Recent Antitrust Developments with Michael Katz on Two Think Minimum

Recent Antitrust Developments with Michael Katz on Two Think Minimum

Tom Lenard (00:01):

Hello and welcome back to TPI’s podcast, Two Think Minimum. It’s Tuesday, September 26th and I’m Tom Lenard, President Emeritus and Senior Fellow at the Technology Policy Institute, and I’m joined by Scott Wallsten, TPI’s President and Senior Fellow, and TPI’s Senior Fellow Sarah Oh Lam. Today, we’re discussing the Google antitrust case and we’re delighted to have Michael Katz as our guest. Michael is Professor Emeritus at the Haas School of Business and the Department of Economics at UC Berkeley. Michael has also served as Deputy Assistant Attorney General for Economic Analysis at the Antitrust Division, was Chief Economist at the Federal Communications Commission. Michael is one of the most thoughtful economists on competition issues and I always learn a lot from talking and listening to him. So, welcome Michael, and coincidentally, this is the same day that the FTC has dropped its case against Amazon, so the government has its hands full.

Tom Lenard (01:03):

The U.S. v. Google case that’s currently being tried was filed at the end of the Trump administration. The Biden DOJ has continued the case as well as filing another one of its own. The current case is the first major monopolization case since the Microsoft case. The trial which is being presided over by Judge Amit Mehta, an Obama appointee, started on September 12th and is projected to take about 10 weeks. If Google is found guilty of antitrust violations, there will be a second phase to determine a remedy. And if history is a guide, the final resolution may take many years. So, Michael, I wonder if you could start off by explaining to our audience what this case is about.

Michael Katz (01:52):

I’d be happy to. Thanks for the kind introduction, it’s a pleasure to be participating. Let me say one thing first because obviously, Google plays a central role in this case, but so does Apple. I’ve worked for Google in the past, but I want to be clear, I’m not working for Google on this case. I’ve also worked for Apple on unrelated matters. I just want to be clear that nothing I say should be taken as the view of either company. Also, let me issue a disclaimer of a different sort, which is because I’m not involved in the case, I’m also not working for the plaintiffs. This is an outsider’s view, and so you know I have limited insights into some of the details and the facts, but obviously delighted to be here and I’ll talk about things at the high level as I understand them. So at the most basic level, the government’s case, particularly I’m talking now about the federal government, as opposed to the state attorneys general.

Michael Katz (02:50):

It’s about monopoly maintenance, that they’re going to establish, plan to establish, that Google has market power. A couple of different relevant markets here, but I think we can just shorthanded it all as thinking it’s about search and search ads and then show that Google has maintained its alleged monopoly in this market by means other than superior foresight, business skill or acumen in particular, what they’re saying, we sometimes, and it’s not clear to me they’re consistent, but at least sometimes what they’re saying is, look, we’re not challenging that Google became, in the Justice Department’s view, a dominant, the dominant search provider, we’re challenging the means by which they maintain that dominance. We’re saying it’s not through making their products better, competing for business, it’s instead by doing things to weaken rivals. So let’s talk about what it is the DOJ says Google is doing to weaken rivals.

Michael Katz (03:50):

And there’s sort of at a high level, I think two classes of conduct. So one, and we’ll focus on Apple, there’s some other companies involved as well, but the Apple part is clearest they say, look, Google pays to be the default search engine on Apple Safari and also other search access points on iPhones. There’s more involved in that, but I think we can focus on that. So Google pays Apple the share of the revenue that Google earns from search ads where they would say run over the iPhone. And that’s one element and something there’s some dispute about actually where it came from, the extent to which that’s exclusive and we’ll come back to that, but fundamentally, the government objects to Google paying to be the default. The other thing Google does in terms of with Android is that Google makes deals with both wireless carriers and also mobile phone manufacturers or OEMs.

Michael Katz (04:46):

It says, look, if you want access to certain Google apps like the Google Play store and stuff, we want you to give in return Google search preferential treatment. So again, you can show up in the search widget or have the desirable locations on screens. Okay, so I think there’s no disagreement among the parties that being the search widget or being the default provider on Safari, that that’s an advantage. I mean, Google has to admit it’s an advantage, otherwise, why are they either paying all this money or giving people these valuable apps? And the real dispute is, is there something wrong with Google buying that advantage? So Google’s position is, and their expert Kevin Murphy says, look, that’s competition. We’re outbidding others to say be the default provider on Apple Safari to be the default search provider on the iPhone. And the government’s saying, no, no, that’s not valid competition.

Michael Katz (05:46):

That’s not competition on the merits. And in particular, the government is saying, look, the reason you want to get the default position is to deny your rivals, particularly Bing, but also say Duck, Duck Go. You want to deny them scale because the government alleges scale is critically important to the quality of your search results. The more you process search results, the more you learn about what people want to know when they search, and the better your search. And so the government’s position is that Google is buying preferential positioning both to increase its own volume, but also to decrease the volume of its rivals and there weaken their ability to compete. So I could go on forever. Let me stop there, I mean, which direction do you want to go with that?

Tom Lenard (06:36):

Well, one thing, well a number of directions, but the obvious thing is now consumers when they take their iPhone out of the box and start it up, don’t they want to have a search engine? That’s one of the basic things you have a phone for. So don’t they want to have a search engine pre-installed?

