suspicious timing. As we noted, the move by EU regulators to claim that Google violated antitrust laws came the very same day that the EU's digital commissioner, Gunther Oettinger announced that the EU should more heavily regulate American internet companies to help European competitors get a leg up against them:

The European Union should regulate Internet platforms in a way that allows a new generation of European operators to overtake the dominant U.S. players, the bloc’s digital czar said, in an unusually blunt assessment of the risks that U.S. Web giants are viewed as posing to the continent’s industrial heartland.

Speaking at a major industrial fair in Hannover, Germany, the EU’s digital commissioner, Gunther Oettinger, said Europe’s online businesses were “dependent on a few non-EU players world-wide” because the region had “missed many opportunities” in the development of online platforms.

Mr. Oettinger spoke of the need to “replace today’s Web search engines, operating systems and social networks” without naming any companies.

And this week, the NY Times has an article about the increasing attention Facebook is getting from European regulators as well. In that case, it's not so much antitrust issues (though, those are raised on the side), but much more focused on data protection/data privacy issues.

To be clear, Facebook doesn't have the best reputation when it comes to handling privacy issues of its users. The company has a history of changing its privacy policies with little notice, sometimes in ways that appear to unilaterally shift the privacy settings on certain information. Frankly, much of this was a result of Facebook needing to shift from what was an almost entirely closed network to one that was much more public and open -- which was a key to the site becoming so successful. Frankly, while some of the criticism is well deserved, and Facebook's bull-in-a-china-shop approach to privacy in its earlier days was pretty startling, of late the company has appeared to be much better about things. And many of the earlier concerns proved to be almost entirely overblown by people misrepresenting things or taking things completely out of context.

That isn't to claim that Facebook is good for user privacy -- but the supposed fears about Facebook and privacy seem overblown. Yes, Facebook is super popular, but it's still a voluntary system that you can choose to use or not. If you really don't like the company, it's not hard to not use it and to block it from tracking you on various other sites. But that won't stop Europe from using fears over privacy as a wedge to attack the company:

Regulators in Europe, however, are especially focused on how the company collects and handles those users’ data. The region has some of the world’s toughest data protection rules, and policy makers from France, Germany and Belgium are investigating whether Facebook broke Europe’s laws after the company announced a new privacy policy this year.

If found to have breached the privacy rules, Facebook may face fines or demands that it change how the company handles people’s data, though the company says it complies with the region’s data protection laws.

Meanwhile, European regulators are also looking to regulate how Facebook's messaging systems work:

Yet lawmakers are now looking into whether Facebook’s messaging services should be regulated like those offered by traditional carriers. And industry executives say that as the social network starts to offer other services like phone calls through the company’s many smartphone applications, Facebook should play by the same rules that now apply to traditional mobile operators.

It will be worth watching closely to see what regulators come up with. It is, of course, entirely possible that these internet companies really are doing bad things that should require regulators to step in. But, to date, there's been a lot of puffed up smoke, rather than any actual fire. And it really seems like the interest from EU regulators has more to do with the fact that these companies are (1) big and successful and (2) American rather than European.

Filed Under: antitrust, eu, jealousy, policy, privacy, regulation, silicon valley
Companies: facebook, google

California Supreme Court Shows How Pharma 'Pay For Delay' Can Violate Antitrust Laws

from the antitrust dept

For many years now, we've been talking about the problematic practice of "pay for delay" in the pharma industry. This involved patent holders paying generic pharmaceutical makers some amount of money to not enter the market in order to keep their own monopoly even longer. There's a complex process behind all of this, which often involves the larger pharmaceutical company first suing a generic maker, and then "settling" by agreeing to pay a sum of money to the generic maker. But, part of the "settlement" is that the generic drugmaker stays out of the market for longer than they otherwise would have needed to do so. Not surprisingly, the rise of such pay for delay, or "reverse payment" deals, came as a result of the Hatch-Waxman Act from 1984, which was supposed to encourage generic drugs to enter the market. But, because Congress does a really crappy job understanding game theory, those behind the bill failed to realize they were actually setting up incentives for the reverse (we'll get to how and why in a moment).

Either way, there have been a number of anti-trust lawsuits filed over these practices and finally, in 2013, in a case against Actavis, the Supreme Court ruled that these kinds of deals may violate antitrust laws, and the FTC had every right to use antitrust law against drugmakers. Late last year, the FTC finally put those powers to use (meanwhile, over in Europe, regulators have been going after the same practice).

