Why An FTC Case Against Google Is A Really Bad Idea

[This series of posts dissects the threatened FTC antitrust case against Google and concludes that a monopolization prosecution by the federal government would be a very bad idea. We divide the topic into five parts, one policy and four legal. We have received several requests for this five-part series (I, II, III, IV, V) to be posted as one complete post, so here it is:]

[PART I]

Folks in the tech industry have for the most part been conspicuously silent, at least publicly, about the Federal Trade Commission’s lengthy investigation of and apparent intention — perhaps as soon as year end — to file an antitrust case against Google for monopolization. In part that’s because Silicon Valley companies typically do not understand or want to get bogged down in legal and political controversies. In part, it’s because many tech innovators realize that staying part of Google’s AdWords ecosystem can be very profitable.

This silence is not driven by fear of retaliation, as Google has never done that to its vertical channel partners or even erstwhile ex-corporate joint venturers like Apple and Yahoo!. But it is likely emboldening the FTC to think that the Washington, DC agency has the interests of competition in high-tech at heart in moving against Mountain View. That’s a disquieting conclusion which should be especially troubling to young Internet-centric companies from Facebook and Twitter to shoestring-funded app developers.

This series of posts dissects the threatened FTC case and concludes that a monopolization prosecution by the federal government of Google would be a very bad idea.  We divide the topic into five parts, one policy and four legal. We’ll start with policy because that’s something which does not turn on the rather arcane elements of antitrust law.

1.   Using Government For Competitive Reasons Is Counterproductive

It’s an old DC adage that if you cannot win in the marketplace, try to win through political influence. Yet the high-tech sector has exploded over the past few decades because it doesnot act like established legacy industries. Oil companies have successfully lobbied Congress for years to enact oil depletion allowances, other special tax breaks and to eliminate subsidies of renewable energy producers. Big pharma’s close relationship with politics is legendary. There are too many other examples even to list.

But computing and technology are different. They are arenas of inspired innovation, out-of-the-box thinking, tremendous product life cycle compression and absolutely ruthless competitive rivalry. At the same time, technology — especially Internet technology — is achieving a profound and increasingly central significance in the lives and workplaces of consumers (both individuals and enterprises). Take for instance the communications revolution ushered in by social media, which is today, a short four years after going mainstream, producing serious disruptions in corporate marketing, sales, news distribution, social and political movements (e.g., Occupy Wall Street) and many other aspects of modern life. Who would have thought in 2009 that “flash mob” advertisements would routinely air on network television, for instance?

The mantra in Silicon Valley for nearly a decade has been “self-regulation.” If the industry creates norms or best practices — for instance on privacy, such as “do not track” browsing — the prevailing ethos has been that government can best act by staying out of the way. Regulation and legislation, by their very nature slow processes, lag technology by years if not decades. And the “solution” even for outliers, like the spam merchants the 2003 CAN-SPAM Act was supposed to eliminate, can often be worse than the problem itself.  TechNet, eTrust and other Silicon Valley industry organizations largely confine themselves as a result to subjects on which government remains sovereign, such as trade tariffs, immigration rules for skilled tech workers and the like.

All of this is to say that the aggrandizement of government regulation is something the tech industry has historically, and rightfully, feared. If the Internet were regulated like the telephone industry, we would probably not have high-speed broadband, ubiquitous WiFi or YouTube, let alone streaming IPTV. While the lines demarcating industries are blurring as a result of technological convergence, the message remains the same — enlist government as an ally to “protect” competition and one runs the very real risk of having government expand its mission and reach, for good or ill.  Furthermore, attempts to “protect” competition often view the market as a static creature and threaten to lock in the paradigm that is on the brink of shifting.  Measures aimed at preventing Google from aggressively competing with mobile platforms or mobile apps threaten to remove a positive competitive force from those relatively young markets.

Many in the public interest advocacy community fear that without government regulation, technology companies will enrich themselves at the expense of consumers. What they sometimes forget is that consumer allegiance in technology is fleeting.  Four years ago Myspace had three-fourths of the social media market and some analysts were calling the service an unbeatable natural monopoly.  America Online was poised to become the dominate online player a decade ago (and yes, people were calling them a monopoly as well).  And, even in the search space, academics were at one point weary of Yahoo!’s impending dominance.  The changing fortunes (and relative market positions) of these major online players were the result of the rapid rise of disruptive business models that were fueled by sweeping changes in the underlying technology, not something produced by government interference.