Michael Katz (06:55):

So there’s actually arguments about that. And in fact today, in addition to being the day the government filed its case against Amazon, is also the day that Apple executive Eddy Cue testified about what Apple’s thinking on this, I think, gather half of his testimony was confidential and they cleared the courtroom, but this is exactly the sort of issue this is getting at because again, let’s stick to Apple, what the government has to explain this in doing this, or at least I think they should have to explain is well, what should have happened instead? Okay, you don’t like it that Google got to be the default, but if Apple’s they’re saying, well, we think it’s a better user experience to have a default, we don’t want people to have to make the choice right away. Mr. Cue testified that Apple does give you a way to change the default if you want, but they want to have one to start with.

Michael Katz (07:50):

So they say, Apple says, we think it’s good for our customers, it’s part of our whole user experience with the iPhone that everything just works. And if we’re going to have somebody as a default, we want a high-quality search engine. And I think there’s agreement on this as well, with the exception of people who care about privacy might disagree, but just in terms of general search for the average user, I think there’s no disagreement that Google’s the best search engine. So Apple says, look, we want to have a default and we want it to be Google because they’re best. And Google then says, so, what did we do wrong? And you can put that as what’s the harm to consumers because that’s what at least Apple believes its customers want. And again, this is something Google has put to the DOJ, that somebody’s got to tell us what should have happened differently.

Michael Katz (08:43):

And in fact, there was a hearing on a motion to dismiss, there was this hearing before Judge Mehta and he put that to the DOJ lawyers. He says, tell me what you think Google was supposed to do. He goes and put it another way—(Tom:) What did they say?—So I can’t, can’t really tell what they said. I just think their argument’s muddled. So let me put it in a different way. I think there’s a broader argument. The way I’m used to thinking about antitrust, I think it’s what economics says. I think in a lot of ways is what logic says. If you’re going to say conduct is harmful, say it’s anti-competitive or you’re going to say it had any effect, you have to compare it to something. What do you mean what’s the effect? Compared to what? Okay, so we usually think in antitrust cases is we have a “but-for” world and we say if Google hadn’t done the challenged conduct, it would’ve done something else.

Michael Katz (09:41):

And the plaintiffs would establish that that was better, where better would mean it was less harmful to competition while still achieving the legitimate objectives of Google’s policy. And as I understand it, the government’s witness in the present case hasn’t put forth a “but-for” world. Instead what he did is he said, well look, if Bing were the default say on Apple, then Bing would be a lot better because it would have more volume and there’d be more competition. My understanding, and I haven’t seen his testimony, this is all gleaned from reading papers filed by the two parties and fighting the motion to dismiss. But my understanding is he hasn’t said, oh yes. And if Google didn’t do certain things. which are illegal, then Bing would’ve won. He just seems to say if Bing had won, the world would’ve been a better place.

Scott (10:39):

It seems like that part of that is requiring consumers to have a worse experience until Bing gets better.

Michael Katz (10:45):

Yeah, it does sound a bit like an infant industry argument. I’m not sure that [unintelligible]. So I think that’s, as I understand, I think the biggest weakness in what the government’s arguing, and I don’t understand their position. I know that the lead lawyer at the motion to dismiss hearing said, the DOJ lead lawyer said that they didn’t have to put forth a “but-for” world and so they weren’t going to, but again, just forget as a matter of law, I don’t understand as a matter of logic, how you say this conduct was bad if you don’t compare it to something else. And I guess they say, well, we’re doing a comparison, but if your comparison is just some idealized world, you can’t claim would’ve ever happened, I just don’t see the relevance of it.

Scott Wallsten (11:30):

So I mean, it’s not your job or our job to come up with those counterfactuals, but we can think about what some would be and what might they mean. I mean, of course, this is in a deposition, you would never answer this kind of question. It’s too hypothetical. But the other possibilities are that you can choose your search engine or Apple could pay Google depending on the nature of who wants what more, what would each of those mean?

Michael Katz (11:55):

But here’s a problem for the government. I think the way they brought the case, and this again came up in the hearing because the judge said, because they could start saying, well, Apple could have had a choice screen, or Apple could have chosen not to collect billions of dollars and say we’re going to pick the default some other way. Although Apple, says they testified today, it wasn’t based on the money, it was based on quality, but the judge’s response was yes, but Apple’s not a defendant in this case. And so it’s why he keeps coming back. He goes, tell me what Google should have done differently. If Apple says we are going to sell the default or we’re going to pick someone for the default who’s ever the highest quality? What’s Google supposed to do? They’re supposed to say, well, Apple will pay you not to make us the default, We’ll pay you to have a choice screen? So that’s one of the big problems I think the government has. And that’s why I think this is a case which I think is somewhat unusual with exclusive dealing. There’s a set of people who want to say, well let’s look, did the customer want the exclusive deal or did the supplier, and often the economists say it doesn’t matter. They can sort of figure out what their joint interest is. And so who cares which one made the proposal? Here, I think it’s going to end up playing, potentially playing a big role. And I think it’s an obstacle for the DOJ, the extent, at least with the Apple one, that Apple’s saying, no, no, we wanted it. But let me also say something else. Europe has been much more aggressive about antitrust than the US in recent years and they’ve gone after Google for search and in fact, they’ve had choice screens, right? They mandated choice screens on Android and at least what the European Commission’s done, I think there’s a pretty broad agreement that it didn’t work very well. Where the disagreement comes is whose fault that was. And there’s certainly people who take the view that Google designed the choice screens to mess things up. Apparently, some other countries have done something different. There are competition authorities and it’s worked better, but that’s one, it’s not. I think right now we don’t know if choice, well, there’s no agreement on whether choice screens would work or not.