And yet, even with the Supreme Court weighing in, all is not yet settled. Here in California, there was a separate case, revolving around pharma giant Bayer and the making of its super popular drug Cipro. There were a few different issues raised in this case, focusing mainly on whether California's state antitrust law could also be used against these deals (rather than just federal antitrust law) and also what "test" had to be used to determine if these deals violated the law (and, as part of that, whether you could presume that any such pay for delay deal must violate antitrust law).

The ruling itself [pdf] is a bit dense, but says that, yes, California's antitrust law does apply, and Bayer's efforts may violate antitrust law. But, in the process, it does a pretty good job laying out just how ridiculous the Hatch-Waxman Act was in terms of the incentives it actually set up, compared to the stated purpose of the bill:

The Hatch-Waxman Act illustrates the law of unintended consequences. Congress wrote into the act a substantial incentive for generics to enter markets earlier by offering a 180-day exclusivity period to the first generic filer, and only that filer, to challenge a patent.... The theory was that a generic would be more likely to challenge dubious patents if offered the carrot of an enormously valuable six-month period in which only it and the brand could produce a drug.... Otherwise, ―free rider‖ problems might arise: every generic would have an incentive to hold back and let some other generic be the one to shoulder the risk and litigation costs associated with challenging a patent.

In other words, somewhat incredibly, Hatch and Waxman basically decided the best way to encourage more non-monopoly-covered drugs on the market was... to grant them more monopolies. Ugh. What is it with politicians falsely assuming that everyone needs a government granted monopoly to do anything?

And, as with most government-granted monopolies, things don't quite go according to plan:

This solution may well have encouraged more generics to file patent challenges, but not without creating a series of new problems. In other settings, a patentee might have little incentive to buy off a challenger in order to preserve its monopoly and continue reaping monopoly profits, for the simple reason that paying off the first challenger would simply encourage another challenger, and then another, and then another.... Two features of the Hatch-Waxman Act change this dynamic. First, the 180-day exclusivity period created a bottleneck; no one else could receive FDA approval until after its expiration.... Second, other generics tempted to challenge a patent in the wake of a settlement with the first-filing generic would have to wait out an automatic 30-month stay the brand could obtain just by opposing their requests for FDA approval....

This legal regime means that, regardless of the degree of likely validity of a patent, the brand and first-filing generic have an incentive to effectively establish a cartel through a reverse payment settlement....

In other words, since Hatch-Waxman gives one generic company its own monopoly, the incentives are for the patent holder to figure out a way to pay off that company to not actually make use of that monopoly, thus allowing the original pharma company to keep its monopoly even longer.

Hey, how about we don't deal with the problems of government granted monopolies by piling more government granted monopolies on top of them? Just a thought...

And, because of all of these issues, it also can be used to block challenge to the validity of a pharma patent:

Rather than expend litigation costs on either side, the brand and generic can reach a settlement that reflects the likely validity or invalidity of the patent (stronger patent, smaller settlement; weaker patent, bigger settlement), grants the generic a share of monopoly profits, and leaves the brand the sole manufacturer of the product.

It is likely for this reason that reverse payment settlements, practically unheard of before the Hatch-Waxman Act, have proliferated in the years since its enactment.... This is probably not what Congress intended.

You think?

Either way, that question on the validity of the patent comes into play in the analysis of how antitrust law applies. After all, patents are technically an exception to antitrust law, since they're a government sanctioned monopoly. But what about an invalid patent?

Courts thus must reconcile the two bodies of law, making ―an adjustment between the lawful restraint on trade of the patent monopoly and the illegal restraint prohibited broadly by‖ antitrust law....

At the extremes, this is easy. If a patent were known to be invalid, a private agreement nevertheless giving it effect would be plainly illegal.... Conversely, if a patent were known to be valid, an agreement foreclosing competition no more than the statutory monopoly would not restrain trade beyond what federal law permitted, and the rights patent law affords the patentee would supersede any state law prohibition. Difficulties emerge when we move from a hypothetical patent known to be determinately valid or invalid to the real world, where validity may be unclear. When assessing the antitrust implications of an agreement arising from a patent, the truth about the patent‘s validity cannot always be known. The issue is how antitrust and patent law should accommodate each other under these conditions of uncertainty.

