Nicholas Economides is a professor of economics at the NYU Stern School of Business.
The European Commission’s antitrust lawsuits against Google, which has recently made headlines, threaten to impose an up to $7 billion fine on the tech giant for forcing Android phone manufacturers (OEMs) to use Google Search, among other alleged violations. This comes on top of the EC’s suit against Google for favoring its affiliates in Internet search, and the EC suit on Google’s dominance and exclusive dealing in online advertising. On Android, Google does not allow Android OEMs, such as Samsung, to install “Google Play” unless they also install “Google Search” as the default application for search.
You might ask what’s wrong with Google (goog) bundling its applications? And after all, McDonalds (mcd) sells bundles (“meals”) of a big Mac with fries and Coke. The big difference is that McDonalds allows you to buy all parts of the bundle separately. It does not force you to buy the Big Mac if you buy fries (assuming that fries is the best part of the “meal”). Because the parts of the McDonald’s bundle are available a-la-carte, no law is broken when they are also sold as a bundle.
Google’s type of bundling, called “tying” in the law, is exactly what got Microsoft in deep trouble starting in 1998 when the company was bundling Internet Explorer with Windows and later its Media Player with Windows. The United States sued Microsoft and won in 2001, precipitating billions of losses in class action suits against Microsoft (msft). The EU sued Microsoft twice, won both times, and imposed fines totaling $3.4 billion. It even forced Microsoft to create a special version of Windows for European consumers without Windows Media Player!
“Tying” deprives consumers of choice in their search provider. It also harms innovation since other search companies are deprived of their chance to reach this market. “Tying” of Google Play with Google Search is illegal under antitrust law in the US, EU, Japan, Korea, Brazil, and many other jurisdictions.
Google Play is an extremely desirable, almost indispensable, application for phone manufacturers because it facilitates downloading and updating Android applications. So OEMs are in a bind. They have to have Google Play, but they are forced to install Google Search as default. Additionally, Google demands uniformity. That is, if Samsung installs Google Play in one line of phones, Google requires it to install Google Search in all its phones!
It’s been widely reported that Google refuses to discontinue tying and will not settle the cases. This strategy may look good from Mountain View, as it did from Redmond over a decade ago. To some extent, it is a result of the arrogance of being a top technology company.
Additionally, technology leaders, especially those that started small like Microsoft and Google, tend to think that whatever they did when they were small, they can keep doing now that they are giants. This is a huge strategic error. Giants have special obligations under the law not to use their market power to crush rivals. It took Microsoft over a decade to learn that.
Microsoft switched, from paying no attention to antitrust problems before it was sued, to obsessing over antitrust a few years after it was sued. Microsoft lost its focus and missed emerging threats to it, such as from a startup called Google.
Another significant antitrust suit filed by the EU against Google is for tweaking its algorithm to place its affiliates on top in search pages, even though they are not the most popular. If you search for “New Orleans New York” in Google, you get a result from “Google flights,” a Google affiliate, at the top of the page and not from Orbitz, Expedia or Kayak. If you make the same search in Bing or Yahoo, you get Orbitz, Expedia or Kayak on top.
Last Thursday, the EU added another suit against Google for exclusive dealing with large websites that were coerced into using Google for advertising on their sites rather than competitors. In total, the EU has three antitrust suits against Google: on Android tying, on comparison shopping and on advertising.
The longer the EU’s cases against Google last, the more the damage to Google. Can Google learn from Microsoft’s experience, settle quickly, and, as an adult giant, avoid squashing its rivals?
If Google does not learn the lessons of adulthood, it will make it more likely that it will be overtaken faster by the next Google (or should I say Facebook?). And Facebook has not promised “to do no evil” … But of course, even for Google, theory and practice can diverge.