To sum up Part I, the technology industry invites government into its business only when it does not fear the consequences. And in turn, that means high-tech companies generally turn to politicians only when they are losing in this ultra-heated competitive space. Yet what is good for the goose is sauce for the gander. Pursuing government regulation of market rivals entails a risk — a big risk — of untoward results. As the financial crisis of 2008 shows, once government deems an economic sector “essential” it takes on an implicit responsibility to regulate everyone, whether they have monopoly power or not. As we discuss last in Part V, this is an especially high risk in the potential case of FTC v. Google, because its proponents seek to extend the law into an uncharted realm to justify handicapping a rival. It may, and probably will, come back to bite the entire technology sector in the ass.

In the next post in this series (Part II) we take on the legal issue of whether the FTC’s supposed focus on the “search advertising market” has any antitrust validity. Hopefully, even non-lawyer readers will follow the analysis, which by its very nature must address some relatively arcane antitrust concepts such as “market definition.”

[PART II]

Section 2 of the 1890 Sherman Act (15 U.S.C. § 2) makes “monopolization” unlawful. As every antitrust practitioner can recite by heart, this means that being a monopoly is not illegal, rather it is illegal to obtain or maintain monopoly power in a “relevant market” by exclusionary or anticompetitive means.

The most famous articulation of this basic principle comes from the case of United States v. Grinnell Corp. (“Grinnell“), 384 U.S. 563 (1966), in which the U.S. Supreme Court explained that a monopoly position reached as a result of a “superior product, business acumen or historic accident” is different from one achieved by the “willful acquisition or maintenance of that power.” That slightly schizophrenic approach reflects the basic conflict within antitrust itself. The law encourages, and permits, firms with market power (typically a synonym for monopoly power, although economists disagree at the margins) to compete aggressively on the merits, and even to eliminate competitors. Yet to tame the results of unbridled capitalism, Section 2 constrains companies from creating or defending monopoly power with anticompetitive practices.

2.   Internet Search and Search Advertising are Not Relevant Antitrust Markets

The starting point for every antitrust case is market definition — outlining the contours of a market, in which the defendant participates, in order to assess whether the firm possesses monopoly power in that market. In defining the relevant antitrust market, courts determine which products compete with the defendant’s product and thus limit or prevent the exercise of market power. Typically, this process involves examining substitutability of products (both from a demand and a supply perspective) to find whether consumers and rivals could switch to another source (or sources) if the defendant firm were to raise price or restrict output. For example, in the 1950s chemical innovator duPont was charged with monopolizing the cellophane market, a product it invented, but the courts ruled that the relevant antitrust market could not be so narrowly limited because cellophane was interchangeable with other food wrapping materials. The “great sensitivity of customers in the flexible packaging markets to price or quality changes” prevented duPont from exerting monopoly control over price.

The more broadly the relevant antitrust market is defined, the less likely it is the defendant has the ability to exercise monopoly power in that market. As a corollary, if the targeted firm does not have monopoly power in the relevant market, there generally cannot be Section 2 liability. Many recent antitrust cases, including the FTC’s controversial attempt to block Whole Foods’ acquisition of Wild Oats and the Justice Department’s challenge to theOracle-PeopleSoft merger, have turned on market definition.

With that background, let’s look at the purported “Internet search” market. That’s obviously the core proposition in any attack on Google for unlawful monopolization, because the necessary premise is that Google’s dominant share — estimated at from 65 to 80% — of Web searches is the foundation of its alleged monopoly. But here the antitrust analysis begins to break down. Internet search is a free product in which the consumers (Internet users) are charged nothing, with the service supported by advertising revenues. Since monopoly power is the “power to control price or exclude competition,” one must necessarily ask whether Google’s high “market share” reflects any market power at all. More importantly, search users are just like broadcast television viewers; they are an inputinto a different product — search advertising — in which consumers themselves are effectively sold by virtue of advertising rates based largely on impressions and click-throughs. Just as NBC, ABC, CBS and Fox compete for television eyeballs in order to sell more advertising (hence profiting) to sponsors, so too do Internet search engines monetize the service by selling eyeballs to advertisers.

