ICOMP

A year ago today the European Commission announced that it was commencing an investigation into Google’s anti-competitive business practices; this marks a good stage to pause and reflect on the events of the past year.

The EU Commission has received at least 13 official complaints from companies based across Europe to the effect that the internet giant has abused its dominant position. The company’s market share in online search and search advertising has grown to 83.62% worldwide and is over 90% in some parts of the EU.

Whilst dominance itself is not an issue of abuse, the complaints have addressed four particular business practices –

- Preferential placement of products – this relates to the artificial distortion of internet search results, which places certain offerings over competing services, and so distorting what are thought by consumers to be natural search rankings

- Penalisation of rivals – the blacklisting of rival sites and has significant implications for competing services, which, if given an artificially low ranking on Google’s search results will find it far more difficult to attract users

- Unauthorised exploitation of third party content – this refers to claims made to the French Competition Authority in particular in the field of news aggregation

- Exclusionary and exploitative practices in relation to advertising services – this complaint revolves around denying competitors access to key content, denying competitors access to interoperability information and imposing penalties on paid for search results

These are discussed in greater depth in the ICOMP White Paper, Google under the Antitrust Microscope.

The past twelve months have seen an unprecedented volume of complainants and mounting scrutiny on both sides of the Atlantic and beyond. For example in South Korea the country’s Fair Trade Commission raided Google’s offices, seeking evidence that pointed to limiting access to rival search engines on its Android mobile operating system. Whilst in June the US Federal Trade Commission opened a formal investigation into the influence over the internet that Google has amassed as a result of its dominance of the search business.

The companies in and across Europe who have come forward to express their views to the Commission span a variety of countries and commercial sectors including mapping service providers, vertical search engines and news sites. It is unprecedented to see so many independent companies go public regarding their complaints about the behaviour of a single entity. And yet they may literally be only the tip of the iceberg as it is known that many other companies have expressed concerns but have sought to keep their identity confidential for the moment.

What do the next twelve months hold in store with regards to the situation currently being played out in Europe?

In the meantime, in support of an innovative and sustainable competitive online marketplace, ICOMP encourages those who may have suffered from antitrust practices to step forward and join voices with those who already have.

Kind regards
The ICOMP Secretariat

Andrés Font Galarza, ICOMP’s Spokesperson in Spain this week attended FICOD 2011, an international fair on digital content based in Spain.

FICOD, founded by the Spanish Ministry of Industry, Tourism and Trade and the Ministry of Telecommunications is a trade fair that focuses on digital content. It also acts as a meeting point for the key players across the industry.

ICOMP hosted a workshop at the event entitled, “The Online Search Industry”, which was aimed at examining the problems that arise from anti-competitive practices in the online marketplace. The workshop attracted an audience of over 60 people, including representatives from the National Competence Commission, the editorial group Unidad Editorial and Telefonica among many others.

During the conference, ICOMP presented the view that an online monopoly harms competition and negatively impacts on other content editors. This is especially the case for advertisers and competitors who offer innovative and alternative solutions with the potential to enrich the sector. Both of which in this day and age are key drivers behind the current and future digital environment.

Overall both FICOD and the smaller ICOMP workshop were a success, generating interest, participation and concern from those who attended.

We are grateful for the opportunity to attend FICOD for the third year in a row and we look forward to participating again next year.

Kind regards
The ICOMP Secretariat

Last week the French Presidency of the G8 hosted a meeting of Ministers of Culture and Intellectual Property to discuss issues related to the future of creation in the digital age. Nineteen States were represented*, as well as representatives of the European Commission, OECD, WIPO and UNESCO.

The French Presidency identified five major principles (which are summarised below and can be found in full here):

1. Effective protection of copyright in the digital environment is an essential prerequisite for creative innovation and cultural diversity.

2. There has been decisive progress in the legal supply of cultural content online, and it is no longer a valid excuse for piracy that lawful content is not available. This also provides an opportunity to develop the cultural economy with ambitious, responsible digitisation of heritage works.

3. Numerous legislative initiatives to combat the illegal sharing of content are underway which will reach their full potential thanks to prevention, education and awareness raising initiatives.

4. Citizens, copyright holders and companies in the digital sector (including search engine operators) have a common interest in the commercial supply of lawful content in place of the loss of value and impoverishment of creation that piracy causes.

5. The borderless world of the Internet cannot be addressed by purely national strategies. The legal security provided by the international copyright system is a decisive asset in the development of tomorrow’s cultural economy.

ICOMP welcomes both the Summit and these conclusions. Whilst the challenges of the digital age are significant, ICOMP has always supported wise and effective adaptation and enforcement of existing rules rather than tacit acceptance of unlawful and unfair practices.

ICOMP calls on all countries – in particular emerging economies such as China and India – to support these principles and take decisive action to support them. Such action should also address significant problems such as abuse of dominance by very powerful players on the Internet including Google.

Regards,
The ICOMP Secretariat, ICOMP France

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*Brazil, Burkina Faso, Canada, Arab Republic of Egypt, France, Germany, Italy, Japan, Morocco, Poland, Russian Federation, South Africa, South Korea, Spain, Sweden, Switzerland, United Kingdom, United States of America, Vietnam

Google has been under the antitrust spotlight for a number of years now. The European Commission and the US antitrust authorities are both deep into their investigations of Google’s business practices and many other competition authorities are engaged. Only this week, the identities of another four complainants in the EU proceedings came to light.

