Evidence of wrongdoing Revealed in FTC Bureau of Competition Recommendation Memo

The Wall Street Journal published a group of stories about Google based on the U.S. Federal Trade Commission’s Bureau of Competition Staff Recommendation Memo, which laid out a long chain of evidence. The staff report concluded that Google should be charged with a violation of Section 2 of the Sherman act and Section 5 of the FTC Act for misusing its monopoly power. The evidence in the report has raised new questions about Google’s action. Unfortunately, instead of responding to the arguments in the report, Google choose instead to try to pick holes in the Wall Street Journal stories.

Below is our view of the report itself:

Evidence of wrongdoing Revealed in FTC Bureau of Competition Recommendation Memo

“Conduct has resulted—and will result—in real harm to consumers and to innovation in the online search and advertising markets;” Google found to have “stopped market segment in its infancy.”

As the European Commission’s Directorate-General for Competition (DG-Comp) continues its investigation into Google, the company has been pushing a narrative that European regulators’ scrutiny into Google’s anti-competitive search practices is primarily motivated by economic protectionism. This view has been echoed at the highest levels of the US government, but the Wall Street Journal’s disclosure of a confidential staff memo from the US Federal Trade Commission (FTC) seriously undermines Google’s protectionism allegations. The memo, which was released to the Wall Street Journal in response to a Freedom of Information Act request, demonstrates that US regulators also believed Google has violated competition law.

The memo is from the FTC’s professional legal staff to the agency’s politically appointed commissioners, and it provides detailed evidence and descriptions of how Google’s conduct hurts Internet users and advertisers, impedes the competitive process and, in so doing, runs afoul of antitrust law. The memo concludes that Google’s “conduct has resulted—and will result—in real harm to consumers and to innovation in the online search and advertising markets,” and the staff recommends pursuing a case against Google challenging three separate search-related practices.

The Wall Street Journal’s reporting on the staff recommendation memo has caused a stir in the United States, particularly after reports on Google’s extensive lobbying efforts.  But the memo’s disclosure also has significant implications for DG-Comp’s ongoing investigation into Google. First, it dispels the argument that DG-Comp is motivated by protectionism—even the FTC’s staff believed that Google was undermining search competition and that Google’s conduct amounted to antitrust violations. Second, and more importantly, the memo sheds light on new, previously undisclosed documents and testimony evidencing that the purpose and effect of Google’s challenged practices were to impede rivals and preserve Google’s dominant position in search. The evidence detailed in the memo is as applicable to Europe as it is to the US search market, and it clearly points to the consumer harm caused by Google’s conduct.

Google’s anti-competitive practices reduce the inputs rivals need to compete in search.
Search engines such as Google and more specialized vertical websites require traffic in order to gather the data necessary to refine their search results. The FTC staff report recognizes this fact, citing testimony from Sergey Brin and Eric Schmidt confirming that “click data is important for many purposes, including, most importantly, providing ‘feedback’ on whether Google’s search algorithms are offering its users high quality results.” They also need a way to make money, i.e., by attracting advertisers. Due to the network effects present in search, these needs feed into one another, and “Google documents are replete with references to the ‘virtuous cycle’ among users, advertisers, and publishers.” Google’s anticompetitive search practices, at their core, decrease competitors’ query volume (user traffic) and monetization (advertiser participation on non-Google platforms).  By impeding rivals’ ability to develop their own search engines, Google hinders innovation and harms consumers.

Google biases its search results to favour its own vertical offerings
One of the primary forms of misconduct underlying DG-Comp’s investigation is Google’s practice of favouring links to its own vertical web services on its search results page (SERP). By elevating links to its own services and demoting rivals, Google steers search users to its own products. The FTC staff memo provides ample evidence of Google’s search manipulation and its effects on competition:

• It notes that “[n]umerous internal Google documents demonstrated Google’s recognition of this vertical threat,” including and email from a Google product manager stating, “if one of our competitors builds a constellation of High quality verticals, we are hurt badly.”
• To combat this threat, “Google displayed its Universal Search results at or near the top of the SERP. This desirable positioning of Google’s Universal Search results pushes all other web search results down, which significantly decreases click-through to the websites displayed in Google’s natural search results. Google displays its Universal Search results in these prominent positions without comparing the quality of Google’s vertical content to that of its vertical competitors, or evaluating whether users would prefer to see Google’s content.”
• Google admitted that it took shortcuts to promote its own vertical content. “According to Marissa Mayer,” the FTC staff noted, “Google did not use click-through rates to determine the position of the Universal Search properties because it would take too long to move up on the on the basis of user click-through rate.”
• Google recognized that if it began to apply the same algorithms to its own vertical search properties that it applies to rivals, then placement of Google’s favoured sites on the SERP would suffer: “Google’s internal data confirms the impact, showing that Google anticipated significant traffic loss to certain categories of vertical websites when it implemented many of the algorithmic changes described above. While Google’s changes to its SERP led to a significant decrease in traffic for the websites of many vertical competitors, Google’s prominent showcasing of its vertical properties led to gains in user share for its own properties. For example, Google’s inclusion of Google Product Search as a Universal Search result took Google Product Search from a rank of seventh in page views in July 2007 to the number one rank by July 2008.”

