United States District Court for the District of Columbia: In a significant decision, involving a 9-week trial deliberating over allegations regarding Google’s unlawful usage of distribution agreements to thwart competition in the relevant markets of general search services; the Bench of Amit P. Mehta, J.*, found that Google exercised its monopoly over the relevant product markets for general search services and general search text advertisements. It was further found that Google’s distribution agreements are exclusive and have anticompetitive effects; and Google has not offered valid procompetitive justifications for those agreements. “Google is a monopolist, and it has acted as one to maintain its monopoly”.
The Court also found that Google exercised its monopoly power by charging supracompetitive prices for general search text ads, which allowed Google to earn monopoly profits.
Background: Google is synonymous with search and this reputation was achieved by involvement of highly skilled engineers, innovations and shrewd business decisions. One of the primary advantages that Google has over its competitors is- default distribution. The default distribution is extremely valuable real estate as many users simply stick to searching with the default, Google receives billions of queries every day through those access points. Furthermore, the distribution agreements benefit Google in bringing more users, which means more advertisers, and more advertisers means more revenues.
Google has secured default placements through distribution contracts. It has entered agreements with browser developers, mobile device manufacturers, and wireless carriers. These partners agree to install Google as the search engine that is delivered to the user right out of the box at key search access points. Now most devices in the United States come preloaded exclusively with Google. These distribution deals have forced Google’s rivals to find other ways to reach users.
Google’s dominance in the relevant market eventually attracted the attention of US Department of Justice (DOJ) and they homed in on Google’s distribution agreements. In October 2020, the DOJ and 11 States filed lawsuits alleging that Google’s agreements and certain other conduct violated Section 2 of the Sherman Act. The DOJ complained that Google has unlawfully used the distribution agreements to thwart competition and maintain its monopoly in the market for general search services and in various online advertising markets.
The trial commenced in September 2023 and concluded just over nine weeks on 16-11-2023.
Court’s Assessment and Findings:
The Court noted that Section 2 of the Sherman Act makes it unlawful for a firm to ‘monopolize’. The Court further took note of the parties in agreement as to USA being the relevant geographic market. The Court pointed out that the evidence at trial established that general search service is a relevant product market and alternative sources for query information, like social media sites, are not adequate substitutes.
Regarding Google’s monopoly power within the market for general search service, the Court pointed out that indirect evidence presented by the plaintiffs supporting the structural approach—a dominant market share fortified by barriers to entry—easily establishes Google’s monopoly power in search. The Court while assessing Google’s monopoly power via its market share, stated that plaintiffs have demonstrated that Google possesses a dominant market share as it enjoys an 89.2% share of the market for general search services, which increases to 94.9% on mobile devices. The Court further noted that Google has enjoyed an over 80% share since at least 2009, which makes it a durable dominant share by any measure.
The Court found that significant barriers to entry exist both individually and collectively, that protect Google’s market dominance in general search, such as- high capital costs, Google’s control of key distribution channels, brand recognition and scale.
Therefore, the Court concluded that Google has monopoly power in the general search services market.
Regarding Google’s monopoly power over advertising markets, the Court noted that search advertising market is broadest proposed advertiser side market. The Court found that Google does not have monopoly over relevant product market for search advertising.
However, the Court found that general search text advertising is a relevant product market in which Google has monopoly. The Court pointed out that both Google and its advertisers recognize text ads as a distinct product submarket. Google has repeatedly acknowledged that text ads and shopping ads are different products. The Court took note of Plaintiffs’ submission stating that Google possesses a large and durable share in the text ads market, which is protected by significant entry barriers. In 2020, its market share in the text ads market was 88%, having grown steadily from 80% in 2016. Furthermore, advertisers confirmed Google’s market dominance when they testified that their text ads spending allocation mirrors Google’s and Bing’s (another search engine) relative query volumes. The advertisers also emphasized that under no circumstances would they spend more than 10% of their text ads dollars on Bing, and that no other platforms were viable substitutes.
Furthermore, the Court found that significant entry barriers insulate Google’s longstanding, dominant market share in the text ads market from erosion. Vis-a-vis allegations of supracompetitive pricing, the Court pointed out that Google does not consider competitors’ pricing when it sets text ads prices. Google controls key inputs to the auctions that influence the ultimate price that advertisers pay and in fact has profitably raised prices substantially above the competitive level which makes the existence of monopoly power clear.
Therefore, the Court concluded that Google has monopolized the market for general search text advertising.
Regarding exclusive dealing/ exclusive distribution agreements, the Court stated that there is no genuine “competition for the contract” as Google has no true competitor. It was pointed out that Google’s monopoly in general search has been remarkably durable and its market share in 2009 was nearly 80%, and it has increased since then to nearly 90% by 2020. Per contra, Bing, during that same period, has never held a market share above 11%, and currently it stands at less than 6%. Thus, over the last decade, Google’s grip on the market has only grown stronger. “The market reality is that Google is the only real choice as the default GSE (…) Google understands there is no genuine competition for the defaults because it knows that its partners cannot afford to go elsewhere. Time and again, Google’s partners have concluded that it is financially infeasible to switch default GSEs or seek greater flexibility in search offerings because it would mean sacrificing the hundreds of millions, if not billions, of dollars that Google pays them as revenue share (…) These are Fortune 500 companies, and they have nowhere else to turn other than Google”.
The Court pointed out that Google’s browser agreements are exclusive insofar as they establish Google as the out-of the-box default search engine. The Court pointed out that users are free to navigate to Google’s rivals through non-default search access points, but they rarely do. Most non-default queries still go through Google. Thus, the fact that a small fraction of Apple and Firefox users search on nondefault access points with a rival GSE, does not render the browser agreements non-exclusive.
Vis-a-vis effect on market for general search services, the Court stated that to be condemned as exclusionary, a monopolist’s act must have an ‘anticompetitive effect. That is, the monopolist must harm the competitive process and thereby harm consumers. In contrast, harm to one or more competitors will not suffice. Perusing the arguments presented by the rival parties, the Court found that as to the general search services market Plaintiffs have proven that Google’s exclusive distribution agreements foreclose 50% of the general search services market by query volume. The Court further pointed out that Google’s distribution agreements foreclose a substantial portion of the general search services market and impair rivals’ opportunities to compete.
The Court stated that Google’s exclusive agreements deny rivals’ access to user queries, or scale, needed to effectively compete which is the essential raw material for building, improving, and sustaining a GSE. Without access to scale, other GSEs have remained at a persistent competitive disadvantage, and new entrants cannot hope to achieve a scale that would allow them to compete with Google. GSE distributors prefer Google because of its search quality and because it would be economically irrational to sacrifice the high revenue share. Thus, the distribution deals are renewed with exclusive terms.
The Court also found that Google gets substantially more queries than its rivals due to Google being the default search engine.
The Court was taken aback by the lengths to which Google went to avoid creating a paper trail for regulators and litigants. “It trained its employees, rather effectively, not to create “bad” evidence”, but refused to impose sanctions. However, the Court clarified that its decision not to sanction Google should not be understood as condoning Google’s failure to preserve chat evidence. “Any company that puts the onus on its employees to identify and preserve relevant evidence does so at its own peril. Google avoided sanctions in this case. It may not be so lucky in the next one”.
The Court thus held that Google has violated Section 2 of the Sherman Act by maintaining its monopoly in two product markets in the United States through its exclusive distribution agreements — general search services and general text advertising.
[United States of America v. Google LLC, Case No. 20-cv-3010, decided on 05-08-2024]
*Judgment by Justice Amit P. Mehta