GOOGL Alphabet Inc

By Brent Kendall and Rob Copeland 

The Justice Department filed a long-awaited antitrust lawsuit Tuesday alleging that Google uses anticompetitive tactics to preserve a monopoly for its flagship search engine and related advertising business, illegally choking off potential competition.

The case, filed in a Washington, D.C., federal court, marks the most aggressive U.S. legal challenge to a company's dominance in the tech sector in more than two decades, with the potential to shake up Silicon Valley and beyond. It thrusts Google, once a startup and now a vast conglomerate, into the type of public showdown the company has sought to avoid.

The Justice Department alleged that Google, a unit of Alphabet Inc., is maintaining its status as gatekeeper to the internet through an unlawful web of exclusionary and interlocking business agreements that shut out competitors. The government alleged that Google uses billions of dollars collected from advertisements on its platform to pay for mobile-phone manufacturers, carriers and browsers, like Apple Inc.'s Safari, to maintain Google as their preset, default search engine.

The upshot is that Google has pole position in search on hundreds of millions of devices in the U.S., with little opportunity for any other company to make inroads, the government said.

"Google achieved some success in its early years, and no one begrudges that," Deputy U.S. Attorney General Jeffrey Rosen said. "If the government does not enforce its antitrust laws to enable competition, we could lose the next wave of innovation. If that happens, Americans may never get to see the next Google."

Google owns or controls search distribution channels accounting for about 80% of search queries in the U.S., according to the lawsuit and third-party researchers. The government says that effectively leaves no room for competition, resulting in less choice and innovation for consumers, and less competitive prices for advertisers.

The wide-ranging lawsuit included details on alleged deliberations within Google aimed at avoiding antitrust scrutiny. The government quoted Google's chief economist as telling employees, "We should be careful about what we say in both public and private."

The lawsuit in particular targeted arrangements under which Google's search application is preloaded, and can't be deleted, on mobile phones running its popular Android operating system. Google has expanded such agreements over the past year since the Justice Department probe began, the government said

And yet the lawsuit provided little new hard data on such tie-ups. Alphabet publicly discloses that it pays other companies to funnel in search traffic; analysts estimate that it pays Apple alone around $10 billion a year. The lawsuit cited a note from one senior Apple employee to his Google counterpart: "Our vision is that we work as if we are one company."

Kent Walker, Google's chief legal officer, said in a statement that the lawsuit was deeply flawed. "People use Google because they choose to -- not because they're forced to or because they can't find alternatives," he said. "Like countless other businesses, we pay to promote our services, just like a cereal brand might pay a supermarket to stock its products at the end of a row or on a shelf at eye level."

Mr. Walker said that, if successful, the lawsuit would result in higher prices for consumers because Google would have to raise the cost of its mobile software and hardware.

Alphabet's shares were roughly flat Tuesday, after The Wall Street Journal first reported news of the impending suit.

The Mountain View, Calif., company, sitting on a $120 billion cash hoard, is unlikely to shrink from a legal fight. The company has argued that it faces vigorous competition across its different operations and that its products and platforms help businesses small and large reach new customers.

Google's defense against critics of all stripes has long been rooted in the fact that its services are largely offered to consumers at little or no cost, undercutting the traditional antitrust argument centered on potential price harms to those who use a product.

The lawsuit follows a Justice Department investigation that has stretched more than a year, and comes amid a broader examination of the handful of technology companies that play an outsize role in the U.S. economy and the daily lives of most Americans.

A loss for Google could mean court-ordered changes to how it operates parts of its business, potentially creating new openings for rival companies. The Justice Department's lawsuit didn't cite particular remedies, action that is usually addressed later in a case. One Justice Department official said nothing is off the table; the lawsuit said the government would seek structural changes to Google's business "as needed."

A victory for Google could deal a huge blow to Washington's overall scrutiny of big tech companies, potentially hobbling other investigations and enshrining Google's business model after lawmakers and others challenged its market power. Such an outcome, however, might spur Congress to take legislative action against the company.

