Yesterday, Federal District Judge Amit Mehta issued a ruling in the U.S. Justice Department’s antitrust case against Google in favor of the government. Judge Mehta didn’t mince words:
Google is a monopolist, and it has acted as one to maintain its monopoly. It has violated Section 2 of the Sherman Act.
The Judge further explained his ruling:
Specifically, the court holds that (1) there are relevant product markets for general search services and general search text ads; (2) Google has monopoly power in those markets; (3) Google’s distribution agreements are exclusive and have anticompetitive effects; and (4) Google has not offered valid procompetitive justifications for those agreements. Importantly, the court also finds that Google has exercised its monopoly power by charging supracompetitive prices for general search text ads. That conduct has allowed Google to earn monopoly profits.
It’s a long opinion, coming in at nearly 300 pages, but the upshot of why Judge Mehta ruled the way he did is summed up nicely near the beginning of the tome:
But Google also has a major, largely unseen advantage over its rivals: default distribution. Most users access a general search engine through a browser (like Apple’s Safari) or a search widget that comes preloaded on a mobile device. Those search access points are preset with a “default” search engine. The default is extremely valuable real estate. Because many users simply stick to searching with the default, Google receives billions of queries every day through those access points. Google derives extraordinary volumes of user data from such searches. It then uses that information to improve search quality. Google so values such data that, absent a user-initiated change, it stores 18 months-worth of a user’s search history and activity.
If you’re interested in how web search works and the business deals that drive it, the opinion is a great primer. Plus, although the details already dribbled out over the course of the 10-week trial, there are lots of interesting bits of information buried in there for anyone interested in Apple’s search deal with Google.
One thing I took away from reading the opinion is that it’s easy to claim that Apple should just build its own search engine like the company created its own Maps app, but the reality is more complex. Doing so would be costly and entail substantial execution risk. Faced with a choice between the certainty of a large payment from Google ($20 billion in 2022) and the financial risk and complexity of building its own search engine, it’s not surprising that Apple has let Google take the business risks of search.
Here’s a sampling of what it would take for Apple to build its own search engine even though the company has already indexed billions of websites according to John Giannandrea’s testimony:
In late 2020, Google estimated how much it would cost Apple to create and maintain a GSE [general search engine] that could compete with Google. Google “estimate[d] that the total capital expenditures required [for Apple] to reproduce [Google’s technical] infrastructure dedicated to search would be in the rough order of$20 [billion].” UPX2 at 392–93; Tr. at 1644:8-20 (Roszak).
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On top of that, if Apple could sustain a business with only one third of Google’s engineering and product management costs, it still would cost Apple $7 billion annually. Seven billion dollars was equal to more than 40% of Apple’s total research and development expenditure in 2019. Id.
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The cost of maintaining a fully-integrated GSE once built runs into the billions of dollars. In 2020, Google spent $8.4 billion to operate its search engine (excluding revenue share payments).
Furthermore:
Apple itself has estimated that it would cost $6 billion annually (on top of what it already spends developing search capabilities) to run a GSE. Tr. at 2295:9-16 (Giannandrea); UPX460 at 177.
The opinion is also replete with data on just how sticky default search engine choices are and the value of those defaults to Google:
In the U.S., only 30% of search engine queries are made in search access points that don’t default to Google.
Google’s own analysis projected that it would lose 60-80% of its iOS query volume if Apple switched search engine defaults.
65% of searches on Apple devices are entered in the Safari search bar, where the default search engine is Google.
Apple’s projections show that it would lose over $12 billion in revenue in the first five years if its search exclusivity deal with Google ended.
I highly recommend skimming through the opinion if, like me, you find those sorts of stats fascinating.
So, what’s next? The answer is, “A lot.” Judge Mehta hasn’t said what the consequences of the ruling are yet; he’ll decide that later. Also, Google has said it plans to appeal to the Federal Circuit Court of Appeals, and depending on how that goes, either side could then appeal to the U.S. Supreme Court. Plus, Google faces a separate antitrust trial over its alleged monopolization of digital ad tech next month.
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