The ruling notes the importance of being able to regularly test the validity of patents to make sure bad patents don't stay in place, robbing the public domain (as well as the public of such benefits). Thankfully, the court recognizes that giving a government granted monopoly has tremendous costs, so they shouldn't just be given out willy-nilly:

Patents carry with them a frequent cost—monopoly premiums the public must bear.... The willingness to pay that cost depends upon a quid pro quo: ― " 'the public interest in granting patent monopolies‘ exists only to the extent that 'the public is given a novel and useful invention‘ in 'consideration for its grant.‘ " ... Accordingly, patent policy does not support unquestioned protection of every inventor‘s rights, but instead favors ―eliminating unwarranted patent grants so the public will not 'continually be required to pay tribute to would-be monopolists without need or justification.' " ... Vigorous testing for validity is thus desirable in order to weed out patents that shield a monopoly without offering corresponding public benefits.

And, in the end, the California Supreme Court notes that while it need not follow the lead of the federal Supreme Court in determining if patent law pre-empted antitrust law, the reasoning makes sense. As for which "test" to apply to see whether there is antitrust here, the Court notes that rather than hard-and-fast rules and buckets, the distinctions may be a bit more fuzzy than some assume. So rather than choosing one of the three big "rules" -- "rule of reason," "per se" or "quick look" -- the Court notes that there's more of a "sliding scale." Instead, it looks at the overall situation to determine if these practices violated antitrust law. The overall analysis is long and detailed, but the court recognizes that what's going on here and how these efforts can certainly harm the public, creating an "anticompetitive effect." It lays out a basic process for determining whether or not these agreements are anticompetitive, but rejects the idea that all such pay to delay deals must be anticompetitive (which would have been a nicer standard). Either way, this ruling certainly will make life more difficult for pharmaceutical companies looking to do pay to delay deals, meaning that it's good for the public and their health.

Filed Under: antitrust, california, cipro, generics, hatch waxman, hatch-waxman act, patents, pay for delay, reverse payments
Companies: bayer

Apple Trying To Kill Off Spotify's Free Tier; DOJ Now Investigating For Antitrust

from the tempting-the-anti-trust-gods dept

Remember a few years ago when Apple got in trouble for conspiring with book publishers to raise ebook prices to hurt Amazon and the public? Apparently the company hasn't learned very much. Today comes a report from the Verge, claiming that the DOJ is now investigating Apple for conspiring with the major record labels to get them to kill off Spotify's free tier, in an effort to better promote its own Beats Music service, which has no free tier.

Apple has been using its considerable power in the music industry to stop the music labels from renewing Spotify’s license to stream music through its free tier. Spotify currently has 60 million listeners, but only 15 million of them are paid users. Getting the music labels to kill the freemium tiers from Spotify and others could put Apple in prime position to grab a large swath of new users when it launches its own streaming service, which is widely expected to feature a considerable amount of exclusive content. "All the way up to Tim Cook, these guys are cutthroat," one music industry source said.

And it's not just Spotify. Apparently, Apple was trying to get labels to pull music from YouTube too:

Sources also indicated that Apple offered to pay YouTube’s music licensing fee to Universal Music Group if the label stopped allowing its songs on YouTube. Apple is seemingly trying to clear a path before its streaming service launches, which is expected to debut at WWDC in June. If Apple convinces the labels to stop licensing freemium services from Spotify and YouTube, it could take out a significant portion of business from its two largest music competitors.

This is fascinating for a few reasons, even beyond Apple's antitrust troubles over ebooks. In fact, there's some history here as well. A few years ago, there was an investigation, after Apple tried to pressure the labels into killing off daily deals that they were offering to Amazon, as it harmed Apple's iTunes business.

And, of course, there's the long history of the labels' relationship with Apple for much of the first decade of the millennium. Almost exactly a decade ago, we wrote about how the music labels all resented Apple because it had become such a dominant force in music with iTunes and the iPod (this was pre-iPhone) and had (for a while, at least) blocked the labels from trying to raise the price of single tracks beyond the original $0.99 price point. Of course, it's quite a sign of how the online music industry has shifted from downloads to streaming that those labels are apparently now working with Apple to focus on trying to stop competitors like Spotify and YouTube.

Just a month or so ago, we noted that there had been a series of articles claiming that the labels themselves were conspiring to put an end to free tiers on Spotify and other services, and we pointed out how stupid this was (mainly in the context of Jay-Z's new "Tidal" service). Bringing Apple into the game as well just makes the whole thing that much more ridiculous.