Tom Lenard (13:59):

Haven’t there always also been choice screens for browsers for the Microsoft case that have had minimal effect or no effect?

Michael Katz (14:08):

Yeah. Well, I never appeared before the European Commission, so I’ll just go ahead and say this. I think that’s right. I mean, look, there’s a history of the European Commission saying, oh, we don’t like the way the markets work. Let’s impose our idealized vision and then nothing changes. Now the question is, is that because it’s such an impossibly hard problem or it’s because the European Commission is sort of singularly bad at this? Look, another thing that happens, so with Android, as I mentioned before, one of the things that the U.S. government’s objecting to is Google saying, we’ll let you have access to our apps like Google Play or Maps or whatever, but you have to do stuff to promote search. So European Commission says, well that’s not fair. That’s tying. So instead Google, what you have to do is you should sell the apps to people and if you want to get better placement, you should pay for it. So I’m going to just make the numbers up. I don’t know what they are. But Google basically said, okay, here’s what we’ll do. You can have the apps, we’re going to charge you 50 euros for the apps, and by the way, we’ll pay you 50 euros for better placement. What do you think? And everybody said, okay. Look, I’m not saying you can’t have a remedy. It’s effective, but it’s proven to be hard. And DOJ will say, look, we’re not in the remedies phase. This is just liability. But I think these issues are relevant because the inability to craft these remedies, I think in part speaks to what the “but-for” world would look like, which is very much about liability. So look, I think one of the things just talking about defaults, I think the government’s going to have a lot of trouble.

Michael Katz (15:46):

I think, and they’ve been emphasizing this. Some as I understand it in the early parts of the trial, is to say, well, it’s not just a Google wanted to get preferential positioning or whatever, but they demanded exclusivity. Like they said, you can’t sell multiple defaults or something like that. And I could see the government saying, look, that’s what’s really anti-competitive, that Google tried to make this all or nothing. They could have done revenue sharing by itself, just said, look, we’ll pay you a fraction of whatever revenues we earn. And that creates an incentive, say for Apple to want to steer people toward Google search. But I think the DOJ will end up arguing you don’t need the extra condition that says yes, and you’re not allowed to do anybody else. Why not just rely on the affirmative? We’ll see where that goes. But I think this point about saying that Google demanded exclusivity could be a big deal, and then the question will be if Google actually did demand exclusivity, which may be a disputed fact, if they did, we’ll have to see what Google’s explanation is.

Scott Wallsten (16:51):

Let’s go back just a little bit. There are different rules in Europe regarding defaults and how consumers choose. Do we know how outcomes have differed there in terms of which search engines people end up choosing?

Michael Katz (17:05):

So my understanding is that the defaults, the European Commission, sorry, having the choice screen’s made very little difference. As I said, I think it may be, Turkey and one other country, that having the choice screens apparently did make a difference. And there’s some theoretical work on this. There’s also you could just imagine intuitively that the way you design the choice screens can make a big difference, but also the way you choose who’s on them can matter. And that’s certainly a question say here, if you do get your remedy, with Apple, are you going to say to Apple, well, you have to give away the position for free even though you weren’t a defendant in this case and no one said you’ve done anything wrong. But it can matter how you, the theoretical work on this, if you are allowed to sell spots on the choice screen. It matters, for example, do you make people bid on just being on the list or do you make them bid on being chosen, which is to say, if I’m on the list but I’ve never chosen, I don’t have to pay. And that can make a big difference to who ends up winning the bidding. So there are just tremendous details there. Again, the details are something for remedy, but I think the big hurdle the government has right now is they have to show that what Google did matters, that people weren’t going to just choose Google anyway. Apple wanted to have a default. They’re going to choose Google anyway. And so where’s the harm?

Tom Lenard (18:35):

I think in some sense you’ve answered this already or suggested that it’s pretty difficult to answer. So what do you think the government has to show to prove its case or to win it’s case?

Michael Katz (18:47):

Well, there are a couple of different levels. I guess. I don’t know. It’s hard to establish in the US that someone’s engaged in exclusionary behavior, and economists have struggled to come up with general criteria for whether somebody’s exclusionary or not. The one though that seems closest that the DOJ could be arguing as they have in other cases is a no economic sense test. So if they go down this road and it’s not clear to me that they are or not, they would say, alright, fine. So Google’s bidding for position, everybody agrees that helps Google’s search business. So some of you got to admit that’s reasonable for them to do, but the question is, is that the only reason they’re bidding and does that explain the full amount they paid? Okay, does it make economic sense that they paid this much just to get a better position for themselves, or is the only possible explanation that they were also paying to weaken Bing, say. That the amount they paid only makes sense if you put into that, if you calculate part of the benefit of winning is that it made Microsoft a weaker competitor. And I’m not aware that the DOJ has alleged that, they’ve certainly hinted that they said, look, you knew it would weaken Bing, and you thought about that when you were bidding. I don’t know. I mean it may all be confidential. I don’t know if they have evidence or not, say a calculation by Google saying this is worth 5 billion to us because we get more business and it’s worth 8 billion more to us it hurts Microsoft. But if they had something like that that I think would be sort of the ultimate smoking gun. They show that they really did do that or something where they explain that the reason we want exclusivity is not just because we get more sales directly, but again that it actively weakens their rivals. The government I think, has hinted at stuff like that and said, but I just haven’t seen them take that on directly. But I think it’s that. And again, just saying, look, you wanted the exclusive part, that you could be the only search engine on the phone, that they could try to go after the exclusivity is again saying that’s motivated by weakening rivals rather than improving Google.

