Monopoly Round-Up: A Judge Can Break Up Google Right Now. Will He?
Google lost an antitrust case late last year to Epic Games. Now California judge James Donato is overseeing the remedy. Could that include a break-up?
This week’s monopoly round-up has lots of news, as usual, including some victories for the Antitrust Division, the government causing big health insurance stocks to tumble, and a privacy bill deal in Congress.
But I want to start with a ray of hope for those who want to break up big tech and are tired of waiting. A judge in California finally has the power and mandate to take apart Google. Not in five years. Not after a long trial. But right now. Will he? Guest-author and antitrust lawyer Lee Hepner has written an important piece on the subject.
Let’s dive in.
To understand the biggest challenge to the practice of antitrust, it helps to start with a basic axiom of our legal system, which is the need for a speedy trial. You can go back to the Magna Carta and find indications of that principle, or to Martin Luther King Jr., who wrote that “Justice too long delayed is justice denied.” In 1970, Supreme Court Justice Warren Burger issued a warning to Congress and the American Bar Association: "If people come to believe that inefficiency and delay will drain even a just judgment of its value,” he said, it would “do incalculable damage to society.”
Over the last ten years, we’ve heard increasing criticism of ‘Big Tech’ – the handful of trillion-dollar giants that organize the information commons in our society – resulting in the Justice Department and Federal Trade Commission bringing sweeping antitrust lawsuits against Google, Microsoft, Meta, Amazon, and – most recently – Apple.
These suits are popular, with 75% of likely voters supporting the Biden suit against Apple and only 16% of respondents in opposition. It’s a tidal shift from just a decade ago, when most people still saw Big Tech as the crown jewels of American innovation.
But these hefty lawsuits are taking years to resolve, with Google and Facebook suits filed in 2020, and not close to done four years later. And that, as Justice Warren would have observed, is a problem, because it leaves a festering impression that there’s little anyone can do about market power. Every crushed competitor, every cheated customer, they have to wait years for justice.
But a private lawsuit against Google’s Play Store monopoly has received much less attention even though it could bring relief much sooner. In 2020, Epic Games, the studio behind the massively popular video game Fortnite, sued Google for illegally maintaining a monopoly over app store distribution on Android phones. Late last year, in a jury trial, Epic won, and next week it will submit its request for remedies. And the judge in the case, James Donato of the Northern District Court of California, is a confident lawyer willing to keep a brisk process moving. In fact, he has publicly encouraged antitrust plaintiffs to swing for the fences when requesting relief.
In other words, it’s a possibility, perhaps even likely, that one of the biggest corporations in the world could be split apart over its monopolistic behavior. And it could happen this year.
So when’s the last time a break-up happened? Most people would say AT&T in 1984, when the phone giant was split apart in response to a government suit. It almost happened in 1998, when the government won a case against Microsoft. But those are government suits. What about a private lawsuit? Interestingly, the answer is actually… 2021, when a private plaintiff, exactly like Epic Games, won a case to break up a window and door making giant named Jeld-Wen. So there’s very recent precedent.
Google’s Epic Blunder
Why might a break-up make sense in this case? The answer to that question requires an understanding of the facts and evidence in the case itself, Google’s acquisition history, and the purpose of remedies to unfetter markets from anticompetitive conduct and restore competition where it was constrained.
In Epic v. Google, Epic Games argued that Google is a monopolist of one of the key gateways on your phone, which is the Google Play Store. With over 90% share of the markets for Android-based app distribution and in-app payment systems, Google controls how any other app developer – including Spotify, TikTok, Amazon, Facebook, and beyond – reaches users on Android phones. (The other major phone system, Apple’s iPhone, is the subject of a different antitrust suit also brought by Epic Games.)
At the core of Google’s Play Store monopoly is Android. Android is an operating system, the brains of the phone, and Google acquired it back in 2005 so it could start cutting deals with mobile device makers. There are many producers of smartphones, but virtually all of them (with the exception of Apple) now use Google’s Android as their operating system. Google doesn’t charge consumers for Android directly, but monetizes Android indirectly through its app store and other highly profitable business lines that are bundled with Android.