Google’s share of search by itself is therefore almost meaningless. Even if the relevant market is confined to search, moreover, there is nothing that enables Google to prevent users from switching, instantaneously, to another of the scores of search engine providers on the Internet. (It should go without saying that even the government does not contend that Google displaced Yahoo!, Alta Vista, Ask.com and the many former search giants that dominated the Internet in the 1990s with anything other than better, more useful, search results, a consequence of better algorithms — the epitome of Grinnell’s “superior product.”) So the relevant market analysis must therefore focus on the area where Google in fact competes with other search engine providers, namely in the sale of search advertising. We all know that the links displayed alongside so-called “organic” search results are paid, listed conspicuously as “sponsored” results. Without search advertising, in today’s Internet economy there would be no free search engine services.

Whatever Google’s share of Internet search advertising, the relevant market cannot be so limited. First, Web search ads compete with display (e.g., banner) ads. The choice of whether to advertise with a graphical display ad or a text search ad depends on relative prices, budgets, reach and attractiveness. Because advertisers are looking and pay for users who click through the ads to their sites, both represent alternative and plainly substitutable ways to reach customers; if Google somehow raised prices for search ads, its own customers would and could switch more of their advertising dollars to display ads. And the display ad segment is something in which Google has for a “long” time lagged well behind the current leader, Facebook — interestingly a company that just four years ago had a minuscule presence in display advertising compared to Yahoo!, AOL and MySpace. Something on the order of 28% of all Internet display advertising took place within Facebook as of 2011. Google is fighting back, which in itself indicates how interchangeable search advertising and display advertising are on the Web today.

Second, both search and display ads increasingly compete against mobile search ads. Here the nascent but very rapidly growing market is radically different, with searches designed to retrieve more immediate, targeted results and in which a developing majority of searches are performed within smartphone and tablet apps like Yelp!, FourSquare, OpenTable and others.

Third, all advertising-supported Internet services in reality compete with traditional media (television, radio, newspapers and magazines) for advertising revenues. The New York Times and other papers, for instance, have lost huge swaths of advertising revenues — especially, but hardly just, classified ads to Craigslist, eBay and Match.com listings — that threaten their very existence, but are making money in digital Web advertising. Nearly 1/3 of the Times total revenue came from online advertising as far back as 2010. The point is not whether digital technology and Internet-centric business models can save the newspaper industry as we know it from disruptive innovation or disintermediation, but rather that the search ads Google sells are substitutes for traditional advertising. As Peter Juke of The Daily Beast observed just days ago:

For a 60-year period, which peaked in 2000 with income of roughly $60 billion a year, print advertising effectively funded journalism. But last year, revenues dropped to around $19 billion. Where has that $40 billion gone? Here’s a suggestion: last year Google generated $37.9 billion in revenue, 96% of which came from advertising. The bulk of these ad dollars come from traditional finance, retail, travel and education companies that — presumably — would have otherwise advertised in the dead-tree press. So far, so good for Google: if it can deliver advertising more efficiently and more directly to the consumer, it deserves to win this race.

Taken together, all of these factors suggest strongly that the relevant antitrust market for assessing Google’s alleged monopoly power cannot properly be narrowed to Internet search advertising, and likely not even to Internet advertising to the exclusion of legacy advertising media. In an “Internet advertising” market Google’s share is almost certainly well below the 70-80% required as the minimum from which to infer monopoly power. (The analytical steps from market share to a finding of monopoly power depend on other factors, which we examine in Part III). In an “advertising” market Google undoubtedly has a share hardly worth worrying about.

All said, if as it seems the FTC’s monopolization case against Google were premised on an Internet search advertising market, that market definition — assuming the actual data, difficult to assemble without subpoenas, are consistent with the metrics cited here — will probably receive the same negative reaction from the courts so many government-proposed relevant antitrust markets have in the past.

[PART III]

Antitrust law is characterized by rigorous, fact-intensive analysis, so much so that the prevailing jurisprudence holds that market definition (explored in Part II) generally should not be resolved on the “pleadings” alone, in other words without factual discovery. Nothing typifies the demanding analytical framework of antitrust more than monopoly power, part of the first element of a Section 2 monopolization case — possession of monopoly power in the relevant market. With respect to monopoly power, the potential case of FTC v. Google, Inc. will likely run into some especially significant barriers, no pun intended.