Scott Wallsten (21:01):

But what aspect of it is exclusive?

Michael Katz (21:04):

Sorry, this is a problem that I can’t see the record. I don’t fully understand the facts, but apparently, there are terms in the contracts that say you can’t have another search provider at a bunch of the spots on the phone or that you can’t do something, like saying that they’re not allowing someone. Google says, well, look, we’ll give you x percent of our revenue for any search say on the iPhone, and we’ll do that. But that’ll be true whether or not you also have, whether for half the customers you make Google the default and the other half the customers you make somebody else the default. As I understand it, it’s like if you want us, you want to be able to make us the default, you have to make us the default on all of your phones, not just some of them. And again, it gets to the question of I think there’s some dispute about that. Before the DOJ was forced to take them down, they put up some emails from Google suggesting that Google was demanding that kind of exclusivity. But even if they did, I think there will still be a fight over what was the actual effect of that, and was that sort of belt and suspenders on Google’s behalf because they would’ve gotten defacto exclusivity anyway.

Tom Lenard (22:11):

How important are the arguments about the switching costs, for people who want to install another search engine or switch the default to another search engine? Obviously, Google is saying that’s pretty easy to do. DOJ is saying it’s hard to do as I understand it. How important are those arguments?

Michael Katz (22:33):

There’s a question of importance to what. One thing they may be important for is optics, they may be important for courting public opinion. So that’s clear to me that they should actually be that important to figuring out what’s going on in the phone way. I mean, if it’s so easy to switch and everybody switches and it’s trivial, then why is Google paying all this money? I think Google has to admit that. It’s value. I mean Google does want to downplay it, but I think the fundamental fact is that it is valuable to be a default. And again, I think we get into the question of what are the effects of that? And so I don’t know, clearly, obviously Google will like to say the effects are as small as possible to reduce the chance that it has any effects on competition. As they say, maybe it ends up mattering in the courtroom, but I just don’t, from my way of thinking, I don’t see how it’s that big an issue.

Tom Lenard (23:28):

Seems to me logically it cuts both ways because on the one hand, they might want to say, well, it’s easy to switch if somebody wants it to another search engine. But on the other hand, it seems to me from the consumer’s point of view, if it’s not that easy to switch, then you really want the one that you think is better pre-installed.

Michael Katz (23:48):

Well, I guess the thing is, I think the Goldilocks solution for people would say no if it turns out it has to be harder, people—Well, the question is why people don’t switch. Again, there are at least three things. So Google says, look, we get picked as the default because the best, and guess what? People don’t switch because they got us first and we’re the best. Another possibility is partly I think the government’s going to argue the next two that I’ll mention, one is say, well look, once something’s the default, it turns out it’s a pain to change. It’s a bunch of work. You go through a bunch of steps and this is where the DOJ and Google disagree on the facts. How hard is it? But then there’s another one which is, look, even if it turns out it’s trivial to do it in terms of the steps, everything else, people have inertia and in fact, the DOJ, one of their first witnesses was behavioral economists.

Michael Katz (24:40):

So in that one, let me take the view most favorable I think to the DOJ’s theory, they say, look, if you had a choice screen, people will make their decision some way that’s pro-competitive. We’ll come back to that in a second, and they have to make some choice, so they’re going to do it. But once a choice has been made, even though the actual physical switching costs are low, they act like they’re very high. So we need to just have people, force them to make a conscious decision, once. And the idea is that everything will be fine. Of course, that raises a question about, well, they do that. Are they all going to just pick Google because that’s the one they’ve heard of? I think Mozilla has said that they’ve done a study saying that’s not true. I think the DOJ is worried about that argument with some of these things.

Michael Katz (25:29):

And one of the things the DOJ says is, well look, but part of the problem is that Google’s popularity is because it’s been engaged in bad behavior for 12 years. Okay? Now the problem with the government falling back on that is you say, okay, so you’re saying the last 12 years they’ve been a monopoly and they’ve done this. How did they get where they were? Right. If you go back 12 years ago, and if they weren’t a monopoly, then are you admitting they were better than everybody else? And that’s how they got picked? And if that’s true, then why is the fact that they continued to get picked all of a sudden bad? And again, my reading of it fairly quickly, the motion to dismiss hearing, is that the DOJ clearly does not have a very good answer to that, or they didn’t as the time of the hearing other than they did fall back a bit on saying, well, but once Google had market power monopoly power, they shouldn’t have demanded exclusivity. Wasn’t entirely clear to me if they mean that it shouldn’t be on default or they mean you shouldn’t have this thing that there can be no other people splitting the defaults. But I think that’s something they’re going to have to try to come to grips with to trial. The government’s saying Google was a good search engine, they got a bunch of, you’ve got monopoly power in the government’s view, and did so legitimately. When did the switch get flipped and what was supposed to happen when it did?

