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Bork-Sidak's Fatally Flawed Google Antitrust Defense

As an unabashed Milton Friedman conservative, I strongly agree with Judge Robert H. Bork and Professor J. Gregory Sidak that antitrust law's purpose is to protect competition and the competitive process and not to protect competitors. I also hold my fellow conservatives in highest regard. However, as a highly-experienced and esteemed judge and professor, they know they must prove their case on the merits. In Google's case, they have not.

While it would be difficult to challenge the sophistication of their legal analysis, it is not hard to discredit the sophistication of their economic analysis of the relevant market, economics, and behavior in question. Their defense indicates that they have fully-adopted Google's core economic premises and public-representations, so their skilled legal arguments can do no better than the fatally-flawed material with which Google has given them to work.

Specifically, their legal analyses rest upon a misunderstanding of the relevant market in question. Since antitrust prosecution is fact-driven, not theory dependent, no amount of legal or economic theoretical elegance can overcome a fatally-flawed factual predicate.

The straw man pillars which undergird the edifice of their legal arguments are built upon a foundation of sand that washes away upon scrutiny that exposes how this market actually works. Moreover, the foundational Google assertions on which they have constructed their case have already been rejected by antitrust authorities repeatedly.

Simply the foundational market assertion of their case is that the relevant market is the charity of free search for consumers and not the business of search advertising between Google, advertisers and publishers. And the foundational economic assertion of their case is that the universal and global nature of Google's business enjoys no scale advantage. If one is allowed to assume away market and economic realities central to the case via unsupported assertion, one can reach most any conclusion one desires.

Let's now move to washing away the two sand-based, foundational assertions upon which their entire antitrust defense of Google rests.

I. Debunking the Google-Bork-Sidak assertion that the market is search and not search-advertising.

The first two-thirds of their antitrust defense depend upon Google's assertion that they are in the search business not the search advertising business.

To begin, antitrust authorities have already rejected this straw man market-definition argument four times.

  • In 2007, the FTC, in approving Google-DoubleClick (4-1), defined the market as online advertising.
  • In 2008, the DOJ determined Google was dominant in the search advertising market in blocking the proposed Google-Yahoo Ad Agreement.
  • In 2010, the DOJ defined the market as search advertising and affirmed that Google was dominant in that market in approving the highly-unusual partnership between then #2 Yahoo and #3 Microsoft.
  • In 2010, the FTC defined the relevant market a second time as advertising in approving Google-Admob.

Now consider their explanation of "the two-sided market for Internet search: Internet users have demand for free search, and advertisers have demand for viewers." If this is an accurate description of the relevant market:

  • Why is Google's mission: "to organize the world's information…" without explicitly mentioning users, their supposed customers?
  • Why are publishers, which supply this mission-critical "information" that advertisers demand and need, not mentioned in their explanation of this two-sided market?
  • Why do users contribute no revenues to this market, but hundreds of thousands of web-publishers revenue share with Google and earn ~$10 billion dollars annually from Google?
  • In other words, why is a transaction set of ~$10 billion or roughly a quarter of Google's total revenues not material enough to warrant inclusion in their explanation of how this market works, but users who contribute 0% to revenues are represented as half of a two-sided market?

The reason for this confusion is that their market definition is incorrect; users are not the customer but the product in this market. Advertisers, not users, pay for Internet content. Users are the product advertisers and publishers essentially "buy" from Google. While user information choice is indeed one click away, competitive choice for Google's real advertiser/publisher customers is not one click away. Google is the de facto bottleneck largely controlling advertiser/publisher access to most Internet users. Google's "competition is one click away" antitrust defense was long-ago discredited as inaccurate and deceptive.

Also consider this. If search users were actually Google customers and not the product/commodity that Google effectively brokers to advertisers and publishers, why would Google have dedicated customer service for advertisers and publishers but none for users? If search users were actually Google's valued customers whose interests they are aligned with, why does Google have so many privacy scandals and such a long privacy rap sheet?

II. Debunking the Google-Bork-Sidak assertion that Google does not harm consumers or innovation.

Once again I agree with Judge Bork and Professor Sidak that antitrust protects consumers by "protecting the competitive process." Why we disagree in this particular instance is that we disagree over the definition of the relevant market and who is the relevant and actual "consumer/customer" whose competitive process must be protected under antitrust law.

They say the relevant "consumer" is the free search user who pays nothing measurable monetarily for using search, whereas I say the real consumers/customers in this antitrust "trade or commerce" market are advertisers and publishers, whose trade and commerce is purposeful-business that can be, and is, measured monetarily and financially.

Why would the Chicago School wish to extend antitrust investigations and enforcement into voluntary free activities, a form of indirect business charity and not a measurable economic form of "trade or commerce from a user's perspective?" The slippery slope of extending antitrust enforcement and potential government intervention to voluntary, free, non-measurable, activities, should give pause to any adherent of the Chicago School of antitrust. If one does not limit Sherman "trade and commerce" to monetarily-measurable economic transactions, what would be a logical and common sense limiting principle to government antitrust intervention going forward?

Such a sweeping potential antitrust precedent could transform antitrust law into a roving de facto regulatory consumer protection tool justifying government intervention into most any free and voluntary activity that happens to be exceptionally popular among consumers.