The case could take years to resolve, and the responsibility for managing the suit will fall to appointees of the winner of the Nov. 3 presidential election.

The campaign of former Vice President Joe Biden didn't return a request for comment about how he would approach the lawsuit if elected. Mr. Biden has called for greater antitrust enforcement more broadly but has stopped short of saying that big tech companies should be broken up.

During the Democratic primaries, Mr. Biden said a proposal from Massachusetts Sen. Elizabeth Warren to dismantle Facebook, Google and Amazon was worth taking "a really hard look at" but said it was premature to make a final judgment.

The challenge marks a new chapter in the history of Google, a company formed in a garage in a San Francisco suburb in 1998 -- the same year Microsoft Corp. was hit with a blockbuster government antitrust case accusing the software giant of unlawful monopolization. That case, which eventually resulted in a settlement, was the last similar government antitrust case against a major U.S. tech firm.

Google started as a simple search engine with a large and amorphous mission "to organize the world's information." But over the past decade or so it has developed into a conglomerate that does far more than that. Its flagship search engine handles more than 90% of global search requests, some billions a day, providing fodder for what has become a vast brokerage of digital advertising. Its YouTube unit is the world's largest video platform, used by nearly three-quarters of U.S. adults.

Google has been bruised but never visibly hurt by various controversies surrounding privacy and allegedly anticompetitive behavior, and its growth has continued largely unchecked. In 2012, the last time Google faced close antitrust scrutiny in the U.S., the search giant was already one of the largest publicly traded companies in the nation. Since then, its market value has roughly tripled to almost $1 trillion.

The company enters this legal showdown under a new generation of leadership. Co-founders Larry Page and Sergey Brin, both billionaires, gave up their management roles last year, handing the reins solely to Sundar Pichai, a soft-spoken, India-born engineer who earlier in his career helped present Google's antitrust complaints about Microsoft to regulators.

The chief executive has in his corner Messrs. Page and Brin, who remain on Alphabet's board and in effective control of the company thanks to shares that give them, along with former Chief Executive Eric Schmidt, disproportionate voting power.

Executives inside Google are quick to portray their business divisions as mere startups in areas -- like hardware, social networking, cloud computing and health -- where other Silicon Valley giants are further ahead. Still, that Google has such breadth points to its omnipresence.

European Union regulators have targeted the company with three antitrust complaints and fined it about $9 billion. The cases haven't left a big imprint on Google's businesses there, and critics say the remedies imposed on it have proved underwhelming.

In the U.S., nearly all state attorneys general are separately investigating Google, while three other tech giants -- Facebook Inc., Apple and Amazon.com Inc. -- likewise face close antitrust scrutiny. And in Washington, a bipartisan belief is emerging that the government should do more to police the behavior of top digital platforms that control widely used tools of communication and commerce.

A group of 11 state attorneys general, all Republicans, have joined the Justice Department's case, officials said. More could join later, according to the court docket. Other states are still considering their own cases related to Google's search practices, and a large group of states is considering a case challenging Google's power in the digital advertising market, The Wall Street Journal has reported. In the ad-technology market, Google owns industry-leading tools at every link in the complex chain between online publishers and advertisers.

The Justice Department also continues to investigate Google's ad-tech practices.

Democrats on a House antitrust subcommittee released a report this month following a 16-month inquiry, saying the four tech giants wield monopoly power and recommending congressional action. The companies' chief executives testified before the panel in July.

"It's Google's business model that is the problem," Rep. David Cicilline (D., R.I.), the subcommittee chairman, told Mr. Pichai. "Google evolved from a turnstile to the rest of the web to a walled garden that increasingly keeps users within its sights."

"We see vigorous competition," Mr. Pichai responded, pointing to travel search sites and product searches on Amazon's online marketplace. "We are working hard, focused on the users, to innovate."

