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Splitting is considered the most powerful deterrent punishment under the US antitrust law. Since the 1990s, the US government has not used this ultimate weapon, but this year Apple and Google have been rumored to have been threatened with this. Why?

This article has 6292 words and takes about 17 minutes to read.

Text｜Financial E-Law Fan Shuo

Editor | Guo Liqin

There have been reports that the U.S. Department of Justice may once again use the ultimate weapon of antitrust law against technology giants - splitting up, this time targeting Google.

After four years of trial, the United States District Court for the District of Columbia in Washington, D.C. recently ruled that Google illegally monopolized the online search market and violated U.S. antitrust laws.

This lawsuit stems from2020In October, the U.S. Department of Justice and 11 states accused Google of"Universal Search Services", "Search Ads", and "Universal Search Text Ads"The case involves a game between the US government and large technology companies, and is regarded by the outside world as the most important federal antitrust lawsuit since the Microsoft antitrust case in 1998. It is also the first in a series of lawsuits against technology giants.The U.S. Department of Justice's first victory will not only have a significant impact on Google's business model, but also serve as a bellwether for subsequent antitrust lawsuits against Apple, Meta and Amazon.

At present, the court has not yet ruled on how to correct Google's illegal behavior, which will be revealed when the litigation enters the second phase. However, local media quoted sources as saying that the US Department of Justice is also considering an option that will have a huge impact - splitting up Google. Kent Walker, president of Google's global affairs, responded in a statement on the day of the verdict that Google will appeal the ruling.

This is the second time this year that the U.S. Department of Justice has said it may use a split-up measure. In March, according to media reports, the U.S. Department of Justice also attacked Apple's core business model in a similar lawsuit and warned Apple that it would not rule out the possibility of issuing a split-up order as a remedy to restore competition. (See: Will Apple be split up?)

After the ruling against Google was released, the capital market reacted quickly. On August 5, the share price of Google's parent company Alphabet fell by more than 5% at one point and closed down by more than 4%. The share price of Apple, an important partner of Google, also fell by 3.3% on the same day.

In fact, this is justThis is one of three antitrust lawsuits Google has faced from the US government, all three cases originated in 2020.On December 16, 2020, Texas led nine other states in announcing a lawsuit against Google, accusing it ofDigital Advertising MarketThere are anti-competitive and fraudulent behaviors. On December 17, 2020, a bipartisan coalition of 38 states in the United StatesGoogle Universal SearchInitiate a lawsuit.

Zhu Keliang, head of DeHeng Law Firm's Silicon Valley office, said the case could potentially go to the U.S. Supreme Court and could last for many years. If the judge rules on how to correct Google's illegal behavior, Google will still have to execute it even during the appeal. Google also has the right to apply to the court for relief measures to be implemented after the lawsuit is over, but the judge generally won't agree unless there are extremely special circumstances.

01

Confirming that Google has an illegal monopoly

"After carefully weighing the witness testimony and evidence, the court concludes that:Google is a monopoly, and it has been maintaining its monopoly as a monopoly.”

This is the largest technology antitrust case since the US government and Microsoft launched an antitrust showdown at the beginning of this century.

Google search engine has always been dominant in the global market. According to data released by market research firm Statcounter,As of March 2024, Google's share of the global search market is 90.9%。

The judgment focuses on the relevant market in the United States, where Google's market share is equally astonishing. The judgment shows that as of 2020, Google's share of the general search market in the United States is close to 90%, and its share on mobile devices is as high as nearly 95%. Its main competitor, Bing, has a market share of about 6%.

The judgment held thatGoogle has monopoly power in the general search services market, as evidenced by its dominant market share and the barriers to entry it has established to protect that market share.Developing and maintaining a comprehensive general search engine requires huge capital and technological investment, so the court believes that the barriers to entry into the general search service market are high.

According to Google's own estimates, building a search engine that can compete with it requires at least billions of dollars in investment, and the technical infrastructure required to develop and maintain high-quality search results (such as index construction, crawler technology, and artificial intelligence algorithms) also requires huge investments. For example, without considering R&D and technology expenses, if Apple maintains a general search engine that can compete with Google, it will cost $7 billion a year, accounting for more than 40% of Apple's total R&D expenditure in 2019. The court therefore believes that it will be very difficult for someone to enter the general search market.

