Blumenthal Continues to Press Google on Market Power and Competition Policy

(Washington, DC) – Senator Richard Blumenthal (D-CT) continued to press Google on its legal responsibilities and possible anticompetitive conduct today, submitting questions for inclusion in the Congressional Record for CEO Eric Schmidt following last week’s hearing on the company’s market power and practices before the Antitrust, Competition Policy, and Consumer Rights Subcommittee of the Senate Judiciary Committee.

In the questions, Blumenthal asks whether it is fair to characterize Google as a monopoly, noting, “For 100 years, federal antitrust law and competition law have existed to protect consumers from the potential negative effects of highly concentrated market power. The bigger a company gets, the more danger there is that the company will abuse its monopoly position to stifle innovation and raise prices. . . . [Google] is overwhelmingly dominant – it really has only one rival, and that rival is losing incredible sums of money each year.” 

Among the questions that Blumenthal submitted are those concerning Google’s market power, its use of that market power, Google’s actions in the smartphone market, and questions about intellectual property infringement.

The full text of the questions follows:

Questions for the Record: Eric Schmidt

 

Questions about Google’s Market Power:

 

(1) For 100 years, federal antitrust law and competition law have existed to protect consumers from the potential negative effects of highly concentrated market power. The bigger a company gets, the more danger there is that the company will abuse its monopoly position to stifle innovation and raise prices.

Justice Scalia noted this fundamental principle in his opinion in Eastman Kodak Co. v. Image Technical Services, where he said:

“Where a defendant maintains substantial market power, his activities are examined through a special lens: Behavior that might otherwise not be of concern to the antitrust laws – or that might even be viewed as precompetitive – can take on exclusionary connotations when practiced by a monopolist.” 

Google is clearly the dominant provider of web search services worldwide. In the United States, 65% or more of all general Internet searches take place on Google. In Europe, Google has 94% of this market. The explosion of smartphones has provided a new search market – and in that space, Google processes a whopping 97% of all searches.

Ten years ago, there were many competing search engines – AltaVista, Lycos, Ask.com, AOL Search, just to name a few. Now, there are really only two – Google, and Microsoft, which provides the underlying software for both the Bing and Yahoo search engines. Microsoft does not appear to have a sustainable alternative – they hold 30% of the market, but are losing over $2 billion a year on search services, while Google made $29 billion in 2010.

Q: Mr. Schmidt, your company is overwhelmingly dominant – it really has only one rival, and that rival is losing incredible sums of money each year. Given the tremendous market power of your company, do you believe it’s fair to characterize Google as a monopoly? 

(2) Google frequently argues that it is not a monopoly because it provides its service for free and competition is “one-click away.” This argument sounds appealing. Consumers are not forced to use Google, and anyone can start a website. The problem is that Google, like all search engines, serves consumers and advertisers. Consumers are really just a means to an end – Google generates nearly all of its revenue from advertisers, through advertisements on its own website and through ads it places across the internet. 

This is not a “new” model. It’s similar to broadcast TV. TV shows cost millions to produce, but consumers get them for free – because they’re funded by advertisers. Millions of people watch ABC, so ABC can charge advertisers high costs, are re-invested into new million-dollar TV shows. But the difficulty in building ad revenue is a significant barrier to entry into this market. You can only fund new shows if you have advertisers. You can only get advertisers if you have viewers. And you can only get viewers if you have new shows. It’s great if you already have all of the viewers – but good luck starting from scratch. These markets tend to move toward concentration and monopoly – there are only a few national broadcast networks.

Google has all the “viewers” on the internet. Since most consumers use Google’s search engine, most advertisers need to advertise through the company. – Google controls 80% of the online search advertising market. Ad revenue means better products, which means more users. This “network effect” makes it hard to push Google from its dominant position.

Jonathan Rosenberg, Google’s own VP of Product Management and Marketing, actually gave the best explanation of this in 2008. He said:

“Google is really based on this. Users go where the information is so people bring more information to us. Advertisers go where the users are, so we get more advertisers. We get more users because we have more advertisers because we can buy distribution on sites that understand that our search engine monetizes better. So more users more information, more information more users, more advertisers more users, it’s a beautiful thing, lather, rinse, repeat, that’s what I do for a living. So that’s … the engine that can’t be stopped.”

Q: Mr. Schmidt, please indicate on an company by company basis how much revenue was shared with each of your top 100 internet advertisers in the prior fiscal year, at whatever level of specificity is appropriate. If you were running most internet businesses, do you think it would be practical to refuse to advertise with Google?

(3) In your testimony before the committee, you suggested that Google’s market share is not a significant barrier to entry because competition is “one-click away.” This seems inconsistent you’re your statement in 2003, when you told the New York Times that “[m]anaging search at our scale is a very serious barrier to entry.”

