By James V. Grimaldi and Brent Kendall
WASHINGTON -- Are big technology companies using monopoly power
to defend and extend their dominance over the U.S. digital
marketplace?
That is the core question antitrust enforcers -- the Justice
Department, the Federal Trade Commission and a number of state
attorneys general -- are asking as they scrutinize four tech giants
for potential violations.
Two separate groups of attorneys general are investigating
Alphabet Inc.'s Google and Facebook Inc. The Google probe, led by
Texas, is expected to be detailed at a news conference Monday. The
Facebook investigation was confirmed Friday by New York Attorney
General Letitia James, who is leading that effort.
Federal antitrust enforcers are also looking at Google and
Facebook, as well as Amazon.com Inc. and Apple Inc.
If a case results from any of those avenues, as many experts
predict, it will take antitrust enforcement into uncharted,
digital-age territory. Courts haven't seen a major monopolization
case since the Justice Department sued Microsoft Corp. two decades
ago.
Federal antitrust laws are broadly written, giving the
government flexibility to apply them to new forms of monopolistic
conduct as the economic landscape evolves. The Sherman Antitrust
Act of 1890, for example, outlaws monopolization and "every
contract, combination, or conspiracy in restraint of trade" that is
considered unreasonable.
Here is a look at arguments that antitrust enforcers could make,
and the companies' potential rejoinders, based on testimony before
Congress and the FTC, interviews with antitrust scholars and people
familiar with the government's preliminary investigations.
The Potential Case Against Google:
--That Google has used its dominance in online search to
solidify its dominance in internet advertising, creating an unfair
advantage over publishers and rival tech firms that sell and place
ads online.
Google, thanks in part to acquisitions of potential rivals such
as DoubleClick, has come to dominate software tools at every layer
between online advertisers and websites, including the main tech
platform that connects buyers and sellers of display ads, this
argument goes.
That middleman status has given it great power, especially
because no one else has anything like the data Google possesses on
publishers, advertisers and what consumers search for.
Advertisers are boosting their spending on digital ads, but much
of the money goes to Google and Facebook, not publishers, whose ad
revenues continue to decline. (News Corp, publisher of The Wall
Street Journal, is among those raising objections.)
--That Google won or maintained its huge market share of online
ad sales by excluding others that could have competed, including
through contractual terms that make it harder for advertisers and
publishers to work with other ad businesses that want to compete
with Google.
Advertisers feel they must use Google's products, rather than
tools from other companies, according to this argument. And in
2016, Google began requiring that advertisers use its tools to buy
ads on its YouTube channel, which has by far the biggest audience
for online videos.
--That Google uses its dominant core businesses to unfairly
favor its other products and services at the expense of rivals.
Google biases its own search results in favor of Google
offerings, the European Union found in levying a $2.7 billion fine
in 2017. One recent study said that less than half of the mobile
and desktop searches on Google result in a user clicking through to
a non-Google site.
The EU also imposed a $5 billion fine on Google for requiring
smartphone makers using Google's market-leading Android operating
system to pre-install Google's search app and its Chrome browser on
their devices.
Google's Defense:
--Google has an enviable place in online advertising, but it
doesn't have monopolistic pricing power.
Google competes with other big tech companies including Facebook
and Amazon for ad dollars, and weak demand for old advertising
models -- not its role in the ad-tech machinery -- is the reason
publishers haven't reaped more of a windfall from digital ads.
--Google's actions are geared toward goals like giving users the
information they want, as quickly as possible. Sometimes that means
directing consumers to Google sites and services, the company
says.
Supreme Court precedent states that companies such as Google
generally have no duty to assist in promoting a rival. In a 2004
ruling, the high court threw out antitrust allegations that Verizon
Communications Inc. provided insufficient service to rival telecom
companies using its phone lines.
--Many of Google's services are free to the public, with
consumers effectively paying with the personal data they
generate.
Judges may face challenges assessing the nontraditional products
that companies like Google and Facebook offer. "It's not like
having 90% of the market for toothpaste," said Cleveland State
University law professor Christopher Sagers.
The Potential Case Against Facebook
--That Facebook has achieved and maintained its dominance
through a pattern of acquiring upstart firms that had become
competitive threats.
Of the roughly 90 companies Facebook bought in 15 years, two
stand out as rivals that could have risen to challenge Facebook:
Instagram, the world's largest photo-sharing service (2012), and
WhatsApp, the largest instant-messaging app (2014).
While antitrust enforcers believe it is illegal for a company to
buy startups for the purpose of killing emerging rivals, neither
the FTC nor Justice Department has brought such a case after the
fact.
--That Facebook acquired monopoly power through deceptive
promises about privacy.
Facing competition from other social-media websites in the early
2000s, Facebook stood out among rivals such as MySpace by promising
consumers superior privacy protections. (From 2005-2011, MySpace
was owned by News Corp, which owns The Wall Street Journal.)
Then, as Facebook became the dominant social-media platform, it
didn't always honor those privacy pledges. The FTC levied a record
$5 billion fine against Facebook this year for privacy
violations.
Under the Sherman Act, it is illegal for a company to acquire
monopoly power by engaging in conduct beyond "competition on the
merits."
--That Facebook abused its market dominance to effectively
require consumers to allow tracking of their internet usage and
exclude competitors in online advertising.
Facebook, the argument goes, can exploit its dominance to
persuade consumers to accept terms allowing the company's use of
their personal data that they would reject if there were a truly
competitive social media platform available.