I also raise a caution flag about the implications that this Google-sponsored paper could have more broadly, if one allows Google to take its self-serving argument to its full logical extension. In a nutshell, Google's antitrust position is that if free search users net-net benefit more than they are hurt, and that if Google is demonstrably net-innovative for free search users, dominant Google then has carte blanche to behave how it wishes in the non-consumer-facing part of the search-advertising-business-ecosystem and towards advertisers, publishers, and competitors, because it somehow can't be anti-competitive as long as users net benefit.

If Google is allowed to stretch Chicago School thinking beyond its reasonable application, Google will have taken the welcome Chicago School high-bar for antitrust prosecution and perverted it into a new Google "monopoly-get-out-of-jail-free" card. Antitrust law centered on the text of "trade and commerce," loses all meaning if non-monetarily-measurable user activity somehow trumps actual monetarily-measurable "trade and commerce."

At bottom, Google's antitrust defense is that Google is better for consumers and for innovation than competition or the competitive process, based on all the consumer benefits and innovation Google has so graciously given the user to date. The fallacy in this self-serving and circular Google position is the broad and deep market experience we have that monopolies have less competitive pressure to improve and tend to lose sight of consumer/customer interests and the need to innovate -- the longer they are a monopoly.

III. Debunking the Google-Bork-Sidak assertion that scale isn't necessary to compete in search.

Global search advertising is an exceptionally scale-dependent market requiring global scale in multiple dimensions. Consider the unmatched scale Google enjoys that antitrust authorities are well aware of:

  • Google search commands roughly a billion more users than its one competitor Bing -- given its market dominance.
  • Google admits to producing at least 5 exabytes of data every two days, which is the equivalent of all the data that existed in world history prior to 2003.
  • Google-DoubleClick serves most all advertisers in the world seeking to advertise on the web, Microsoft-Yahoo's bing has a fraction of that amount quantitatively and qualitatively.
  • Google provides outsourced search for most all of the free-world's websites that provide search to monetize traffic except for Microsoft, Yahoo and Facebook.
  • Google's-YouTube is the second largest search generator in the free-world; reaches 82% of total Internet unique viewers and has 4 billion views per day; serves 21 times more online videos than their top competitor; and serves 94 of the top 100 Ad Age advertisers. Bing does not have a comparable competitive offering.
  • Google's has many times more servers and fiber, and data centers than its nearest competitor.

If scale does not matter, why is Google so dominant financially?

  • In the past year, Google substantially increased its market share versus Microsoft-Yahoo growing its annual search revenue base by 21% to $43b with $25b in gross profits.
  • In stark contrast, Microsoft's annual search 2012 business grew 10% to $2.9b with a loss of $8.1b, while Yahoo's annual search revenues grew 4% to $1.5b.
  • Simply, Microsoft-Yahoo's search business is one tenth of Google's and falling, and in Google's 2012 gross profit margin was 57% compared to Microsoft's search gross profit margin of-283%.
  • Google enjoys financial scale as well.

If Judge Bork and Professor Sidak are right that scale does not matter in Google's business, why would Google executives publicly contradict them?

  • "Scale is the key. We just have so much scale in terms of the data we can bring to bear." said Google CEO Eric Schmidt to Bloomberg-BusinessWeek.
  • "We don't have better algorithms than everyone else; we just have more data." said Google’s Chief Scientist Peter Norvig per the ECPM Blog.
  • “Google is really based on this. Users go where the information is so people bring more information to us. Advertisers go where the users are, so we get more advertisers. We get more users because we have more advertisers because we can buy distribution on sites that understand that our search engine monetizes better. So more users more information, more information more users, more advertisers more users, it’s a beautiful thing, lather, rinse, repeat, that’s what I do for a living. So that’s … the engine that can’t be stopped.” said Google Sr. VP Jonathan Rosenberg.

Lastly, if scale does not matter, why did the DOJ and the EU allow the highly unusual combination of the #2 Yahoo and #3 Microsoft to try and generate sufficient scale to create a viable competitor to "dominant" Google?

IV. Conclusion

In sum, as an unabashed Milton Friedman conservative, I strongly agree with Judge Bork and Professor Sidak that antitrust law's purpose is to protect competition and the competitive process and not to protect competitors. And as a fan of the Chicago School, I also oppose allowing a company to merge or acquire a monopoly, which is why I strongly opposed Google's acquisition of DoubleClick because it predictably would tip Google to monopoly and because it was the only other company in the world that had a dominant global share of users, advertisers, and publishers. I opposed combining the only two dominant companies in different aspects of Internet advertising because I accurately thought preventing a government-facilitated monopoly was vastly better than having to sue Google for monopolization and engage in remedies that never should have been necessary if the FTC had only enforced the Clayton Act.

Simply, the FTC's failure to enforce the Clayton Act and prevent Google from acquiring a monopoly via DoubleClick, is the reason Google faces a potential Sherman and Section 5 antitrust case in the coming weeks, ironically from the FTC. Most of the Bork-Sidak paper would be moot if the FTC had enforced antitrust law five years ago and not facilitated Googleopoly.

In a word, the evidence above indicates Judge Bork and Professor Sidak's antitrust defense of Google is fatally-flawed in multiple dimensions.

 

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