Q: Mr. Schmidt, please explain why “[m]anaging search at our scale is a very serious barrier to entry” and how this can be reconciled with your claim that competition is “one-click away.”

(4) When Google argues that it is not anticompetitive, the company sometimes points to its efforts to allow consumers to easily move away from Google Products. Google actually runs an organization called the “Data Liberation Front” to help you “move your data in and out of Google Products.” The group’s mission statement is this:

“Users should be able to control the data they store in any of Google’s products. Our team’s goal is to make it easier to move data in and out.” 

Of course, it’s the advertisers who are actually generating profits for Google. Google’s products are free so that they can gain additional consumers, making their platform more attractive to advertisers. It’s what economists call a classic example of a “two-sided market” – a business that provides value to two separate but related groups of customers. Consumers could choose not to use Google. But advertisers certainly can’t.

Economists have noted allowing advertisers to move easily and cheaply between platforms helps to deter the market concentration and monopoly effects that are a natural result of markets that generate increasing value from large networks. 

If a small company has to invest the resources to compete in an effective internet advertising auction, it’s going to invest in Google’s ads, not Microsoft’s. If the company could easily export its data to Microsoft, it could advertise in both places with no additional cost. But if it has to choose one, it’s going to choose the dominant player.

In your testimony before the committee, you indicated that advertisers have the same freedom to move data in and out of Google’s advertising platform as users. Some companies, however, have complained that it is not easy to move advertising data they have compiled for Google’s ad auctions to competing advertising platforms, like Microsoft’s Bing or Yahoo.

Q: Mr. Schmidt, please explain precisely what advertising data can and cannot be exported from Google’s ad services and imported into online advertising auctions on competing platforms.

Questions about Google’s Use of Its Market Power:

(5) It’s not a crime to be a big. Google’s explosive growth over the last decade is a great American success story. Federal law is concerned with the responsibilities that a big company has not abuse that dominance. One classic legal concern is when a dominant company uses its market power to push into new markets and unfairly hurt competitors. This is the chief complaint that other online companies have about Google. In 2007, Google’s VP Marissa Mayer said that Google favors its own content:

“[When] we roll[ed] out Google Finance, we did put the Google link first. It seems only fair, right?  … That actually has been our policy, since then…. So for Google Maps, again, it’s the first link, so on and so forth. And after that it’s ranked usually by popularity.” 

Google calls this practice of directing users to its own products at the top of its search page “Universal Search” – and says it’s an effort to provide a better consumer experience. But if Google’s product always wins, there’s little incentive to make it the best consumer option. 

“Google Product Search” is an online shopping comparison product. Originally called “Froogle,” it was seen as a failure for its first five years, with few users–until December 2007, when Google started putting Google Product Search first. Over the next two years, Product Search traffic grew by over 1,200 percent. In 2008, an online retail consultant noted:

“Previously, Google Product Search struggled to get more than 2% of Google users… [but now] Google Product Search has become the largest and most important specialty shopping search engine in existence…. Yet their shopping product itself is still inferior in its presentation and usability to some other leading shopping search engines.”

Q: Mr. Schmidt, how can consumers be assured of a better experience if they are always directed to Google software first? 

(6) Google’s effort to build its own local business reviews product provides a good example of where Google’s dominance may cause problems. Yelp.Com and TripAdvisor.Com grew into significant businesses based on user-generated reviews of hotels, restaurants, and stores. Google wanted to enter this market with a competing product – “Google Places.” But “Google Places” had low traffic because it had no reviews. 

Of course, Google had all of Yelp and TripAdvisor’s reviews saved in its search servers. So the company took a shortcut – they “scraped” those reviews from its competitors, and pasted them on “Google Places” pages. TripAdvisor and Yelp cried foul. Those reviews are the heart of their businesses. But Google said if they didn’t like it, they could just withdraw from the search engine entirely. That is totally impractical. When Microsoft tried to do the same thing to Yelp, Yelp threatened to withdraw from Bing, and Microsoft backed down. Google, however, generates most of the traffic to TripAdvisor and Yelp. Those companies would lose half their revenue if they left Google. As TripAdvisor’s CEO has said, “I don’t feel like it’s fair to force me to provide information to a site that’s trying to compete with me.” Google announced just this past July that it would no longer scrape third party reviews and put them up on Google Places pages.

Q: Mr. Schmidt, please indicate with as much specificity as is possible why Google decided to change its policy on scraping competitor content.

Questions about Google’s Market Power in Smartphone Operating Systems

(7) Google’s dominant position in the smartphone market is under increasing scrutiny. Google’s Android operating system now runs on over 50% of all smartphones. Nearly a half million new Android phones are activated daily. The growth of Android’s smartphone market share raises questions around whether Google’s market power is being unfairly leveraged to promote its other products – like its search engine, which runs on all Android phones, or its “Places” application, which seems to ship with every Android phone.