Rather than trying to build a better experience for users and give them more value, it appears that the labels and Apples are looking to decrease the value of competitors through coordinated action. It really says something -- and not something good -- when a company thinks the only way to compete in the market place is to kneecap competitors rather than build a better service itself. Competition has shown that great services can be built when they actually do focus on what consumers want. And there's still a long way to go. Spotify still has significant problems, but it's pretty good right now. It's astounding that Apple and the labels think that the right solution is not to build an even better product, but rather to make everyone else's products worse. Once again, it makes you wonder if they actually want to drive consumers back to completely unauthorized services.

And here's the thing that's really bizarre: why should Apple care about this at all? Apple is a hardware business. Even when iTunes was dominant, people at Apple would quietly admit that it was considered a "loss leader" or maybe a "breakeven leader" with the focus on selling more hardware. The same should be true of a streaming music service. Beats can make iPhones even more valuable -- and one way to do that is by offering a free streaming tier. Why Apple wants to take away its own value seems like a strategic error all around -- not just for consumers and competitors, but for itself as well.

Filed Under: antitrust, competition, doj, free tier, music, music streaming, value
Companies: apple, riaa, spotify, youtube

Google To EU: You Know, No One Really Uses Our Vertical Search Products

from the fine-lines dept

As was widely expected yesterday, the EU has officially come out with its "Statement of Objections" to Google practices that are at the heart of its antitrust complaint. They are almost entirely focused on the fact that Google promotes its own shopping search product at the expense of competitors. From the announcement:

• Google systematically positions and prominently displays its comparison shopping service in its general search results pages, irrespective of its merits. This conduct started in 2008.
• Google does not apply to its own comparison shopping service the system of penalties, which it applies to other comparison shopping services on the basis of defined parameters, and which can lead to the lowering of the rank in which they appear in Google's general search results pages.

• Froogle, Google's first comparison shopping service, did not benefit from any favourable treatment, and performed poorly.
• As a result of Google's systematic favouring of its subsequent comparison shopping services "Google Product Search" and "Google Shopping", both experienced higher rates of growth, to the detriment of rival comparison shopping services.
• Google's conduct has a negative impact on consumers and innovation. It means that users do not necessarily see the most relevant comparison shopping results in response to their queries, and that incentives to innovate from rivals are lowered as they know that however good their product, they will not benefit from the same prominence as Google's product.

This somewhat echoes the FTC's analysis of Google's playing with shopping search -- but the FTC also noted that the end results actually seemed to be good for consumers (something the EU appears to be less concerned with). Here was the FTC's conclusion on the same issue:

Indeed, the evidence paints a complex portrait of a company working toward an overall goal of maintaining its market share by providing the best user experience, while simultaneously engaging in tactics that resulted in harm to many vertical competitors, and likely helped to entrench Google's monopoly power over search and search advertising. The determination that Google's conduct is anticompetitive, and deserving of condemnation, would require an extensive balancing of these factors, a task that courts have been unwilling- in similar circumstances - to perform under Section 2. Thus, although it is a close question, Staff does not recommend that the Commission move forward on this cause of action.

In short, it is clear that Google experimented with ways to improve its own shopping search performance, but it's hard to see how some of the EU's complaints make that much sense. What business is required to promote it competitors?

Either way, Google is now in the somewhat awkward position of pointing out that its own vertical search products both are good enough to deserve the treatment Google gave them, yet bad enough that no one actually uses them. Thus it has put out a somewhat hilarious blog post that talks about how little people actually use Google's vertical search products while also highlighting how many competitors there are. Here, for example, is the chart it shows for shopping sites in Germany: It's pretty clear what point Google is trying to make there, though it seems likely that the EU Commission will quickly argue that this chart is actually unrelated to the point that it is making -- that Google may be somehow "unfairly" leveraging its dominant position in general search, to push its vertical shopping search on users. The real question, is whether or not that's harming end users in any way. That's the part that seems tough to support. There do appear to be many other options for searching. And, personally, as someone who regularly uses Google (and other search engines) for a variety of searching needs, I can say that I never use it for product/shopping search, whether or not it promotes it in its search results, because I automatically default to other specialized sites for those kinds of searches. I'm at a loss as to how Google promoting its own shopping search does any harm to me in those situations. It's just another competitor (and to me, not a very good one).