3.   Google Has No Monopoly Power, Even In Internet Search/Advertising

There’s precious little room in a relatively brief blog series to expound on all the various elements that factor into a judicial finding of monopoly power. The basic principle is that a high market share (typically 70% or more), coupled with barriers to entry, allows an inference of monopoly power to be drawn. But like nearly all legal inferences that’s merely a rebuttable, prima facie construct, as direct proof of the “power to control price or exclude competition” is the best evidence of monopoly. (It’s just hard to find.)

This author has written elsewhere about The Fantasy Google Monopoly, in which I noted that “the reality is that Google neither acts like nor is sheltered from competition like the monopolists of the past, something the company’s critics never claim because they just can’t.”

Like the Red Queen in Through the Looking Glass, Google succeeds only by running faster than its competitors — merely to stay in the same place. There’s nothing about Internet search that locks users into Google’s search engine or its many other products. Nor is new entry at all difficult. There are few, if any, scale economies in search and the acquisition of data in today’s digital environment is relatively cost free. Microsoft’s impressive growth of Bing in a mere two or so years shows that new competition in search can come at any time.

While that sums up, rather cogently I must say, the antitrust analysis, let’s go to thecoaches’ tape and break it down.

No Bottleneck or “Gateway” Control. Ten years ago, when the FCC and FTC both believed America Online — which boasted a very high share of dial-up Internet access — had monopoly power, the (fleeting) conclusion rested on the fact that AOL controlled access by its customers to the Internet and thus competing Internet content. Much like the pre-divestiture AT&T Bell System, the concern was that AOL held a “bottleneck” through which consumers had to pass to reach rivals. Yet Google does not own the Internet’s tramsission lines or 4G spectrum, and is thus not a bottleneck. Regardless of search share or volume, the reality is that Google has no control over the content its search users can access on the Internet. Web search is one of many ways, together with links, URLs, browser bookmarks, directories, QR codes, email marketing and uncountable others, for Internet sites to drive traffic and hits. Google is not a gateway so much as it is a highly and quickly searchable index of the Web. When there’s a host of other ways to find a page, the index itself is just a convenience, as much for bound books as for Web sites.

No Power Over Price. Whether search ad rates are the price of search or alternatively therelevant antitrust market itself, they fail on the central monopoly power criterion of control over price. As micro-economics teaches, a monopolist can increase prices above marginal costs, resulting in a “deadweight” loss to consumer welfare. Yet Google’s search ads are priced via an auction system — the highest bidder for an advertising keyword buys the ads (as many or as few as it wants) at the winning bid price. Certainly, there are ways to game any auction to favor some bidders over others or to exert indirect influence on the wining auction price. But so far as we can tell, such a theory of pricing power is not involved in the FTC’s threatened monopolization claim against Google. And if it were, that case would be even harder to prove than this overview analysis concludes.

No Network Effects. Nothing symbolizes modern antitrust so much as an emphasis on so-called “network effects.” Network effects exist when the value of a product increases in proportion to the number of other users of the product, hence a name which originated in telephone antitrust cases, where subscriber demand for service rose in proportion to the number of interconnected telephone companies (and thus other telephone subscribers) the end user could call. Network effects are in part a barrier to entry, by increasing requirements for scale economies by new firms, and a source of power to exclude rivals, by allowing the dominant network effects firm to deny competitors critical mass. Yet there is no, or at least precious little, evidence that with respect to search users and search advertisers, there are any network effects at all involved with Google. That you may conduct Web searches using Google’s engine makes it no more likely that me or any other Web users will select Google for search. That Sears may buy some AdWords keywords for search advertising makes it only slightly if at all more likely (and a consequence of retail competition, not Google) that Macy’s will purchase search ads via a Google auction.

No Entry Barriers. A monopoly in a market in which entry by new competitors is unlimited cannot be sustained for long. Thus, as noted antitrust law couples market share with barriers to entry in assessing monopoly power. It is difficult if not impossible to make a serious case that there are substantial entry barriers in Internet search or advertising. Web page indexing — the key input to search — is a product of raw computing horsepower and storage capacity. Both are commodities with steadily falling prices, per Moore’s law, in today’s Internet economy. That Facebook is planing to launch its own search product says it all: entry into search only requires investment capital, which the antitrust laws rightfully do not regard as an entry barrier. As the UK’s Daily Mail wrote, “Facebook is looking to tackle Google by making search a much more prominent part of it social network.”  The Red Queen strikes again.

