The Department of Justice filed its highly-anticipated antitrust case against Google Tuesday, focusing on payments Google makes to ensure its search engine is the default choice on millions of phones and computer internet browsers made by other companies.
The payments are a little-known part of how Google does business. Cutting them off could disrupt a long-standing status quo that helps Google but also provides significant revenue to other companies.
The biggest of those deals is with Apple Inc. Sanford C. Bernstein & Co. estimates Google pays around US$8 billion a year to be the default search engine on the iPhone maker’s Safari mobile web browser. The lawsuit argues Google uses the massive cash reserves of parent company Alphabet Inc.-- some US$121 billion -- to pay those giant fees, which would be out of reach for smaller competitors. Nearly 60 per cent of all search queries happen in places where Google has a distribution agreement to be the default search engine, the DOJ said in its complaint.
The agreements amount to a “web of exclusionary and interlocking agreements that shut out competitors,” Associate Deputy Attorney General Ryan Shores said on a conference call. “Google’s conduct is illegal under traditional antitrust principles and must be stopped.”
Google immediately pushed back. “Today’s lawsuit by the Department of Justice is deeply flawed,” a spokeperson said in an e-mail. “People use Google because they choose to -- not because they’re forced to or because they can’t find alternatives.” Google will have a fuller statement later this morning, the spokesperson said.
Google is willing to pay so much for the distribution deals because it’s confident it can make more money from the millions of queries consumers type into their browsers, iPhones and other devices. That’s because the company has packed the top of search results with advertising in recent years, increasing it’s ability to profit from users’ hunts for information.
The distribution agreements also benefit the companies being paid to give Google’s search engine prominence. Even for Apple, US$8 billion is a considerable revenue stream. Other big electronics makers like Samsung Electronics Co. Ltd., the world’s biggest mobile phone maker, benefit from them too. (Google and partners have not disclosed how much the company pays for these deals, but some details have occasionally leaked out through litigation or regulatory filings.)
For some companies the payments can mean the difference between success or failure: Mozilla Firefox, one of the last remaining web browsers that competes with Google’s Chrome in the U.S. and Europe, relies on a distribution agreement with Google for search for much of its revenue.
“The silver lining for Google, if those default search deals would eventually be ruled illegal by the courts, is that Google would no longer have to pay Apple a revenue share on search clicks that users would choose to make on Google,” said Colin Sebastian, an analyst with Baird. He estimates Google pays a total of US$15 billion a year in payments on all of its distribution agreements.
The case could take years to be resolved, and major changes would only be ordered by a court if Google’s activity is proven to be illegal, or if the company agreed to a settlement with the government instead.
Google also gains a subtler, but potentially more potent benefit from these paid default deals. The company’s search engine gets better the more it’s used. When a query comes in, Google’s technology monitors what result people click on and how they behave after that. If a user clicks back to the list, that suggests they were unhappy with their initial result. The system logs this and adjusts future results, perhaps demoting that specific answer and raising up an alternative suggestion. This happens millions of times a day, helping to keep Google’s search engine ahead.
Rivals, with less money to pay for big distribution deals, find it hard to keep up with a virtuous feedback loop that operates at such a large scale. But if the U.S. government prevents Google from paying to be the default provider in so many place, competitors may have more of a chance.
In Europe, regulators have forced Google to give Android users a choice of which browser they want as their default. The rules, which require rivals to pay Google through auctions, haven’t made a major impact on market share yet. If people had to choose which search engine to use on all sorts of phones and browsers, some might switch to a competitor, but most would probably stick with Google, said Mark Shmulik, an analyst at Sanford Bernstein.
That could result in a situation where the money saved from canceled distribution deals is greater than the loss of revenue from people picking other search engines, ultimately helping Google instead of curbing it.
The biggest risk for Google is if regulators go further and devise rules that specifically give an advantage to smaller competitors like Microsoft Corp.’s Bing or DuckDuckGo over Google, Shmulik said.
Europe’s latest remedy has been criticized for not giving consumers enough choice over search engines and forcing competitors to pay Google for placement.
The focus on search hits Google in its most visible and important business, but also leaves out possible attacks that may have been more damaging or disruptive to the tech giant. Investigators had examined Google’s advertising technology business at length, and industry watchers had speculated the government could try to force the company to sell off part or all of the division completely. Other critics argued that the company’s biggest parts should all be split up, hiving off search, advertising technology, its browser and the YouTube video service.