Amid the criticism, Google and other tech giants remain broadly popular and have only gained in might and stature since the start of the coronavirus pandemic, buoying the U.S. economy -- and stock market -- during a period of deep uncertainty.

At the same time, Google's growth across a range of business lines over the years has expanded its pool of critics, with companies that compete with the search giant, as well as some Google customers, complaining about its tactics.

Specialized search providers like Yelp Inc. and Tripadvisor Inc. have long voiced such concerns to U.S. antitrust authorities, and newer upstarts like search-engine provider DuckDuckGo have spent time talking to the Justice Department.

News Corp, owner of The Wall Street Journal, has complained to antitrust authorities at home and abroad about both Google's search practices and its dominance in digital advertising.

Some Big Tech detractors have called to break up Google and other dominant companies. Courts have indicated such broad action should be a last resort and only if the government clears high legal hurdles, including by showing that lesser remedies are inadequate.

The outcome could have a considerable impact on the direction of U.S. antitrust law. The Sherman Act, which prohibits restraints of trade and attempted monopolization, is broadly worded, leaving courts wide latitude to interpret its parameters. Because litigated antitrust cases are rare, any one ruling could affect governing precedent for future cases.

The tech sector has been a particular challenge for antitrust enforcers and the courts because the industry evolves so rapidly. Also, many products and services are offered free to consumers, who in a sense pay with the valuable personal data companies such as Google collect.

The search company famously outmaneuvered the Federal Trade Commission nearly a decade ago.

The FTC, which shares antitrust authority with the Justice Department, spent more than a year investigating Google but decided in early 2013 not to bring a case in response to complaints that the company engaged in "search bias" by favoring its own services and demoting rivals. Competition staff at the agency deemed the matter a close call, but said a case challenging Google's search practices could be tough to win because of what they described as mixed motives within the company: a desire to both hobble rivals and advance quality products and services for consumers.

The Justice Department's case doesn't focus on a search-bias theory.

Google made a handful of voluntary commitments to address other FTC concerns. The resolution was widely panned by advocates of stronger antitrust enforcement and continues to be cited as a top failure. Google's supporters say the FTC's light touch was appropriate and didn't burden the company as it continued to grow.

The Justice Department's current antitrust chief, Makan Delrahim, spent months negotiating with the FTC last year for jurisdiction to investigate Google this time around. He later recused himself in the case -- Google was briefly a client years before while he was in private practice -- as the department's top brass moved to take charge.

The lawsuit comes after internal tensions, with some department staffers questioning Attorney General William Barr's push to bring a case as quickly as possible, the Journal has reported. They worried the department hadn't yet built an airtight case and feared a rush to litigation could lead to a loss in court. They also worried Mr. Barr was driven by an interest in filing a case before the election. Other staff members were more comfortable moving ahead.

Mr. Barr has pushed the Justice Department to move ahead on the belief that antitrust enforcers have been too slow and hesitant to take action, according to a person familiar with his thinking. He has taken an unusually hands-on role in several areas of the department's work and repeatedly voiced interest in investigating tech-company dominance.

If the Microsoft case from 20 years ago is any guide, Mr. Barr's concern with speed could run up against the often slow pace of litigation.

After a circuitous route through the court system, including one initial trial-court ruling that ordered a breakup, Microsoft reached a 2002 settlement with the government and changed some aspects of its commercial behavior but stayed intact. It remained under court supervision and subject to terms of its consent decree with the government until 2011.

Antitrust experts have long debated whether the settlement was tough enough on Microsoft, though most observers believe the agreement opened up space for a new generation of competitors.

--Ryan Tracy and Sabrina Siddiqui contributed to this article.

Write to Brent Kendall at brent.kendall@wsj.com and Rob Copeland at rob.copeland@wsj.com

(END) Dow Jones Newswires

October 20, 2020 14:37 ET (18:37 GMT)

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