“Data” Is Not a Search Entry Barrier. Proponents of a Google monopolization prosecution have recently refined their analysis, suggesting that the wealth of demographic data assembled by Google from users’ Web searches is a barrier to entry. That’s a smokescreen. Data about consumer preferences and behavior — aggregated and (much to the annoyance of privacy advocates) individualized — is also a commodity in our modern economy. Whether credit and commercial transaction data via the “big three” credit reporting agencies, product preference and consumer satisfaction data from  J.C. Power and the like, or the emerging “big data” marketplace, data can easily be bought, in bulk, for cheap. (The U.S. legal presumption that a company owns, and thus can sell, data about its customers plays into this point, but is not relevant for antitrust purposes.) The corollary to this argument is that economies of scale pose a barrier to entry, an even more subtle concept which, unlike network effects, has not been recognized by mainstream antitrust courts as a dispositive Section 2 factor — every large-scale business enjoys scale economies, after all. Suffice it to say, the FTC would have to make new antitrust law if it relies on this novel theory, which seems to contradict the factual realities of the ubiquitous availability of inexpensive data and data storage on consumer preference and behavior today.

To sum up, claims that Google enjoys monopoly power in Internet search or search advertising fail in the face of the recognized criteria for that crucial Section 2 monopolization factor. Without monopoly power, unilateral (as opposed to concerted among competitors) action by a single firm is of no antitrust significance. Indeed, an implicit — and sometimes articulated — presumption in the arguments in favor of an FTC monopolization case is that Internet search is a “natural monopoly,” one dictated and preordained by the economic structure of the market. As an antitrust lawyer who while with the DOJ in the 1980s railed against the proposition that cable TV represented a natural monopoly — something satellite television and IPTV have at long last conclusively disproven — this author abhors that construct.

Even if they are correct, the parties pressing for government antitrust action against Google cannot claim the courts have ever recognized the concept of natural monopoly as a surrogate for the United States v. Grinnell Corp. requisite demonstration of actual monopoly power, willfully obtained or sheltered by exclusionary practices. We’ll turn to that question, whether Google has engaged in conduct antitrust law deems anticompetitive, next.

[PART IV]

To make out a monopolization case, any plaintiff, FTC or otherwise, must not only show monopoly power in a relevant market, but also that anticompetitive practices led to (obtained) or protected (maintained) that power. Antitrust lawyers dub this the “conduct” element of Section 2. It’s what differentiates lawful monopolies, earned by innovation and business skill, from unlawful acts of monopolization.

Exclusionary or anticompetitive conduct — the terms are the same — is something other than competition on the merits. A colloquial definition which basically matches the judicial one is that anticompetitive conduct is business behavior that defeats competing firms on a basis other than efficiency. Likewise, conduct that sacrifices short-run profits in order to “recoup” those relative losses with higher future prices is not rational business behavior and is thus regarded by the law as presumptively predatory, the most egregious form of anticompetitive behavior.

4.   Google Has Not Engaged In Exclusionary Practices

Try as they might, the proponents of an FTC case against Google have not made a credible showing anything Google has done meets these accepted tests for exclusionary conduct. The fallacy of their critique is summed up with a Web ad running now asking whether we can “trust” Google. Neither trust nor fairness have anything to do with the antitrust laws. Monopolization is not unfair competition, it is illegal competition.

Unfairness represents a qualitative judgment that has nothing to do with current antitrust law. As the modern Supreme Court has written:

Even an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws; those laws do not create a federal law of unfair competition or “purport to afford remedies for all torts committed by or against persons engaged in interstate commerce”…. The success of any predatory scheme depends on maintaining monopoly power for long enough both to recoup the predator’s losses and to harvest some additional gain.

In sum, marketplace competition is not boxing and there are no Marquess of Queensberry Rules governing how firms must fight “fairly”.  Anything goes in our market system so long as it pits product against product and is not illegal — in other words, so long as the challenged practices do not use the power of a monopoly position to drive out equally-efficient competitors.

Search “Fairness” Is Not An Antitrust Obligation. The central problem with the potential case of FTC v. Google, Inc. is that the firms pushing for a prosecution can only contend that Google’s search algorithms unfairly demote result rankings for so-called “vertical” competitors. Their theory is that Web search has an inherent standard of fairness or objectivity — which they once called “search neutrality” — that, if violated in favor of Google’s own products, represents exclusionary conduct. Recognizing that search results are inherently subjective, others now claim fairness is not the linchpin, but still assert that intentionally degrading “competing” search links is exclusionary.