Tom Lenard (26:52):

Do they have to define a market and are they going to have trouble defining a market?

Michael Katz (26:57):

So I think they feel legally they have to and they have, defined at least two markets, a market for general search and then also a market for the associated advertising, that is disputed. Google says, no, we compete against things like specialized search like Travelocity or Amazon is a huge search provider, but obviously for specialized search. And so we’ll see what happens there. I mean, I guess they haven’t really defined it that way. It’s sort of interesting. It’s clear that say that Amazon is a substitute for Google for when you’re searching for products. Of course, it’s always a question of how close are the substitutes, and that’s one of the things we get in the battles. I have wondered whether the government would try to make some sort of argument saying, well, but let’s look at something like the market, as its own problem, something like the market for being defaults or something. Because clearly, Amazon can’t compete with Google and Bing to be the default on Safari, but the government hasn’t tried to define a market like that, but I wonder if maybe they can make some sort of argument, at least when we see things like when Google’s economist, Kevin Murphy says, look, this is just competition to purchase the default. We’re competing as buyers. It’s legitimate competition on the merits. Maybe there the government can say, well, but the set of potential buyers is limited, and so we just have to look at what you’re doing to them.

Scott Wallsten (28:29):

Not to talk about the Amazon case specifically, but since you mentioned Amazon, is it possible that one complaint can hurt the government in the other complaint? I mean, do they coordinate enough to make sure that they don’t have overlapping conflicting definitions? And saying, not to say anything specific about this case, because it just came out.

Michael Katz (28:50):

I’ve wondered about that and how much. It’s interesting. I’m assuming that, well, look, let’s take another one I’ve wondered about. So a lot of people in public, they’ve said that the DOJ, DOJ and FTC divided the world up, right? FTC, you get Amazon and Facebook and DOJ, you get Google and Apple and a lot of people ever since have been waiting to see the four cases. I guess we’ve now seen cases against three of them. I assume that the FTC, at least the people high up in the agency are coordinating their two, and if there were ever to be another case, DOJ against Apple, they would coordinate. I don’t know if they coordinate across and I haven’t looked yet to see, but it’s a really interesting question given the amount of interaction and relationships.

Michael Katz (29:43):

Look, it’s also certainly wouldn’t be the, I can’t think of an example of the specific case, but I have in my career seen plenty of times where even within a single case, the parties argue against themselves. So, it wouldn’t be unprecedented for there to be some inconsistencies. And this mentioned something else that came to mind, but, talked about this theory of harm being that Google’s denying scale to its rivals and weakening them. And this whole question is, is that what Google’s doing or is Google just buying distribution for themselves? There have also been claims, I mean Tim Wu had this in a New York Times editorial saying that Google paid Apple off to harm competition because Apple would’ve come up with its own search engine, but for all this money, Google’s paid them—(Tom:) I was going to ask you about that. I’ve seen reports saying that the DOJ is challenging that I’ve read the complaint and maybe I missed it, although I did use a search for the words Apple and entry and a few other things, DOJ sort of mentions that sort of saying, oh, well Apple didn’t enter, but I haven’t seen something say it.

Michael Katz (30:50):

But I think just the way it keeps saying this whole thing about well wait, is Google buying distribution for itself or is it paying to stop others? And the problem here for the government or anybody trying to get to the bottom of it, those are the flip sides of the same coin. Here you’ve got these two flip sides. You say, well wait a minute. You say that Google is paying Apple off to block entry. But another interpretation is Apple’s a customer, they’ve gone to Google and say, well, we have an alternative. And so Google, you should give us a good deal, okay, because we could use you and I mean maybe the price is negative here and say the customer, but they say, Google, if we don’t get a good enough deal from you on search, yeah, we’ll do it ourselves. But that’s using the threat of integration to get bargaining leverage. And so look, there is a logical point the other way saying, well, you’re paying them not to enter, and you could try the, I guess, no economic sense test. Somebody could try to go down the road of saying that the amount Google pays is not just because it knows if Apple integrated here’s how much of Apple’s business it would lose, but it’s also calculated it would lose even more money. Because it would have to compete against Apple, and it’s paying Apple some of that profits and sort of sharing.

Scott Wallsten (32:07):

We saw this show though with maps, right? Because Google used to be the default map and then they dropped the deal, Apple dropped the deal, I don’t remember all the details of it, and they made a map and it was terrible for a long time. So maybe,

Michael (32:21):

Yeah, I actually know, even have a relative who prefers Apple Maps, so apparently it’s getting better. Well,

Scott Wallsten (32:27):

Do you ever see them? Do they manage to make it to your house?

Michael Katz (32:30):

Yeah, but look, one of you mentioned beforem some of these things are two-edged as well. The government wants to say also look that Google has monopoly power because entry is so difficult. But then maybe that’s one, they don’t go down this road and say no, but for this payment, Apple would’ve entered. So again, I don’t see this from what I’ve seen, playing a big role in what the DOJ saying, but again, critics of Google have said it. Now you could say yes, but Apple was uniquely positioned to enter and that’s why you went after them. But again, I think it’s a problematic rule to say if someone goes to you and says, I have a better option for supplying myself, and then you say to them, oh, well then we’ll give you a good deal that that’s viewed as anti-competitive.

