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Why Android Enforcement Action Is Potentially Counterproductive and Unlikely to Succeed

· February 19, 2019

Stephen Houck, Special Counsel to Offit Kurman, P.A., played a prominent role in the prosecution of the government’s monopolization case against Microsoft’s Windows operating system.  Mr. Houck has previously written for DisCo regarding his paper on the viability of a similar enforcement action with respect to Android.  His most recent paper, regarding antitrust enforcers’ decision-making discretion, is previewed in the following guest post.

U.S. antitrust enforcement officials enjoy broad discretion in determining whether to prosecute a civil case.  Absent from the literature is discussion about the criteria that drive the critical case selection process.  Having spent more than four years making these kinds of decisions while Chief of New York State’s Antitrust Bureau, I provide insight into that process from the perspective of an antitrust enforcer.

My paper examines what factors guide U.S. antitrust enforcement officials in the exercise of their prosecutorial discretion.  I then apply that analysis to a hypothetical challenge to the Android operating system for mobile devices, which is timely given recent events in the E.U.

With limited resources and many complex matters under their purview, U.S. antitrust enforcement officials must be discerning in the cases they choose to prosecute.  The decision to commence litigation and its ultimate success or failure have significant ramifications, signaling to the antitrust bar what enforcers thinks the law should be, impacting competition within the market, and shaping the development of the law and future enforcement efforts.

Four principal considerations drive decisions by antitrust enforcement officials about how to deploy their scarce enforcement resources.  They are: (1) the strength of the case on the merits; (2) consumer harm and remedies; (3) deterrence of similar conduct by others in the marketplace; and (4) the importance of protecting competition, not competitors.

The likelihood of success of the U.S. equivalent of an E.U. abuse of dominance case with regard to Android is a function of the proper application of Sherman Act, § 2 jurisprudence, particularly the highly influential unanimous en banc decision by the D.C. Circuit Court of Appeals in U.S. v. Microsoft.  A brief summary of my analysis is set forth below.

Strength of the Case on its Merits

As I previously discussed, to succeed in a Section 2 case, a plaintiff must first establish that the defendant possesses monopoly power in a relevant market.  Second, a plaintiff must show that the defendant has willfully acquired or maintained its monopoly power by unlawful means rather than as a consequence of “a superior product, business acumen or historic accident.”

Android is open source, suggesting that Google lacks the defining features of monopoly power: the ability to set and control prices.  Moreover, unlike Windows, which enjoyed market shares in excess of 90%, Android devices constitute approximately 50% of the relevant market.

Significantly, the D.C. Circuit stressed the critical importance of the presence of a “high” structural barrier to entry protecting the allegedly monopolized product from competition.

There is no such barrier protecting Android comparable to the application barrier to entry that protected Windows.  Additionally, the characteristics of the software market at issue in Microsoft simply do not exist today where consumers can readily switch mobile devices running on different operating systems – whether different versions of Android or proprietary products like Apple’s iOS.

Similarly, the conduct at issue bears little relationship to Microsoft’s in kind or effect.  Whereas Microsoft embarked on a multifaceted campaign that had the purpose and effect of “substantially” foreclosing competitors’ access to the market, Android OEMs and consumers are free to preload and install applications that compete with Google’s, and can do so even via Google’s own Play Store.

Consumer Harm and Remedies

There are four well-recognized forms of harm that antitrust enforcement agencies endeavor to ameliorate: higher prices, lower output, loss of choice, and reduced innovation.  The judicial analysis with respect to price, output and choice is likely to be straightforward.

Because Android is open-source, any OEM can choose to download, install and modify the source code free of charge for use in the U.S.  Since Android source code is available to OEMs royalty-free, Google cannot control prices or reduce output.  Moreover, Google provides OEMs with great freedom to configure their own devices, utilize their own distinctive user interfaces, and preload a wide variety of applications (including those of both Google and its rivals).  As a result, consumers have options from a wide array of vendors, including numerous device models and applications within the Android ecosystem itself, as well as those provided by competitive products running on proprietary software code.

With respect to innovation, antitrust officials should bear in mind that the impacts of their decisions are difficult to predict and take care not to deter innovation by penalizing the development of novel products that have proved attractive to consumers.  As recently remarked by Antitrust Division chief Makan Delrahim, in words applicable to Android: “We must remember that big platforms were once themselves start-ups, and be cautious in any enforcement decision to not undermine the very innovation incentives that competition aims to protect.”

Deterrence

Since the days of Microsoft there is abundant evidence that high technology companies are cognizant of the risks they run from not complying with antitrust laws.  Thus, commencing an antitrust enforcement action primarily to deter future wrongdoing is unnecessary and, indeed, could well have unintended consequences harmful to future enforcement efforts.      

Protecting Competition, Not Competitors

It is a fundamental tenet of antitrust jurisprudence that the antitrust laws “were enacted for the protection of competition, not competitors.”  In evaluating competitor complaints against Google, there is a striking contrast between the situations of the principal complainants about Microsoft and Google.  In Microsoft, Netscape, a start-up company, was the target of a panoply of exclusionary conduct that caused a “dramatic drop in [its] revenues.”  Conversely, Yelp has seen a dramatic rise in its revenue since its founding in 2010, topping $241.1 million in the third quarter of 2018, generated in large part by referrals from Google’s search engine.              

Conclusion

As developed more fully in my paper, a Section 2 action directed at Android would be unlikely to succeed because Android does not have a monopoly share of a reasonably defined market protected by structural barriers to entry, and Google’s conduct is very different from that condemned by the D.C. Circuit in Microsoft.  Moreover, there is no clear-cut consumer harm.  On the contrary, the advent of Android, which is based on a disruptive new technology, resulted in downward pressure on prices, expanded output and has led to greater – not less – consumer choice.  Consequently, the resources necessary to prosecute such a complex litigation with such little prospect of success will result in significant lost opportunity costs from an enforcement perspective.

Additionally, there is no credible argument that such a case is necessary for deterrence given the demonstrated and widely reported successes of antitrust enforcement officials in challenging anticompetitive activity, where warranted, in the high technology sector.  Finally, the principal complainant about Google has ample means to defend itself, suggesting that its real motivation in seeking government intervention is to enhance its own bottom line, not to protect competition.        

The paper, “Exercising Antitrust Enforcement Discretion: Android” is available here on the Social Science Research Network (SSRN).

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.