Dividing this into two portions, first consider whether such practices have any effect on the ability of competitors to do business. Even if travel booking firms, for instance, compete with Google in search (there’s a solid, contrary argument that travel searches are conducted to buy products and thus do not compete with general Web search and search advertising, rather with travel agents and airline/hotel proprietary sites), there is no evidence link demotion in any way diminishes the traffic to such vertical rivals. Some of these are the same companies that forecast Google would force them out of business but now boast of traffic gains and successful IPOs. Second, consider whether there is a practical way to ferret out from Google’s constant tweaking of its algorithms which changes “demoted” quasi-search rivals. This author suspects that if the FTC had gathered smoking gun evidence that Google designed search changes specifically to screw competitors by depriving them of search-originated Web traffic, the case would be almost ready for trial now. (Note I do not concede this would constitute a Sherman Act violation, only that the atmospherics and headlines would be sexier.)  Since everyone admits Google got to its present position by building a better search engine, the trade secret and IP consequences of such a monopolization theory are enforcement quicksand for the government.

Deception Without Much More Is Not Exclusionary. A colleague of mine, whose views on this topic differ, suggested in a debate recently United States v. Microsoft Corp. offers a road map for the FTC because it shows “deception” constitutes unlawful conduct for a monopolist. Hardly. The Microsoft decision broke new legal ground in assessing when networks effects (there known as the “applications barrier to entry”) matter under Section 2. What the courts did not do, though, was sustain a Section 2 offense premised on lying to or deceiving customers, distributors or rivals. Lying may and often does violate truth-in-advertising or other consumer protection statutes; it’s just not exclusionary conduct for antitrust purposes.

Microsoft was held liable under Section 2 for deceiving Java developers that Java programs written with Microsoft’s JRE tools would be OS-indifferent. Along with the Netscape Web browser, Sun’s Java was one of two “middleware” technologies that in the mid-1990s allowed software to run without resort to Windows APIs. In reality, the Microsoft Java interface created Windows-only Java apps that would not run on any other platform, thus ”polluting” the Java standard and reinforcing the built-in cycle that perpetuated the Windows desktop monopoly. No one, not even my colleague, argues that anything Google has done has tricked competitors, advertisers or search users into utilizing Google products when they thought they were creating a Google-free computing environment. It’s hard even to imagine what Google might do to accomplish such a result, especially when all the consumer data it holds (emails, bookmarks, blogs, photos, profiles, etc.) can be ported elsewhere with ease. That’s also nothing like the deception by which a patent holder can illegally elevate an invention from a cool toy to a must-have technology by lying to a standards-setting organization so its IP-protected product becomes essential for an entire industry,

Use of Monopoly Power For “Leverage” Is Not Unlawful.  Google has defended its emerging practice of organizing search results around themes and answers, rather than a list of “10 blue links,” as something Yahoo!, Bing and other search engines do also. That’s not a formal legal defense because a firm with monopoly power may be restrained from competing in the same manner as other firms, especially if it involves losing money in new markets — something at which Google seems to excel. But with the caveat that below-cost pricing can (although is rarely proven to) be predatory and thus exclusionary, a final problem with the FTC antitrust theory is that it represents a discarded notion of monopoly leveraging.

Vertical rivals like Yelp and TripAdvisor do not compete with Google in search advertising, the relevant market in which Google’s share arguably reaches monopoly territory. (The 65% or so of general Web searches Google handles is only barely if at all within possible monopoly range, and not bolstered by entry barriers.)  What they compete with are Google’s complementary content (e.g., Zagat and profiles) and sales (e.g., Google Checkout and anticipated travel booking service) products. In other words, the essence of the claim is that Google uses its purported power in the search/advertising market to gain a competitive advantage in a second, different market.

Pioneered by the Berkey Photo v. Kodak case of the 1970s, that leveraging theory has beenoverruled as a standalone Section 2 violation. Only if the competitive impact in the second market amounts to an attempt to monopolize — which requires a specific intent to monopolize and a “dangerous probability of success” — is this sort of behavior illegal. It is frankly impossible to conceive of an FTC antitrust complaint that could credibly assert there exists a dangerous probability Google will likely, let alone probably, monopolize airline bookings, restaurant reviews or (whether it takes on Amazon or anyone else) any other content on the Internet.