Sarah Oh Lam (33:18):

Could you also say if there wasn’t a payment between Google and Apple that they’re colluding somehow? If there wasn’t some sort of arms-length transaction and people kept using Google as their default, maybe that’s why they had a payment. I don’t know. It could look bad if there wasn’t a payment.

Michael Katz (33:39):

Well, it would make you wonder why there was no payment either way. I guess Scott was saying how when often these things with platforms, you don’t know which direction the payment would go and maybe you could say it was the situation where the forces just happen to balance each other. But again, you’re getting at this thing that when you do see the payment, you say Apple, put the other way, Apple had valuable real estate and they auctioned it off essentially. And putting in the light that’s the least favorable to the government, Apple said, we want to do this, we auctioned it off and Google won.

Tom Lenard (34:15):

Do they implicitly or explicitly re-auction it off? I mean, I assume that, I don’t know the details. I assume that Google has not purchased an indefinite, that real estate, for an indefinite period of time.

Michael Katz (34:30):

Yeah, no, no. I don’t know what the terms of the contracts are that’s been public. But from what I read right before I got on this session to record this podcast, I mean Eddy Cue was talking about his involvements in renegotiating or negotiating the new contract. I don’t know if it’s renegotiation or extension, whatever, but they do periodically get together and negotiate over what the terms are going to be going forward. So yeah, it’s, it’s not something that’s signed in—

Tom Lenard (34:59):

And in theory, at least, Bing could come in at some point and say we want to pay more or something, right?

Michael Katz (35:06):

Yeah. And well now we get to, I mean if there are two parts of this, again, apparently Eddy Cue said the main thing to Apple was the quality of the search engines. I would just say you do have to ask though then well maybe it says they’re just unbelievable amounts of surplus because if Google really is the only choice from Apple’s perspective, we wonder why Google’s paying as much as they are paying. But I think it probably certainly is true though that Apple’s got to care a lot about what the quality is. And I think there is a real question how strong an alternative Apple considers Bing to be. But it’s certainly a possibility. I mean it’s something Apple could choose to do.

Scott Wallsten (35:45):

So I can’t believe I’m going to ask this question, but in this case, is 10 billion dollars a lot of money? I mean it’s talking about, you’re talking about an enormous share of the search market for mobile search.

Michael Katz (35:57):

No, but it’s a lot of money if you think that Google ism I think general agreement, that Google is clearly better and that from Apple’s perspective, using any other search provider would really risk damaging their reputation. Then,

Scott Wallsten (36:13):

Right? Yeah,

Michael Katz (36:15):

But you’re getting at this point, that is what I started saying, maybe this surplus is so large. Yeah, I mean it’s conceivable. Yeah, you’re right. If you say something like, well, it’s not worth a hundred billion dollars, but Google gets most of the surplus because they also realize Apple doesn’t really have good alternatives. I mean that’s certainly a logical possibility. It’s one of the problems we have since none of us can see all the confidential material.

Tom Lenard (36:39):

I think at the beginning of this case or the beginning of the, when they started putting on, and I don’t know if they’ve argued this in court or they just argued it in the press, but I think the DOJ or some people were saying this is similar to the Microsoft case. So is it similar to the Microsoft case or what’s your opinion on that?

Michael Katz (37:00):

I mean there’s similarities. I’ve actually thought about this a little bit, but there are a lot of different pieces in Microsoft. I mean certainly the government has argued repeatedly that it’s like Microsoft and they’re trying to use that as the legal standard. And again, they cited Microsoft in the hearing to say this is why they didn’t have to define a “but-for” world. I mean there’s certainly true in Microsoft, there were things where they integrated Internet Explorer into Windows and they tied, and you could say, was that like some of the stuff happening with Android? Although again, it’s a little bit different because you have these explicit payments. So I think maybe it’s more like the second part where that Microsoft was accused of signing exclusionary contracts about browser use and promotion. So they went to computer OEMs instead of phone manufacturers and they went to internet access providers say instead of carriers and they cut deals with them, exclusive deals with them.

Michael Katz (38:01):

So in that sense, it’s similar. I think where there may be some big differences is in terms of at least what some of the distributors such as Apple were saying about did they want to have multiple browsers or was this sort of forced on them, how much people wanted defaults versus choice screens? So I think it’s one of these things, the specific facts can potentially matter a lot, but at a very high level there is sort of this thing of saying, okay, well you signed these contracts that made it harder for this rival to be distributed. Of course the big difference there was also though if not that the browser itself was making money or even selling the ads, and the accusation was that Microsoft was doing this, [unintelligible (get protect Windows?] because the famous line by Gates that if a third party browser became popular enough the applications would write to the browser and commodify the operating systems.

Michael Katz (38:58):

So it was really a bunch of concerns about two-stage entry. By the way, I have to point out, I think that turned out, I think Gates did believe that that’s what they were doing and two-stage entry was a threat and that ultimately the DOJ kept changing its theory of the case. Ultimately that was its theory of the case and I think they all both turned out to be wrong, but it is what everybody was thinking at the time, right? We have in fact subsequently seen Chrome be really successful and this has not somehow led to a whole bunch of entry into desktop operating systems. So look, I think there are a bunch of similarities, but there are also differences, actually, I’ll mention one other overlap though is Mike Winston is the DOJ’s economic expert in the current Google case. He also wrote an article about the Microsoft case and one of the things now it’s a long time ago, so economic thinking’s evolved, but he did write about how hard it is to determine welfare effects and what these things really do. It’ll be interesting to see to what extent he’s expected to overcome that difficulty. Again, DOJ is putting forth a different standard. They seem to think all he has to do is say, well, if the world were different, it would be better. And he doesn’t have to say the world actually would be different had Google changed its behavior.