As for specific monopolistic behaviors, the judgment mainly focuses onExclusive dealing and “self-favoring”：

Exclusive deals are exclusive distribution contracts signed between Google and browser developers such as Apple and Mozilla, mobile device manufacturers and wireless carriers.Make Google the default search engine pre-installed on user devices. The contracts also often contain exclusivity clauses that prohibit these platforms from pre-installing or recommending other competing search engines. As a result, Google has obtained a huge amount of user data, which is used to improve search quality and further consolidate its market position.

The court held that, first, Google's exclusive contract made it almost impossible for other search engines to reach most users through pre-installation. Since many users would not change the default settings, this made it difficult for competitors to expand their user base, thereby hindering their effective competition in the market. Second, Google made it impossible for its competitors to obtain sufficient user query volume to achieve economies of scale, and it was difficult for other search engines to enter the market. In addition, due to its monopoly position, Google could raise its advertising prices without scruples and reduce the quality of its advertising. Therefore, the court held that Google's exclusive transaction behavior violated the US Sherman Act.

"Self-favoritism" refers to Google using its ad management platform SA360 to get advertisers to place more ads on Google. The U.S. Department of Justice and other plaintiffs believe that Google deliberately restricted the optimization function for Bing ads on SA360 in order to make advertisers prefer Google. Google argued that SA360 was a choice based on user needs and technical priorities, rather than for the purpose of deliberately weakening Bing's ad management capabilities. Developing and maintaining functional equality with Bing ads requires a lot of resources, and the allocation of these resources needs to take into account the actual needs and technical feasibility of the business. The court held that the plaintiffs failed to provide sufficient evidence that Google "favored itself" and caused substantial damage to competition, and therefore could not prove that Google's behavior violated antitrust laws.

02

Apple is caught in the crossfire

Because the verdict revealed the huge profits Apple made from its cooperation with Google, Apple became the giant that was caught in the crossfire.

The judgment shows thatApple sets Google as the default search engine for the Safari browser on all of its devices. In exchange, Google will share the search advertising revenue generated on Safari with Apple.

The judgment did not disclose the proportion of these advertising revenues. But in November 2023, Kevin Murphy, a professor at the University of Chicago, testified for Google and revealed that Google paid Apple 36% of its search advertising revenue through the Safari browser.

The judgment disclosed thatIn 2022, Google's payment to Apple is estimated to reach $20 billion, double the amount it paid in 2020.Apple's revenue in 2022 was $394.3 billion, and its service revenue was $78.1 billion. Based on this calculation, Google's share accounted for 25% of Apple's service revenue and 5% of its total revenue.

This agreement has lasted for nearly 20 years. Google and Apple first reached a cooperation agreement in 2005. With the launch of the iPhone in 2007, the deal was expanded to the Safari browser on the iPhone. The two companies have never announced the details of the deal. But in 2016, a copyright lawsuit against Google showed thatGoogle paid Apple $1 billion in 2014 to ensure that the latter would continue to use Google as the default search option in the iPhone's Safari browser.

Since then, the share has grown dramatically. The U.S. Department of Justice previously disclosed in a lawsuit thatAnalysts estimate Google pays Apple $8 billion to $12 billion per year for the deal。

Tony Sacconaghi, an analyst at Bernstein, said:If the Google deal is scrapped entirely, Apple's stock price could fall by as much as 20%, unlessApple could find strategies to offset the damage. Morgan Stanley said in a recent report that even if Apple finds a solution, the ruling could still have an impact of 4-6% on its earnings per share in 2026.

03

Possible outcomes for Google

At present, the court has not yet made a penalty decision against Google.

Deng Zhisong, senior partner of Dacheng Law Firm and head of the competition and antitrust professional group, believes that this ruling of the US courtThis will undoubtedly have a significant impact on Google's business model., and forced it to re-evaluate its agreements with partners such as device manufacturers and adjust related business models.