* * * * * * * * * * * * * * * * * * *

Some of these observations have a decidedly US-centric orientation. On monopoly leveraging, for instance, the EU operates under a different statutory regime, one outlawing “abuse” of a “dominant position,” that could as a competition law matter potentially support a leveraging complaint. But the Europeans also want to extend remedies to Google without a judicial test of their claims (which is proper procedure only across the pond) andbefore the market impact is known (which even for empowered Brussels regulators is questionable). Whichever standard is employed, the operative question remains whether whatever Google is charged with having done, or may do in the future, respecting its display of Web search results should be considered exclusionary conduct for antitrust purposes. For us the answer to date is a resounding “No.”

[PART V]

The FTC, a federal agency established in 1914, enjoys some unique powers.  It can prosecute some claims before an Administrative Law Judge instead of the courts. Additionally, Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45) allows the agency to challenge “unfair methods of competition.”  Use of Section 5, expanded to include “unfair or deceptive practices” in 1938, has received a rather checkered reaction from the federal judiciary.

There have been hints by the FTC that it may rely on Section 5 as the basis for a potential case against Google. This strategy could have serious repercussions because the FTC’s use of unfair competition as a surrogate for what the antitrust laws do not or cannot reach would be unbounded from the rigorous Sherman Act standards of unlawful monopolization. The FTC has never won a pure Section 5 lawsuit before.

5.   A “Pure” Section 5 Case Would Almost Certainly Lose, And Should

There is one point of law on which everyone agrees. As the Supreme Court held, Section 5 can reach business conduct that is not, of itself, violative of the antitrust laws. But exactly how far the statute extends beyond the Sherman Act is unclear; in the FTC’s 2008 public workshop on Section 5 As A Competition Statute there was much debate on that issue. Here’s how the FTC described the problem:

The precise reach of Section 5 and its relationship to other antitrust statutes has long been a matter of debate. The Supreme Court observed in Indiana Federation of Dentists that the “standard of ‘unfairness’ under the FTC Act is, by necessity, an elusive one, encompassing not only practices that violate the Sherman Act and the other antitrust laws but also practices that the Commission determines are against public policy for other reasons.” In the early 1980s, however, lower courts were critical of efforts by the FTC to enforce a reading of Section 5 that captured conduct falling outside the Sherman Act. In striking down the FTC’s orders, the Second Circuit in its “Ethyl” decision expressed concern that the Commission’s theory of liability failed “to discriminate between normally acceptable business behavior and conduct that is unreasonable or unacceptable.”

The vast majority of non-merger FTC cases enforce the Sherman Act. However, beginning in the early 1990s the Commission reached a number of consent agreements involving invitations to collude, practices that facilitate collusion or collusion-like results in the absence of an agreement, and misconduct relating to standard setting. Because the complaints in these cases did not allege all the elements of a Sherman Act violation, the Commission’s theory of liability rested on a broader reach of Section 5.  As consent decrees, none of these cases was reviewed, let alone endorsed, by the courts.

And that’s the rub. Take “invitations to collude” for instance. Under Section 1 of the Sherman Act, an agreement among competitors, whether express or tacit, is the predicate to illegality. This has been interpreted to mean attempts at price-fixing are not unlawful unless the other company says “yes.” Famously, the Justice Department initially lost, but then won on appeal, a 1982 challenge to American Airlines’ overt attempt at fixing airfare rates using an antitrust theory of attempted joint monopolization, fashioned to end-run the requirement of a horizontal agreement. That case presented unique market circumstances (American and Braniff sharing dominance of Dallas “hub” flights) and unequivocally anticompetitive behavior that lacked any efficiency or competitive justification. Most antitrust scholars and practitioners thus generally agree that an invitation to fix prices is something the FTC should, as it has in the past, prosecute pursuant to Section 5, because the underlying conduct itself has no economic legitimacy other than to override marketplace competition.