Over the course of a 4-week trial nicknamed ‘Fortnite Court,’ Epic sought to show how Google stops rivals from creating app stores that might compete with the Google Play Store. Every antitrust trial is a morality play, and in this story, Google was easily cast as the villain, with the judge sanctioning the firm for destroying evidence relevant to the trial. And the proof Epic Games did present was overwhelming.
Epic showed how Google forced agreements on smartphone manufacturers that required pre-installation and prominent placement of the Play Store on hundreds of millions of devices. Smartphone manufacturers, like Samsung and Motorola, consented to this arrangement because Google gave them a lot of money through “revenue sharing agreements,” paid for out of Google’s monopoly profits that smartphone manufacturers helped secure. These agreements created a closed platform ecosystem, or walled garden, around Google’s business.
Google didn’t just buy off smartphone manufacturers. When major developers like Activision, Riot Games, and Tencent became frustrated with Google’s 30% commission and threatened to develop their own distribution and payment systems, Google launched a “Play Risk Mitigation” strategy that included paying hundreds of millions of dollars to prevent them from doing so. Google’s head of partnerships Don Harrison estimated that there are now “billions of dollars flowing” between Google and Activision-Blizzard (now a subsidiary of Microsoft) as part of a deal to quash innovation by would-be rivals.
As a result, Google now controls the only meaningful app store for Android phones and the primary gateway for how any other business reaches consumers. Its 30% commissions on all app sales and in-app payments is not a competitive price, but a monopoly price it extracts while preventing rival stores from undercutting it. By comparison, Epic’s Game Store proposed a commission of just 12%, a far more attractive rate for developers that would likely have resulted in lower prices for consumers, too – if Epic could have gotten its foot in the door.
The financial incentive for Google to prevent companies like Epic, Activision, Spotify and Tencent from undercutting its monopoly profits is significant. In 2008, Google said that it had no intent to operate the Google Play Store as a profit center. By 2020, the Google Play Store was, on its own, one of the most profitable business segments in the world, with a 65 percent operating margin and $4.4 billion in half-year profit.
A jury found the evidence in Epic v. Google compelling, deliberating for just under 4 hours before reaching a unanimous verdict that Google is an illegal monopolist.
But the question at hand now is, so what? And that’s what makes this situation so interesting.
A Verdict and $3 Can Buy You a Cup of Coffee
So far, what we know is that Google got dinged by a jury. But absent a remedy that fully wrests control of the market from Google’s monopoly, that verdict only exists on paper. Such a remedy can be broad-based, anything from monetary damages to break-ups to creating internal compliance departments to voiding unlawful contracts to banning senior executives from the industry.
Epic Games is, conspicuously, not asking for money, but for the right to compete on a level playing field. Before Google bought Android and converted it into a chokepoint in the value chain between device manufacturers and consumers, Android was an open-source operating system. That’s what Epic has stated it is seeking to restore, the openness of the Android ecosystem for the benefit of all developers and consumers.
Forcing Google to spinoff Android may be the cleanest way to achieve this goal and blow open a lane for new competition and innovation to occur. Developers other than Google could seek arrangements with Android that simultaneously increase the quality and diversity of apps, lower costs for developers and consumers, and encourage smartphone innovation. At the dawn of artificial intelligence, a structural separation of Android would also loosen Google’s grip on innovation at the relative infancy of that technology.
Though a breakup of Google might sound radical, it’s a fairly orthodox remedy for an illegal monopoly. Six decades ago, the Supreme Court described “divestiture” – a type of structural remedy that includes breakups – as “the most important of remedies. It is simple, relatively easy to administer, and sure.” Ten years later, the Supreme Court reiterated the core purpose of antitrust relief to “unfetter a market from anti-competitive conduct and ‘pry open to competition a market that has been closed by defendants’ illegal restraints.”