As we noted a few months ago, based on a tool that Yelp and TripAdvisor put together, there are arguments to be made that Google could do a better job with how it handles vertical search results, using its search algorithm to pull in results from others -- but it's difficult to see why anyone should want government bureaucrats determining how to build search engine results.

Filed Under: abuse, antitrust, consumers, eu, europe, monopolies, shopping search, vertical search
Companies: google

EU Official Says It's Time To Harm American Internet Companies Via Regulations... Hours Later Antitrust Charges Against Google Announced

from the as-expected dept

This has been expected for a few weeks now (or a few months, depending on how you look at it), but the EU is now officially getting ready to file antitrust charges against Google. The WSJ has the initial report with very few details:

Europe’s antitrust regulator has decided to file formal charges against Google Inc. for violating the bloc’s antitrust laws, a person familiar with the matter said on Tuesday, stepping up a five-year investigation that is set to become the biggest competition battle in Brussels since the European Union’s pursuit of Microsoft Corp. a decade ago.

This also happens to come out the very same day that the EU's digital commissioner, Gunther Oettinger, has announced that the EU should regulate American internet companies to provide a bigger opportunity for European companies:

The European Union should regulate Internet platforms in a way that allows a new generation of European operators to overtake the dominant U.S. players, the bloc’s digital czar said, in an unusually blunt assessment of the risks that U.S. Web giants are viewed as posing to the continent’s industrial heartland.

Speaking at a major industrial fair in Hannover, Germany, the EU’s digital commissioner, Günther Oettinger, said Europe’s online businesses were “dependent on a few non-EU players world-wide” because the region had “missed many opportunities” in the development of online platforms.

Mr. Oettinger spoke of the need to “replace today’s Web search engines, operating systems and social networks” without naming any companies.

Obviously, the details of the charges against Google matter quite a bit, but, as we've said in the past, it seems odd that technocrat regulators seem to think that they know how to better design a search engine or a social network than the companies who have actually been doing so. Furthermore, the idea that European companies are at some sort of inherent disadvantage to American startups seems disproved by the success of multiple European internet companies, including Spotify and Soundcloud. Those companies didn't succeed by having regulators kneecap their competitors, but by building a better product.

Again, the specifics here definitely matter quite a bit, but given just how "transparent" EU regulators have been lately about wanting to take down successful American internet companies solely because they're successful and American, there are serious questions about the real motives behind this particular antitrust move. And, even worse, they don't seem to realize how a misguided antitrust fight will come back around and harm European internet companies as well, limiting their ability to truly compete.

Filed Under: antitrust, competition, eu, gunther oettinger, innovation, internet
Companies: google

Accidentally Revealed FTC Document Details Some Questionable Google Practices, But Not The Ones Most People Focused On

from the fascinating-stuff dept

Last week, the Wall Street Journal published an article detailing how one part of the FTC, the competition bureau, wanted to go after Google for antitrust violations, claiming it was eventually "overruled" by the FTC's commissioners who sided with the economic bureau that felt there was no real antitrust violations in Google's practices. The WSJ got its hands on part of the internal report by accident -- saying that the FTC inadvertently handed it over as a response to a different FOIA request, but that it was only part of the internal report. Late yesterday, the WSJ released the document it received (which you can see here in PDF form). Somewhat bizarrely, it's every other page of the report, suggesting some sort of weird screwup inside the FTC.

I recommend reading through the whole thing (the final third is all footnotes, but they're also super interesting). It details a variety of background tidbits about the search industry, some of which have never been revealed before. If you want an annotated version, I highly recommend reading Danny Sullivan's live tweets as he read through the report and the footnotes.

However, now that we get to read all the details, it seems like the Wall Street Journal oversold the story. It doesn't really show a huge conflict within the FTC at all. Basically, the competition bureau discussed three practices that it found problematic and potentially worthy of prosecution. And, yes, the FTC eventually decided not to prosecute. But -- and this is the important part that most of the coverage seems to ignore -- the final agreement between the FTC and Google involve Google agreeing to cease two of the three questionable practices (and, frankly, the third "questionable" practice doesn't seem that questionable).

And, on top of that, the one practice that got most of the attention (both early on in the antitrust complaints against Google and in the coverage about this leaked report) -- the demoting of vertical search engine results in Google's search -- was the part that even the competition bureau found likely did not violate any antitrust laws, and was actually for the benefit of Google's users.