One of the key missions of ICOMP has been to provide context for the complaints and to join up the dots between them. Whilst the effects on individual online businesses are important, it is the effect on the online sector as a whole which is most important. Lack of competition, absence of choice, harm to innovation and harm to consumers have all been identified as outcomes of Google’s super-dominance of search and search related advertising.

In order to explain the overall impact of Google’s behavior, this blogpost identifies three main structural concerns with Google’s market position and practices.

• First, Google acts as the middleman in what economists call a ‘two- or multi-sided market’, but because of its size and scale advantages and unlike typical middlemen it can determine who pays what to whom.

• Second, in markets which are increasingly dependent on the successful use of data, Google determines who gets to use what data and how.

• Third, there is a fundamental conflict of interest at the heart of Google’s business model in that in running its search platform it has oversight of the commercial activities of firms with which it also competes.

1. Monopoly power cancels out two-sided market benefits

The most common example of a two-sided market is newspaper advertising. Advertising revenues subsidise the cover price of a newspaper, the lower price of which means that it attracts more readers. In turn, this increases the value of the advertising to advertisers, who pay more to the newspaper owner, which allows the newspaper owner to reduce his cover price or improve his content and distribution, selling more newspapers and satisfying more readers. In principle, search and search advertising markets work in the same way.

However, Google turns this model on its head. Its overwhelming dominance at the heart of the search market allows it to decide what subsidy the advertiser should be paying the content owner. Worse, it allows Google to extract a rent from its position as bottleneck which far exceeds that extracted by platforms in traditional two- or multi-sided market.

The creation of the monopoly at the heart of the search, search advertising and related markets has fundamentally changed the nature of the relationship between advertisers and content publishers in online markets. Instead of being one of many channels for putting advertisers and viewers together and assisting the two sides of the market in achieving the most welfare enhancing outcome by facilitating cost subsidies, Google has become an obligatory trading partner, able to extract maximum surplus itself from a wide range of economic operators and regardless as to whether this promotes individual transactions. In capturing these monopoly rents it diminishes the revenues that would have been available for investment in content, which further harms consumers.

2. Control of Data

Data performs two fundamental functions in today’s online economy. First, it can be bundled with existing products and services to enhance the usefulness and value of those products and services. Second, it can be used to create new product and services. The former use would typically be the case where an online publisher or an online advertiser uses data to improve, personalise or provide feedback on the effectiveness of use of space or the advertisement. These uses of data do not depend on volume but depend on insight into the effectiveness of an individual transaction. The latter use of data typically involves services where scale is crucial, such as the ability to identify general trends or search. These services rely on the ability to capture large volumes of data.

Google has sought to monopolise both kinds of services.

Google seeks to deprive advertisers and publishers of the data which will enable them to improve the quality of their services and to generate increased revenues. The explanation for this behaviour seems to be two-fold. Google is inherently reluctant to share data with any third party and routinely includes in its contracts with advertisers and publishers contractual provisions which inhibit their ability to capture and use the data generated by their commercial activities. As discussed further below, this is in part because Google recognises the value of a monopoly in data. It is also because Google is not an impartial observer. Google provides the analytics tools which assess the effectiveness of the advertising services it provides. Wider availability of data would enable third parties to offer similar services and, more importantly, to compare the effectiveness of Google as an advertising medium to other channels, and thereby to promote competition.

With respect to services based on large volumes of data and scale effects, Google has used both fair means and foul to establish a lead over its (law-abiding) rivals which is nigh on impossible to overhaul. Numerous examples exist of exclusive arrangements between publishers and Google – not least the highly controversial, anti-competitive and ultimately unsuccessful Google Book Settlement which has given Google near sole access to close to twenty million published works. The data generated by those arrangements is used by Google on an exclusive basis to deny scale to its competitors with respect to services for which large volumes of data are necessary, such as the provision of search services.

3. Google’s dual role creates a fundamental conflict of interest

At the heart of Google’s business model is a fundamental conflict of interest of the sort that has been prohibited in other sectors. That conflict of interest results from the dual role played by Google in operating the world’s overwhelming dominant search platform and setting the rules by which online businesses have access to that platform, and at the same time running an expanding range of commercial services on the platform itself.

This conflict of interest gives Google both the opportunity and the incentive to ensure that its commercial activities benefit from unfair commercial advantages, resulting in less competition and less choice for consumers. Worse, the dual role allows Google to have oversight of and insight into its competitors’ business activities in a way which would never be allowed in other sectors. For example, Google can see what innovations its competitors are introducing, how customers are responding in terms of search and click activity and can adjust its own commercial offerings in the light of having obtained this unfair commercial advantage. It can identify and pre-empt nascent competitors before they are able to establish themselves and can even topple well established rivals.

4. What this means in practice

Thanks to its overwhelming dominance in search and search-related advertising, Google’s business model has become deeply entrenched in the online ecosystem. Its control of online business activity and the influence of its bad practices are likely to get even worse over time, further distorting competition, reducing consumer choice and harming innovation.

The structural concerns described above are not easy to put right and may require a combination of both structural and behavioural remedies. However, it is absolutely clear that the restoration of competition requires all of them to be addressed.

David Wood
ICOMP Legal Counsel