Zhu Keliang believes that the lightest punishment may be to require Google to stop signing exclusive agreements with Apple and other manufacturers, and to require Google to share its user search data so that other search engines can optimize their algorithms. Google may also be fined at the same time, but the amount will not be large. A slightly heavier punishment may be to require Google to abandon some core measures in its ecosystem, such as giving up the pre-installation of Google Chrome in the Android operating system. He gave an example that Microsoft bundles IE browser when selling Windows operating system, and Google also pre-installs Chrome browser when selling Android operating system, and users cannot delete it, so Google has a natural competitive advantage.

Lu Haijun, a professor at the School of Law of the University of International Business and Economics, believes that the judgment mentioned that Google's search service quality is higher than that of all its competitors, and that channel operators are unwilling to develop their own search engine services due to the huge costs. In addition, Google's market share in search query services in 2020 was close to 90%, and close to 95% on mobile devices, and its dominant position has not been challenged in the past 10 years. Therefore,In the short term, the impact of rectification measures on the market structure will not be too obvious.

Some media quoted sources as saying that the US Department of Justice is also considering the "ultimate killer weapon" - splitting up Google.That could mean Google is forced to spin off its Android operating system or Chrome browser, both of which are at the heart of its dominance in search. A spinoff of Google's advertising platform, SA360, is also under consideration.

Zhu Keling pointed out that the most serious penalty consequence is to split up Google, that is, to split up the part that has most seriously violated the antitrust law.Currently, there are three potential parts to be split: Android operating system, including the Android app store; Chrome browser; and advertising algorithm system.

Deng Zhisong said that whether Google will really be split up remains to be seen. Splitting up is considered to be the most deterrent punishment measure under the US antitrust law. However, since the 1990s, the US government has not actually used this ultimate weapon in cases of abuse of market dominance. Most of these cases have not been split up due to settlement.

The last time a tech company faced the risk of being broken up was Microsoft.

In 1991, the U.S. Federal Trade Commission (FTC) began investigating whether Microsoft abused its power to establish a monopoly in the PC operating system market. In August 1993, the U.S. Department of Justice also intervened in the case, and the two sides reached a settlement.

However, in October 1997, the U.S. Department of Justice sued Microsoft again, accusing it of violating the Sherman Act by forcibly bundling the sale of the browser software Internet Explorer (IE browser) with the Windows operating system.In April 2000, the U.S. Department of Justice formally requested a judge to split Microsoft into two companies, one operating the Windows operating system business and the other operating application software and Internet business including IE browser.The judge ruled in June of the same year to split Microsoft into two companies and also stipulated that the two companies could not merge within ten years. Microsoft immediately appealed, and in November 2001, Microsoft and the US Department of Justice reached a new settlement agreement, and Microsoft finally avoided the fate of being split.

In the technology sector, the only company to be broken up was AT&T.AT&T has long monopolized the long-distance and local telephone markets in the United States. In 1974, the U.S. Department of Justice filed an antitrust lawsuit in the U.S. District Court for the District of Columbia. In 1984, the U.S. Department of Justice split AT&T into eight companies in accordance with the Sherman Act. One of them continued to use the AT&T company name and specialized in long-distance telephone services, while the remaining seven operated local telephone services.

Deng Zhisong said that the court had already made a ruling to split Microsoft, but after Microsoft appealed, after much bargaining and compromise, Microsoft reached a settlement with the US Department of Justice. After making huge concessions such as paying a high settlement fee, promising to give up exclusive arrangements, and opening up some source code, Microsoft avoided the fate of being split.Although the possibility of splitting up Google objectively exists, if Google can reach an agreement with plaintiffs such as the U.S. Department of Justice, it may not actually be split up.

At the same time, Google is facing another potential penalty. At a hearing in San Francisco on August 15, Judge James Donato made it clear thatHe is considering requiring Google to give consumers the option of downloading alternative app stores.To maximize flexibility for users and developers to download and distribute apps outside the Google Play Store.

In 2020, Epic Games provided Fortnite players with a way to bypass Google and Apple system stores, encouraging them to purchase game props directly from the company's official website to circumvent the "Apple tax" and "Android tax". Apple and Google later removed Fortnite from their shelves. Subsequently, Epic Games took Google and Apple to court, accusing the two companies of using their dominant position to squeeze excess profits from app developers.