Hence the problem where Google is concerned. First, there is a recognized basis under Section 2 for attacking unilateral attempts to monopolize a relevant market. Absent the necessary dangerous probability of success, somethingwoefully lacking here, an unfair competition case premised on conduct by a dominant firm that falls short of attempted monopolization is very likely to receive the same hostile judicial reaction the Commission acknowledged in 2008. Second,as private unfair competition cases (which may only be brought under state law, not Section 5) have explained, the absence of legitimate business justification can support aninference of anticompetitive behavior. Yet, in organizing and structuring its organic search results, no one disputes that Google has a real business justification to deliver better results to users and thus more eyeballs to advertisers: in other words to make money. Without the predatory sacrifice of short-run profits — i.e., with normal, profit-maximizing behavior — there is real economic legitimacy to the conduct forming the basis for a case against Google.

A traditional legal definition of unfair competition is “any fraudulent, deceptive, or dishonest trade practice that is prohibited by statute, regulation or the common law.” The most well-known aspect of unfair competition is trademark infringement, where a firm intentionally means to defraud and confuse buyers or does it unintentionally, but there is a likelihood of confusion. Some state unfair competition statutes have been interpreted more broadly to outlaw “immoral, unethical, oppressive or unscrupulous” business practices.

It is tremendously difficult to translate this vague, amorphous standard into something offering concrete tests for illegal behavior. That’s not to say such an effort cannot be undertaken — rather the FTC would need to explain with some specificity how its interpretation of Section 5 offers what the federal courts have insisted is the necessary line “between conduct that is anticompetitive and legitimate conduct that has an impact on competition.” In order to guard against overreaching by the government, Section 5 requires “definable standards” that provide guidance to private companies. In rejecting an FTC challenge to oligopolistic pricing — by which firms in a concentrated market may achieve price uniformity without overt or tacit coordination, that is without contravening the antitrust laws — the Second Circuit emphasized:

the Commission owes a duty to define the conditions under which conduct claimed to facilitate price uniformity would be unfair so that businesses will have an inkling as to what they can lawfully do rather than be left in a state of complete unpredictability.

Like any litigant, the FTC is allowed to seek to develop new law in the course of its prosecutions. Given the problem of defining with some rigor what differentiates “unfair” competition from conduct otherwise lawful for antitrust purposes, however, there is a real risk the Commission will once again fail if it attacks Google purely under Section 5. Not only are there no objective standards for defining what is “fair” business behavior in Web search and search advertising, the marketplace impact of Google’s unilateral search practices has hardly been shown to have substantially exclusionary consequences. Therefore, unlike the Justice Department in American Airlines, the FTC would be taking on a huge legal burden by proposing Section 5′s unfairness standard should extend to conduct competitors dislike merely because it presents a threat of disintermediation.

Take travel bookings, for instance. Expedia and others apparently believe Google’s prominent placement of direct links to airline sites in its organic search results is exclusionary. Yet what they really dislike is that Internet users can more easily find and buy travel products from the providers directly, without using Expedia’s or Travelocity’s own travel sites — and with them both airline commissions and extra ticket booking fees — to make those purchases. Just as Amazon.com disintermediated brick-and-mortar book retailers like Borders, this is a competitive result the antitrust enforcement authorities should applaud, not condemn. Cutting out a middleman and delivering lower total costs to consumers is a good thing. Unfairness is a label the federal government should not seek to attach to business behavior that disrupts established players by delivering easier and cheaper products to consumers.

Conversely, since the basic criticism by Google’s opponents is that so-called “demoting” of search links for would-be vertical rivals is deceptive — whether or not it is the “evil” Google’s founders initially pledged not to do — a Section 5 case premised on lack of disclosure might have some legs. But bear in mind, the linchpin here is deception not of potentially competing firms, but rather of consumer demand. If the FTC can prove that Google told search users one thing but secretly delivered something else, for instance with undisclosed paid links intermingled with organic search results, there may be a lurking Section 5 case for deceptive practices. But claims that Google is too big or evasive to “trust” do not amount to consumer deception. Fraud is something that’s been unlawful for centuries; its basis is a false statement of material fact, intended to deceive, something which even Google’s critics have yet to demonstrate.

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That wraps our five-part series on FTC v. Google, Inc. Of necessity, these posts do not analyze the evidence presumably compiled by the FTC, because its investigation is not public. But with some educated guesses, knowledgeable observers can assess whether such a prosecution would succeed, and whether it would be a good idea. Others may (and do) differ, but this author believes an FTC monopolization case — or a “pure” Section 5 case — against Google would be a really bad idea.