This paper, which can be found here,  argues that the Android decision is an exercise in platform engineering by European antitrust authorities. The decision makes a statement about acceptable entry paths for firms dominant in one market into another by demanding that a successful firm pivot away from the practices that consumers found valuable, and that indeed led to the emergence of dominance in the first place. In doing so, the Commission appears to undervalue the virtues of business model competition.

The paper is structured as follows:

Section II describes the European Commission’s interactions with Google.

Google’s core business consists of organic horizontal search results matched with ads paid for by third parties. This, of course, is the classic business model of media markets offering consumers content – sometimes for a fee, sometimes for free – and charging advertisers that want to reach those consumers. So-called vertical search competitors, on the other hand, offered specialised search results.

On November 30, 2010, the Commission announced that it had opened an antitrust investigation to assess whether Google was abusing a dominant position in online search, following complaints that Google was favouring its own services compared with those of its competitors. On April 15, 2015, the Commission sent a statement of objections to Google regarding comparison-shopping – which would eventually lead to a fine – and also announced that it had opened a separate investigation into Google’s licensing practices for Android.

Section III describes the Android decision.

As this was just done in detail above, I will not repeat it here. The author does not seem to be concerned with the decision as regards exclusive dealing and anti-forking provisions. However, he does take issue with the decision as regards tying.

Section IV addresses the business model in mobile operating systems.

Both Microsoft and Google faced competitive challenges in the mid-2000s as smartphones threatened to diminish the importance of personal computers. Microsoft had dominated the market for PC operating systems. Google had dominated the PC Internet search market, but would that position be at risk if everyone switched to smartphones? Android was Google’s response to the new competitive threat. The competition between Microsoft and Google was precisely over which way of paying for smartphone OS software would win.

Google had zero experience in smartphones and there is no obvious reason that it would achieve success in this new market. However, by 2018, Android would held roughly 80% of the worldwide smartphone market with most of the rest belonging to Apple.

Google’s plan when it launched Android was to build a new software ecosystem around it, and to give away Android for free. Google helped form the Open Handset Alliance, a group of 34 handset manufacturers, phone system operators and others to jumpstart development around Android.

Given this, how would Google make money from Android? It could charge a fee to license Android, but that would almost certainly have reduced the uptake of Android as Microsoft was playing exactly the same strategy and, in effect, was ahead. Google undoubtedly wanted to support Android through its advertising business, as that was its great competitive advantage. Embedding Google search in Android was the natural way to do that. This meant that Android would come with a third-party payment mechanism built in, and that the price of Android handsets would presumably be lower since the Android software itself would be free.

In other words, Google was offering a different business model to Apple’s integrated software/hardware model, and Microsoft’s laptop/mobile software model: lots of handset makers and advertising-supported software. This was very much a two-sided markets approach, though one that looks very much like that used by traditional media companies.

Section V addresses how the Android decision outlaws a successful business model.

The takeaway at this point, when the detailed decision has not yet been published, is that Google’s business model to enter the mobile OSs market was acceptable. The problem identified by the Commission is that Google did not switch its business model once Google Play became dominant.

The author calls this a dominance pivot, i.e. a demand that a dominant firm switch strategies at the point that they achieve dominance.

The dominance pivot required by the European Commission seems to force Google to charge a cash fee for Android. This will restrict business model competition in mobile operating systems; worse, it will force Google to adopt a business model that consumers rejected when offered a choice of the Microsoft approach to mobile OS. However, if the European Commission were to force this change of business model, that would almost certainly change the economics of Android for Google. The natural response for Google would be to charge for Google Play in order to rebalance the funds flows of Android software. Of course, Google has announced that it plans to do just that.

Section VI concludes.

Even if Google had been blocked from tying search to Google Play from the start, there is still every reason to think that Google search products would have been the default install on most Android handsets – because, as with Apple handsets, Google does the best job of monetizing search and hence can pay more to have its service installed by handset producers. T

The consequence of such a prohibition is not whether Google apps and services would have ended up on Android handsets. The difference is merely in how Google would organise its cash flows and in the type of mobile OS competition that would have taken place. If it had to buy distribution on Android handsets, the natural alternative for Google was full-blown vertical integration à la Apple or to charge a licensing fee for the Android software à la Microsoft. Since vertical integration might have reduced handset competition, the question this raises is why the Commission would want to restrict competition to cash payments for mobile OSs? Consumers were actually presented with the choice of a fee-based OS handset — Windows mobile — and Android, and obviously chose the latter.

Condemning the original Google business model here would be a mistake. Further, forcing a business model pivot at this point would not lead to any obvious change in actual competition or even on the net flow of funds between Google and handset makers. In other words, this decision seems to be another example of an empty remedy in antitrust — like with Microsoft MS-DOS in the U.S. in 1994, Windows Media Player in Europe in 2004, and the browser choice screen in Europe in 2009.

 

Comment:

This is, as is always the case with this author, an insightful piece. It strikes me that the paper makes two criticisms of the decision. The first is that the Commission’s counterfactual seems to be wrong – as he says ‘I understand why the Commission is concerned about Google extending its desktop position on search into mobile, but, as I have suggested, I think that was going to happen one way or the other.’ Maybe, but that is a matter that is hard to assess in the absence of an empirical basis.

The second criticism is that the remedy – requiring Google to change its Android business model – is unlikely to be effective. I have some sympathy for this, but it strikes me that the logical conclusion of such a line of thought is that a much more stringent remedy, maybe even the divestiture of Android by Google, would be required to remedy the anticompetitive harm. However, I suspect the author would be even more critical of that possibility than he is of the current remedy.

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