Tom Lenard (40:15):

You don’t think they have to show a little bit more concretely that consumers are harmed.

Speaker 2 (40:20):

Well, so this may be one reason why they define two markets, as I understand it they’re arguing about harm and I might come back to harm from what; arguing about harm and say, well, okay, look, users of search services were harmed because there’s been less innovation because there’s been less competitive pressure on Google and the rivals haven’t, I guess had as strong incentives to innovate. Google hasn’t been pushed to innovate, so that’s their theory. Consumers in the everyday sense of the word have been harmed. And then they’ve also put forth, and I said I don’t have them memorized, but several mechanisms by which they say advertisers are worse off because they’re saying you want to do search advertising. Google’s really, they’re saying it’s the only game in town, so you have to pay higher prices. And I think they’ve saying Google’s done some things with targeting or information to fail the advertisers to make them worse off.

Michael Katz (41:11):

So they have identified mechanisms of harm. The innovation one gets tricky because the link between innovation and market structures, there’s a fair amount of disagreement on, among economists and antitrust practitioners. The advertising stuff is maybe more traditional or straightforward, but I think in some ways the bigger issue, again, is harm from what? Because are they saying, well look, advertisers would be better off if Bing had been the default and then was much more successful, or are they saying advertisers would’ve been better off had Google not engaged in certain conduct? And as I understand it, they tend to focus on the, well, advertisers would be better off if Microsoft had won. And again, to my way of thinking, at least that’s not the right question. A question you have to answer, but there’s another, you have to ask, but for Google’s whatever the anti-competitive conduct is, would Microsoft have won, and then if they would’ve won, would they have done a lot better?

Michael Katz (42:13):

And at least I understand, the government hasn’t really attempted to address the first question. And it seems to me, again, I keep coming back to this, but it seems to me that’s sort of the biggest weakness in their case. The way I think with Google, maybe at least from the bit I understand, it’s the biggest thing is whether the DOJ keeps going, okay, but you weren’t just buying distribution. You kept saying you want exclusives and you want, we’re going to say that’s showing you really wanted to keep others out, not just get yourself in.

Tom Lenard (42:42):

Well, this has been very interesting. Do you guys have any additional questions with Michael before we wrap this up?

Scott Wallsten:

Yeah. So what odds do you put on this? Over, under?

Michael Katz (42:54):

I actually anticipated that question and like any student of today, I said, well, I’m going to get that question, I’m going to go ask the chat bot on Bing what the answer is. And so I asked it and actually it gave quite a good answer. It’s the same answer I’m going to give you, which it said, well, I’m not going to say I’m just a chat bot, but it said,

Scott Wallsten (43:15):

How will our listeners know?

Michael Katz (43:17):

That’s true. It said, look, it said my program or whatever doesn’t have access to the most up-to-date information, et cetera. And so I don’t offer opinions on the outcomes of cases. I’ll give a similar answer here. I mean antitrust is, I think practiced properly is super fact-specific and there’s just so much about it. I don’t know what’s being said, so I won’t handicap, but I will say, I have said that I do think that there are a bunch of ways in which the government has an uphill battle, which is not to say they won’t win anyway or we won’t see something like they win, but they don’t get much out of winning, there’s just lots of ways judges can slice things. But I will say this, I definitely do not see it as a slam dunk. And I think the extent there’ve been some commentators who particularly I think some of the first week stuff, which was about sort of establishing optics that Google is bad. I think those people are overly optimistic. I think we got a lot of case ahead of us.

Tom Lenard (44:21):

Guess it gets to a broader question. I mean obviously this case was first filed under the Trump administration, but for sure, it would’ve been very difficult for the Biden administration not to pursue it, but there seems to be an appetite for uphill cases. What’s your general view about that?

Michael Katz (44:39):

So look, I do think that American antitrust has gotten out of alignment or something. I think antitrust in the US is common law that has its advantages. The Sherman Act, the Sherman Act’s incredibly brief. It’s survived for a hundred and some years and it’s because the courts updated and updated with new economic learning. But I think, I think the courts have gone awry. I think they have gotten sort too hostile to plaintiffs’ theories and something needs to be done. It’s not clear to me what bringing this case will do on that, one answer is you say, given how the courts are, if we waited for a slam dunk case, we’d be waiting forever. So we just have to bring one case and there’s some good chance we’ll lose, but that’s the best we can do and it’s a good use of resources. There’s another view which I think several people have ascribed to Lena Khan, the chair of the FTC, which is, look, we’ll bring these cases and we’ll lose and we’ll go to Congress and go see, we should have won and we didn’t.