Specifically, most of the focus on Google's potential "anti-trust" activists has been on its impact on "competing" search engines, specifically "vertical" search engines for things like "local," "travel," and "shopping." And the report disclosed pretty clear evidence that Google purposely pushed down some of those results to promote its own results -- but there were good reasons for this, and as such, it appears that pretty much everyone at the FTC -- including those who wanted to punish Google for other things, agreed that there was no antitrust violation here. That's mostly because those efforts actually benefited consumers. And it's not difficult to see how: when you do a search on Google you want to get to results. You don't want to be sent off to another vertical search engine with another set of results. While the FTC agrees that this may harm vertical search competitors, that doesn't mean it harmed consumers. The FTC recognizes that in an effort to provide a better experience to consumers, that might harm other search engines, but that's not an antitrust violation:

Indeed, the evidence paints a complex portrait of a company working toward an overall goal of maintaining its market share by providing the best user experience, while simultaneously engaging in tactics that resulted in harm to many vertical competitors, and likely helped to entrench Google's monopoly power over search and search advertising. The determination that Google's conduct is anticompetitive, and deserving of condemnation, would require an extensive balancing of these factors, a task that courts have been unwilling- in similar circumstances - to perform under Section 2. Thus, although it is a close question, Staff does not recommend that the Commission move forward on this cause of action.

However, the report does highlight those other areas where Google's actions were a bit more questionable. The key one is in scraping the sites of vertical competitors and using their data in its own vertical offerings -- and then threatening to remove those vertical offerings from the general search if they wanted to have that data not used for vertical search activities. As the report noted, this was an internal policy choice by Google, rather than one of technical necessity:

Indeed, Google almost simultaneously launched a new reviews-collection product -- Hotpot -- to (again) try to solicit original user reviews, this time seeding it with eviews from third-party websites with no attribution. Yelp, TripAdvisor, and CitySearch all complained to Google. All of these parties sought removal of their user review content from Google Placcs/Hotpot, as well as the removal of their reviews from Google's aggregated review count on the main SERP. This time, however, Google told each company that if Yelp, TripAdvisor, and CityScarch wanted to have their content removed from Google Places/Hotpot, they would have to exclude their websites from being crawled by Google altogether, which meant complete exclusion from Google's SERP. This was not technically necessary -- it was just a policy decision by Google.

As the competition bureau noted, this move -- threatening to remove those sites from overall search results if they didn't allow the use of the data to prop up its own (underperforming) vertical sites -- was clearly problematic:

Google's threat (and willingness) to degrade its own web search product- by banishing high-quality vertical websites from its web search results altogether- suggests that Google's motive in scraping high-quality content from its vertical competitors was not procompetitive.

Indeed, it seems like Google could have easily agreed to remove that content from its vertical products without removing it from the general search results -- and, in fact, that was one of the things Google agreed to stop doing in its agreement with the FTC:

Google also has promised to provide all websites the option to keep their content out of Google’s vertical search offerings, while still having them appear in Google’s general, or “organic,” web search results. The FTC investigated allegations that Google misappropriated content, such as user reviews and star ratings, from competing websites in order to improve its own vertical offerings, such as Google Local and Google Shopping.

The other sketchy behavior was the way Google's Adwords API proactively blocked companies from building tools that would work with competing search ad providers (mainly Microsoft's AdCenter). Here, it appears that there was actually support within Google to do away with such restrictions, as many realized that it would be better for the overall market to allow companies to create cross-platform tools. However, Larry Page himself stepped in and blocked this plan:

In December 2008, Holden, senior vice-president of ad products Susan Wojcicki, and others met to discuss the issue. Of the meeting, Holden wrote:

[O]ne debate we are having is whether we should eliminate our API T&Cs requirement that AW [AdWords] features not be co-mingled with competitor network features in SEM cross-network tools like DART Search. We are advocating that we eliminate this requirement and that we build a much more streamlined and efficient DART Search offering and let SEM tool provider competitors do the same. There was some debate about this, but we concluded that it is better for customers and the industry as a whole to make things more efficient and we will maximize our opportunity by moving quickly and providing the most robust offering.

In February 2009, Holden wrote the executive summary for a DART Search product review, in which he advocated that Google "alter the AdWords Ts&Cs to be less restrictive and produce the leading cross-network toolset that increases advertiser/agency efficiency." Such a move, he wrote, would "[r]educe friction in the search ads sales and management process and grow the industry faster." In April 2009, in light of evident disapproval from Larry Page about the idea of removing the co-mingling restriction, Holden wrote: "We've heard that and we will focus on building the product to be industry-leading and will evaluate it with him when it is done and then discuss co-mingling and enabling all to do it."