While they’ve become less favored in recent decades, breakups have historically been successful. In 1911, Standard Oil was broken into 34 separate companies, leading to, among other things, the commercialization of gasoline. In the 1940s, the Paramount Decrees broke up film production studios from movie theater chains, ushering in a new golden era of cinema over the following decades.
And then there was the 1982 breakup of AT&T into seven regional telephone networks, and the vertical separation of those local networks from the rest of the Bell System. That breakup led to an explosion of competition and innovation among telephone device manufacturers and long-distance telecommunications providers – and lower prices for consumers. A similar positive outcome would flow from a structural separation of Google and Android, which would blow open the smartphone field for innovation among developers and device manufacturers currently under Google’s thumb.
Breakups are particularly effective where, as with Google and Android, the implicated business segments have natural fault lines and can effectively stand alone. This is often the case with monopolies that were the result of mergers – again, like the merger of Google and Android – which combine inherently distinct business segments, and which remain visibly distinct. (Jeld-Wen was an unwinding of a merger.)
By comparison, the costs associated with ineffective behavioral remedies are significant, such as monitoring for compliance, addressing evasion, chilled innovation by the constrained actor, and the costs of hampering a company’s ability to adapt to market conditions. More fundamentally, an ineffective remedy is justice delayed, which as Justice Warren said so many years ago, is corrosive to society. Both FTC Chair Lina Khan and DOJ Antitrust Chief Jonathan Kanter have made clear their aversion to behavioral remedies and an intent to “pursue structural remedies in our conduct cases whenever possible.”
It’s pretty obvious big tech firms see laws as suggestions. In recent months, Apple has drawn criticism for its “malicious non-compliance” with new European Union regulations and a court order in Epic’s separate app store case against Apple. In the latter case, Apple was ordered to allow developers to use third-party payment systems, but is undercutting would-be competition by taking a 27% commission for facilitating those transactions. Google too is under investigation in Europe for similar behavior in refusing to comply with the law. As long as Google retains control over the Android operating system, it would do the same.
The Courage to Provide Effective Relief
So how is Judge Donato thinking about the problem? At a recent status conference in Epic v. Google, he made clear his aversion to behavioral remedies that would require ongoing court supervision or otherwise result in awkward micromanagement of Google: “I’m not going to say ‘you can have four click screens, not eight.” He added, “I have great doubts I’m in any position to set a fee that developers might pay.” Moreover, he is curious about the behavior of other dominant tech firms in response to remedies that seem to have failed. (“What did Apple just do?” he asked, about malicious non-compliance over the judicial order in Epic’s other antitrust case.)
Epic has a clear opportunity to request structural remedies and Judge Donato has broad latitude to grant them. If Epic doesn’t call for Google to spin off Android, it may still call for other forms of structural relief, like compulsory licensing of core tech infrastructure, that could go a long way to restoring competition to broader markets. We’ll know Epic’s request soon enough, Google will file its own more limited proposal, and dueling economic experts will jump in another of Judge Donato’s “hot tubs” at the end of May. Shortly thereafter, Judge Donato will decide how and whether Google’s vise grip over the Android ecosystem should be meaningfully weakened.
Why is all of this important? Innovation, whether on smartphones or tablets or augmented reality headsets, works best when wrested from the control of monopolists whose overriding motivation is the preservation of their monopoly. We all benefit when companies are forced to differentiate themselves by offering new and better products, or, at the very least, the same old things at lower prices.
For its part, Epic has a powerful verdict in hand. For it to be more than pyrrhic, remedies must now accomplish several goals: they must unfetter the market from monopoly power, they must deprive the monopolist of the spoils of its illegal conduct, and they must provide certainty that the monopoly will not re-emerge.
Perhaps more importantly, Judge Donato has the ability to help Americans understand that the rule of law actually means something, and that when a jury says that a giant firm has broken the law, the wrongdoing will be remedied. Given that mandate, the biggest impediment to an effective remedy is lacking the temerity to impose one that may actually work.
And now for the monopoly related news of the week.
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