Michael Katz (45:47):

And this is a way to stimulate legislative reform. Unfortunately, I think legislation is the right way to deal with things. I mean, it’s actually the theory with common law is that the courts get too far out of line with congressional intent. Congress can act, but the problem is we have a Congress that’s completely dysfunctional. So I don’t know where it leaves us. I mean, I actually have been in favor for many years of the agencies being more aggressive than they have been on Section Two cases, but it remains to be seen whether it’s actually going to do anybody any good. I mean the danger always is you bring a case that’s out there and then the court rules against you in ways that become precedents that then hurt cases that are less out there. I don’t know in this case. Well, we’ll see. I mean what happens with it and how far up it went, maybe it would be a chance for the Supreme Court to pair back those elements of the Microsoft decision that are favorable to defendants.

Scott Wallsten (46:48):

So I got just a question about cases in general, antitrust cases in general, they’re so often full of quotes from emails, and to me those just generally mean nothing. I mean unless you’ve got Bill Gates and Steve Jobs talking to each other about how to set prices, it’s also so vague and generic and kind of reflecting intense competition. Are those more for show or do courts ever actually take that stuff seriously?

Michael Katz (47:17):

So one thing, I don’t know what juries do and how much that influences them. Okay, but with judges, I’ll say I agree with a lot of what you say, but I’ve seen in a few places I’ve actually been surprised how much judges dismiss some of these, even when sometimes they’re very much on point and by very high-level people. And this actually happened years ago. There was a case brought against American Airlines for predation, and Robert Crandall, I think by everybody’s agreement, was the smartest person in the airline industry ever, or was one of the top five. And he was not a low-level employee and he was talking about, I guess pricing against Southwest. And he said there’s no reason to price this low unless we’re driving them out of the market.

Scott Wallsten:

That was a classic.

Michael: And he also did another thing which involved a different case, a lot of profanity, which I’ll leave out, but he called the head of Braniff, which then existed in airline and said, let’s collude. And he said, you raise your prices, I’ll raise mine. And that also they got off, but that’s because Braniff turned him in and therefore there was no collusion. But right,

Scott Wallsten:

And also soon, no Braniff.

Michael Katz

Yeah, that’s true too. So the thing is I think, look, attorneys continue to try, but I think judges they’ve just seen so much stuff come and go that they do dismiss it. What’s interesting is that the DOJ tried here, as you probably know, one of the first things they did is they called the chief economist of Google to the stand as part of the DOJ case and walked them through various emails where he told people to be careful about how they described things. Now the irony of this is that I was actually just somewhere, which I guess to be vague about, but there was a government official talking to the researchers saying, be careful what they called markets or not, because he didn’t want them to then be misinterpreted.

Michael Katz (49:08):

And I pointed out to this person a second, you do realize you just did what DOJ is saying shows you’re up to no good. But it does show actually though, that Google was worried about it because as my understanding what happened is they sent out a memo saying, look, don’t start talking about market share and things like that, I guess particularly if you don’t mean it, because someday when we get sued, someone goes, see, you said market share that shows you think this is a market. Now it’s sort of interesting because they think, look, if I were an expert witness in a case and people talk about market share, that is one of the things they look at as part of establishing substitution, how people in the industry think because you say, well, fine, they’re not defining relevant markets from an antitrust perspective, but if that’s something they track, its suggests it matters to them, et cetera.

Michael Katz (49:55):

But what’s interesting here is the DOJ has more made an issue of the fact that Google was thinking about the issue and they’ve tried to say to the judge, basically, look, but for Google being aware of this, we would’ve had a lot of hot documents, but Google knew not to create hot documents and here we have the hottest document of all because it shows they knew not to create hot documents. And other than being sort of too meta and not Mehta, other than being too meta, I just think that’s not really going to get ’em anywhere. But yeah, everybody does try. But as I say, I don’t know of any cases where, well, the one point I think here’s where these hot documents can work is firms do something and then government, whoever the plaintiff says, look, that’s anti-competitive and you were doing this for exclusionary reasons, and they said, no, no, no, no.

Michael Katz (50:46):

We had this. We were doing it for this whole other reason. And then there’s some document that says, oh yeah, let’s claim this whole other reason even though none of us believe it. There are ones like that where it goes so clearly to, I guess that’s where I’ve seen it more, where the plaintiffs successfully said, look, your pro-competitive justifications clearly are just made up and were ex-post rationalizations and there I think it can help because that’s different than ones where they say, let’s go out there and crush the competitors and we’ll just kill them. And they don’t literally mean those things. These other ones I think are a little different.

Tom Lenard (51:23):

Okay. Well, this actually has been very interesting and I think we’ve probably gone over the amount of time that we’ve set out to do, but I want to thank you very much, Michael, for taking the time to do this, and we’ll talk soon. Hopefully.

Michael Katz (51:39):

I should talk again in a couple of months. We’ll know more about where things ended up at trial, even though it’ll I guess be a long time before we know which side convinced the judge.

Tom Lenard (51:49):

I guess if the trial itself takes, what, 10 weeks and I guess, I don’t know. Let’s say it doesn’t go to a second phase. I don’t know how long it would take. I guess it’s going to take a while regardless for the judge to write an opinion, but it could be over sooner than some people predict.

Michael Katz (52:06):

Well, I think we’ll see whether the trial could end up being shorter than people predict too, because it’s something else I’ve seen in antitrust cases is at some point I’ve seen this more than once the judge is like, okay, I’m kind of hearing the same things over and over. Can we just get to the point and so we’ll see. I could see one or both sides trimming their cases just to stay on the judge’s good side.

Tom Lenard (52:30):

Okay, well thanks a lot.

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