This allegation led Germany last year to order Facebook to stop
tracking user's web information without consent, though the company
recently won a favorable appellate ruling. The litigation is
ongoing.
--Facebook leverages the power of its data by sharing it with
strategic partners while cutting off access to hobble potential
competitors, such as Twitter Inc.'s Vine, a video app that is now
closed, the claim goes.
Facebook's Defense
--Facebook says it doesn't have monopoly power and faces
numerous rivals, including Twitter, Snapchat, Apple, Pinterest,
Microsoft's Skype, Google and Amazon.
Competition is vigorous because "barriers to entry for digital
platforms are low," said Matt Perault, public policy director of
Facebook, testifying before Congress.
The company also faces growing competition for its members'
time: "Users increasingly spread their time between more and more
services," Mr. Perault said.
--Facebook has acquired companies that have complementary
strengths to make its social-media platform a better experience for
consumers -- and not with the intent of putting a competitor out of
business.
Also, Facebook likely would argue that the companies it bought
wouldn't have grown to the same extent without Facebook's
investment and know-how.
The Potential Case Against Amazon
--That Amazon's rise -- and the tactics that facilitated it --
have squeezed suppliers and harmed rival sellers, creating
different types of disadvantages for consumers, such as lower
product quality and reduced innovation.
Amazon sells not only its own products, but also is a dominant
platform for non-Amazon, third-party sellers. Those vendors now
account for more than half of the company's global sales, and the
platform is crucial to their survival.
Third-party sellers say Amazon imposes fees and terms that the
company couldn't sustain if it faced a real online competitor, and
benefits from an omniscient view of these companies' sales data and
customer relationships.
"It would be as if Walmart owned our malls and Main Streets,
decided which firms could operate in these spaces and on what
terms, and surveilled every move they made," Stacy Mitchell,
co-director of the Institute for Local Self-Reliance, an advocacy
group for independent businesses, said in recent congressional
testimony.
A study published by Harvard University found that Amazon used
its data to identify independent sellers' best-selling products and
then introduce its own version. The Amazon brand often then became
the default search option on the platform, the study found.
--That Amazon's tactics can lead to higher prices on other
websites.
Some vendors that could sell their products more cheaply
elsewhere, thanks to fees lower than Amazon's, say they are fearful
of doing so.
"If we sell our products for less on channels outside Amazon and
Amazon detects this, our products will not appear as prominently in
search," toy vendor Molson Hart, who has spoken with the FTC, wrote
in a post on Medium in July.
--That Amazon has limited competition by removing some vendors
from its site.
After Amazon reached a deal to allow Apple to sell iPads,
iPhones and other devices on Amazon, third-party vendors who sold
refurbished Apple products say they were removed.
"I was doing 40 to 50% of business on Amazon," said John
Bumstead, a reseller of refurbished MacBooks who said he was kicked
off Amazon and spoke to the FTC in July. "That chunk of business
evaporates."
Amazon's Defense
--Amazon's growth has been fueled by a determination to offer
consumers low prices and it has competed fairly and legally against
rivals.
The company has invested in supporting third-party sellers and
wants them to succeed. That approach has benefited consumers "in
the form of competitive pricing, great selection and unprecedented
convenience," Amazon associate general counsel Nate Sutton told a
House antitrust subcommittee in July.
Amazon also is far from a retail monopoly, Mr. Sutton said,
because 90% of U.S. retail sales still take place in
bricks-and-mortar stores. Amazon says it doesn't use
seller-specific data in creating its own private-label products,
and offers fewer private-label goods than many of its retail
competitors.
The Potential Case Against Apple
--That Apple has used its platform for iPhone apps to favor its
own products and services over rival offerings.
A Wall Street Journal analysis published in July found that in
the Apple App Store, Apple's own mobile apps routinely appear first
in search results ahead of competitors'.
Music streaming service Spotify has complained to U.S. antitrust
authorities and filed a complaint with the EU's antitrust arm
claiming Apple made it difficult for rival subscription services to
sell to users without using Apple's payment system, which generally
takes a 30% cut of transactions.
--That the company charged inflated prices in its App Store
because iPhone users are prohibited from buying apps elsewhere.
This requirement prompted a private antitrust suit that was
given the green light to proceed by the Supreme Court. Consumers
are stuck with the company's terms because it is expensive to
switch to a rival device, this argument goes.
Apple's Defense
--Apple doesn't have a monopoly in anything -- iPhones have less
than a 50% market share in the U.S.
--Apple says its closed platform protects consumers' data. By
requiring iPhone users to buy exclusively from Apple's store, Apple
ensures the software is safe and won't compromise users' iPhones
with viruses or spyware.
And if Apple favoritism has crippled rivals, then why have
consumers downloaded Spotify 300 million times in the App
Store?
--Apple is under no significant legal requirement to give
competitors a leg up.
"Even if, as Spotify alleges, Apple has monopoly power and has
suppressed competition in its App Store, the government would still
have a difficult time making a case under current doctrine as
interpreted by some courts," said former FTC lawyer Michael Kades,
a director of competition policy at the Washington Center for
Equitable Growth.
Still, Apple has run afoul of antitrust authorities before. In
2012, the Justice Department sued the company for conspiring with
publishers to raise the price of e-books. Courts ruled Apple's
actions were anticompetitive, and the company was ultimately
compelled to pay $450 million.
--Ryan Tracy contributed to this article.
Write to Brent Kendall at brent.kendall@wsj.com
(END) Dow Jones Newswires
September 09, 2019 08:32 ET (12:32 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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