Google’s practice of favouring its own verticals in its search results does not only hurt rival verticals, but it also hurts consumers by steering them away from the results that are most relevant to their search queries.

Google imposes restrictive terms & conditions that prevent multi-homing
DG-Comp has also expressed concerns over how Google promotes its own dominant search advertising tool, DoubleClick Search, by including restrictive AdWords Application Programming Interface (API) Terms & Conditions (T&Cs) that undermine competition from neutral third-party search engine marketing (SEM) tools providers and competing search advertising platforms. Google’s restrictions impede “multi-homing”—the process of running an advertising campaign across different search platforms—by making it more difficult for marketers to transfer critical data about their campaigns programmatically.

The FTC staff report underscores the effect that Google’s restrictions have had on small business and SEM specialists alike. Ultimately, the memo concludes that “Google’s restrictive conditions stopped this market segment in its infancy,” and that staff’s investigation “has shown that the restrictive conditions do not have any procompetitive virtues, whereas their anticompetitive effects, while difficult to measure, are substantial.” Regardless whether Google eliminates any surviving restrictive API T&Cs going forward, those roadblocks to advertiser multi-homing already effectively cemented Google’s dominant position by inhibiting the development of tools advertisers could use to work with alternative search platforms, again, in the industry’s mere “infancy.”

• The FTC staff report contradicts the FTC commissioners’ indications that the small businesses most affected by Google’s restrictions apparently showed little interest in extending search advertising campaigns to other platforms: “The advertisers affected are those whose campaign volumes are large enough to benefit from using the AdWords [API, yet who are too] small to justify devoting the necessary resources to develop in-house the software and expertise to manage multiple search network ad campaigns.” The staff’s interviews with those companies “strongly tend[ed] to support the thesis that many small advertisers would extend their advertising to other search networks if they had access to a cross-platform optimization tool. Nearly all small advertisers interviewed showed interest in such a tool.”
• The memo also describes statements from SEM firms that, “but for the restrictive conditions, they too would develop and offer [cross-platform] functionality. They would also be freer to innovate the tools they offer based on their clients’ demands. Google anticipated that the restrictive conditions would eliminate SEM incentives to innovate.”
• Internal communications prove Google understood the effect its API restrictions had on multi-homing: “If we offer cross-network SEM in [Europe], we will give a significant boost to our competitors. Most advertisers that l have talked to in [Europe] don’t bother running campaigns on [Microsoft] or Yahoo because the additional overhead needed to manage these other networks outweighs the small amount of additional traffic. For this reason, [Microsoft] and Yahoo still have a fraction of the advertisers that we have in [Europe}, and they still have lower average CPAs [cost per acquisition].”
• Google understood that these practices were impeding the emergence of rival SEM tools, which is why Google executives, such as Larry page, rejected “the idea of removing the co-mingling restriction.”

By preventing multi-homing, Google preserves its dominance and locks advertisers into its own search advertising ecosystem.  Without a credible competitive threat, Google has the power to increase prices and take a larger share of advertisers’ budgets.

Google’s exclusive agreements harm rivals
The FTC staff report also criticized Google’s search exclusivity agreements with intermediation partners. This has been an important area of focus for DG-Comp, which has expressed concerns that Google exploits its dominant search position by entering into exclusive agreements with Internet publishers and device OEMs, obligating them to use Google as their default search provider. These restrictive agreements have the effect of driving search traffic to Google and denying emerging rivals an important foothold in building a search user base.

• The FTC staff memo describes the restrictive effects of Google’s exclusivity agreements: “Google’s exclusive [AdSense for Search] agreements effectively prohibit the use of non-Google search and search advertising within the sites and pages designated in the agreement.”
• The FTC staff’s investigation revealed concerns among Internet publishers regarding Google’s dominance: “Staff’s interviews did identify a fairly small, but significant, group of publishers that were deeply concerned by the exclusivity provisions in their Google AdSense agreements.”
• Yet, the Federal Trade Commission’s closing statement entirely fails to address Google’s exclusionary agreements.
  As with Google’s search manipulation, Google’s exclusivity agreements starve rivals of search queries and prevent them from growing into competitive threats.  The end result is less innovation and choice for users.

Conclusion
The disclosure of the FTC staff memo not only provides additional evidence that can inform and support a potential challenge to Google, but the FTC staff’s concerns expressed in the memo do much to squelch criticisms that objective scrutiny into Google’s conduct is motivated by economic protectionism rather than a genuine concern for consumer welfare.