Q: Mr. Schmidt, does Google occupy a dominant position in the smartphone operating system market?

(8) The most prominent claim of Google unfairly leveraging its market power is the case of Skyhook Wireless, who recently filed suit against Google arguing that the company pressured Motorola and other manufacturers into dropping Skyhook’s mobile location service in favor of Google’s. Emails from within Google made public as part of that lawsuit showed significant concern over Motorola’s decision to go with Skyhook instead of Google’s software. One email from Steve Lee, an Android product manager, speculates that Skyhook may have beaten out Google because it’s “a hungry start-up” – or because Skyhook’s location accuracy was superior to Google’s.

Google ultimately forced Motorola and others to drop Skyhook’s technology from their phones, arguing that it violated the company’s Android “compatibility” requirements. But Dan Morrill, a manager in the Android group, noted at the time that it was obvious to manufacturers that in general, “we are using compatibility as a club to make them do things we want.” Last month, Google announced that it intends to buy Motorola outright. 

Q: Mr. Schmidt, does Google have an obligation to ensure that it does not abuse its smartphone market position to favor its own products, and if so, what policies are in place to ensure that such abuse does not occur?

Questions about Google’s Market Dominance and Facilitation of IP Infringement

(9) As discussed during the September 21, 2011 hearing, on August 24, 2011, the Department of Justice announced that Google had been fined $500 million for allowing online Canadian pharmacies to place advertisements through its AdWords program, resulting in the unlawful importation of controlled and non-controlled prescription drugs into the United States.  The Department’s press release noted that “Google was aware as early as 2003, that generally, it was illegal” to ship pharmaceuticals into the U.S. 

Based upon the questions, and your responses to those questions, Google is also well aware that online copyright infringement online occurs on a massive scale and that it is a “problem that [Google] takes very seriously.”  

In light of the Department of Justice’s statement that it “will continue to hold accountable companies who in their bid for profits violate federal law,” Google’s approach to ensuring it does not profit from intellectual property theft should not only be of great interest to the Committee, but Google as well. 

Q: Mr. Schmidt, to what extent does Google take steps to ensure that it does not profit from the violation of federal copyright or trademark laws?

(10) The DOJ announcement mentions that the $500 million forfeiture, one of the largest ever in the United States, represents, “the gross revenue received by Google as a result of Canadian pharmacies advertising” through Google services. 

Q: Mr. Schmidt, what are the gross revenues received by Google as a result of advertising the company has placed on websites that have been identified by law enforcement, copyright owners, or Google itself as a venture that offers unauthorized copies of copyrighted materials.

(11) The August 24, 2011 release stated that, “this investigation is about the patently unsafe, unlawful, importation of prescription drugs by Canadian on-line pharmacies, with Google’s knowledge and assistance, into the United States, directly to U.S. consumers…  It is about taking a significant step forward in limiting the ability of rogue on-line pharmacies from reaching U.S. consumers, by compelling Google to change its behavior.”  As you know, I am a cosponsor of the PROTECT IP Act, which gives the government the ability – after an investigation by federal prosecutors and review by a federal judge – to cut-off a foreign-based website that profits by facilitating the online theft of works from the U.S. marketplace. This proposal was unanimously approved by the Senate Judiciary Committee earlier this year.

Q: Mr. Schmidt, to what extent are you aware of Ads by Google, Adsense, DoubleClick or any other Google advertising service on offshore websites that are not authorized to make available the copyrighted music or movies that are the heart of those websites?  

(12) Q: Mr. Schmidt, to what extent have you been contacted by property owners regarding the presence of ads that enable such rogue websites to reap financial gain?  

(13) Q: Mr. Schmidt, how does Google respond when contacted by a property rights owner or advertiser regarding Google advertising on a site offering or distributing its content or product without authorization?  On average, how long does it take Google to respond to such a complaint?

(14) Q: Mr. Schmidt, what technologies is Google developing to ensure that its companies do not place ads on sites engaged in piracy and counterfeiting? 

(15) The FDA stated that it will hold “all contributing parties accountable for conduct that results in vast profits at the expense of the public health.” While the theft of music and movies does not endanger the public health, it does endanger consumers who patronize professional looking websites that are validated and made to feel legitimate with “Ads by Google.”  It endangers consumers because it exposes them to liability for the theft of copyrighted materials.  It endangers consumers who provide credit card and other personal information to criminal organizations.  It exposes their computers to malware, viruses and spam, and, is not only wrong, but also a drain on the US economy.  Equally important, it allows criminal operations – and your company – to profit from crime. 

Q: Mr. Schmidt, what can you and others in the online advertising sector do to devise a workable plan that holds all parties accountable for conduct that results in vast profits for those operating online criminal enterprises predicated on the theft of American-made intellectual property? 

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