It's good to see that within Google they wanted to remove these restrictions, and recognized that a more open, less-restrictive API would have resulted in a better overall experience. It's unfortunate that Larry Page stepped in to block that, and actually this was a part of the final FTC settlement, where the FTC agreed not to prosecute the company. It didn't get much attention at the time, but Google "agreed to give online advertisers more flexibility to simultaneously manage ad campaigns on Google’s AdWords platform and on rival ad platforms."

Frankly, it seems like these two issues -- both of which it agreed to stop doing -- were clearly bad decisions on Google's part, and it's a good thing that the company is no longer doing either. Both appear to go against the basic principles that Google often sets out for itself publicly, in terms of promoting openness and improving the overall ecosystem.

As for the third "bad" practice -- that one seems a bit more bizarre and it's no wonder that the FTC eventually decided not to do anything. The competition bureau argued that Google used exclusive deals to prevent partners from also working with Microsoft, and this may have cost Microsoft some business. However, there wasn't much evidence to support this in reality, and the report notes that most of the various partners don't even seem particularly bothered by this setup. They could negotiate different deals and weren't too worried about negotiating exclusive deals. It's not all that surprising that the FTC eventually just let that issue drop.

In the end, the document is really interesting and worth reading (even if you're only reading every other page). It certainly highlights a few questionable activities on Google's part that we're glad it agreed to stop doing. It seems like if Google just continued to focus on providing the best overall offering and promoting a more open internet, it never would have gotten into that mess in the first place -- and hopefully that's a lesson that Google will remember going forward.

Either way, as some have been pointing out, it seems like the FTC made the right decision in not prosecuting, as the competitors that the FTC was worried about have been growing pretty rapidly since then, while Google's market position has been declining. Such is the nature of the rapidly changing internet...

Filed Under: advertising, antitrust, competition, ftc, search choices, vertical search
Companies: google

How Corporate Sovereignty Provisions Could Undermine Anti-Trust Actions

from the are-you-sure-you-want-to-do-that? dept

One of the (many) problems with corporate sovereignty provisions in treaties is that their practical effects are highly unpredictable. Unlike courts operating in the Anglo-Saxon tradition, investor-state dispute settlement (ISDS) tribunals are not obliged to take into account precedents set in previous hearings. Essentially, they can come to more or less any decision -- one, moreover, against which there is no real appeal. That means the inclusion of ISDS in TAFTA/TTIP and TPP is giving hostages to fortune: nobody can honestly say that they know how things will work out later on.

Writing on the International Economic Law and Policy Blog, Simon Lester has raised an intriguing -- and deeply troubling -- possibility in this context. He points to a pro-TPP piece that appeared in the Washington Post recently. It includes the following point:

[Qualcomm's] substantial share of the Chinese chip market attracted the attention of the Chinese government, which proceeded to extract $1 billion in fines for alleged anti-competitive practices. In the U.S., where Qualcomm also sells its chipsets, the company has faced no such anti-trust penalties.

Under current trade law, Qualcomm has little recourse to appeal its treatment by the Chinese government. Under a trade agreement with China like the TPP, however, Qualcomm and other U.S. companies would have access to an investor-state dispute settlement mechanism.

Lester points out that if Qualcomm were indeed able to use corporate sovereignty provisions to fend off anti-trust actions, it would be very big:

The suggestion that ISDS could be used against antitrust/competition policy actions was something I hadn't thought of before. Would this mean that, in the future, Microsoft or Google could use ISDS in the TTIP -- if that happens -- to challenge the various European actions taken against them? And could a foreign investor bring an ISDS claim based on an action not taken against one of its competitors?

As he says, not only might large companies use ISDS to contest anti-trust actions against themselves, they might also use it to put pressure on governments to bring anti-trust actions against their competitors. This emphasizes not only how ISDS could take governments into completely uncharted waters for anti-trust actions, but also that there are even more ways in which corporate sovereignty could undermine a nation's ability to set and implement policy. That's another good reason to remove it from trade agreements before it causes this kind of serious damage to the fabric of democracy.

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Filed Under: antitrust, corporate sovereignty, isds, trade agreements