In December 2023, the court ruled that Google's operation of the Google Play Store violated US antitrust laws. Subsequently, Epic Games submitted a series of requests to the court, hoping that Google would open the Android platform to third-party app stores and provide its application catalog, etc.

Donato said:He hopes to issue a directive in the coming weeks outlining a framework for changes to the Google Play Store and setting up a three-member compliance and technical committee to implement and oversee it.

Zhu Keliang said that since the jury has already determined that Google has engaged in monopolistic behavior, there will be no procedural obstacles for the judge's injunction. The judge is currently considering what measures to take to reduce the negative impact of Google's monopolistic behavior on market competition.

Deng Zhisong said that even if the court issued a rectification order,Google can still delay the order through the appeal process, as Microsoft did before.At the hearing, Google has said it hopes to have 12 to 16 months to make adjustments to ensure a smooth transition and avoid glitches that could affect the performance of Android smartphones. If it does, Google can buy more time to determine the specific implementation of the rectification order and try to get the most favorable conditions for itself.

Deng Zhisong reminded that Google Play will not only face the attention of the US judicial and law enforcement agencies, but also face compliance risks in its operations in Europe as the EU antitrust regulation becomes increasingly strict and the Digital Markets Act is implemented. While implementing the rectification order of the US court,Google should perhaps think about how to optimize its global business model to avoid being put in a passive position in more jurisdictions.

04

What is the significance of weather vane?

The ruling on Google is a milestone in the long-running antitrust battle between the U.S. government and technology companies. The industry generally believes that this ruling is a bellwether.

Zhu Keliang said,On average, the United States has a major antitrust case against large technology companies every 20 to 30 years. Therefore, once the U.S. Department of Justice wins the case or obtains a more favorable settlement agreement, other large companies will follow suit.

But Lu Haijun reminded that during the Trump administration, the US Department of Justice and the FTC began investigating the monopolistic behavior of Amazon, Apple, Google and Meta, and subsequently sued the four companies.Although the Google case has a first-instance verdict, it is still far from the final judgment, so its reference value is greater than its practical significance.In addition, since the lawsuit was filed by the U.S. Department of Justice, the final outcome will be affected by the U.S. election.

Since 2019, the US government has launched an antitrust crackdown on technology companies.In October 2020, after a 16-month investigation, the House Judiciary Committee released a report stating that the four major technology giants all engaged in monopolistic behavior.

The report states thatMetaIt has driven the social networking market towards monopoly and maintained its monopoly through a series of anti-competitive business practices, often acquiring competitors or even copying competitors' services to achieve commercial goals;GoogleGoogle has a monopoly in the online search and search advertising markets, and requires smartphone manufacturers to pre-install Google's own applications and give them default status, hindering competitors in the search and other application markets;Amazonmonopoly power over many small and medium-sized businesses that have no viable alternatives to Amazon to reach online shoppers;appleUse its control over iOS and the App Store to set up and enforce barriers to competition, discriminate against and exclude competitors, and favor its own products, while extracting excessive commissions from app developers’ sales.

Since then, the four companies have been involved in antitrust lawsuits one after another.

Google was the first to be hit and was sued by the U.S. Department of Justice and 11 states in October 2020. The FTC filed lawsuits against Meta and Amazon on December 8, 2020 and September 26, 2023, respectively.

The FTC accused Meta of illegally maintaining its monopoly on personal social networks through years of anti-competitive mergers, most notably its acquisitions of Instagram in 2012 and WhatsApp in 2014.The FTC is seeking a permanent injunction in federal court, including a divestiture of Instagram and WhatsApp, and requiring Meta to provide prior notice and approval for future acquisitions.The court initially dismissed the case in June 2021, finding that the argument about why Meta had a monopoly "lacked specific factual allegations." However, the FTC did not give up, and two months later added "additional data and evidence" and "detailed statistics." The trial date of the case has not yet been determined.

In the Amazon case,The FTC accused Amazon of penalizing sellers who offer low prices and keeping online product prices high.For example, if Amazon finds that sellers offer lower prices elsewhere, Amazon can hide the information of these low-price discount sellers in the search results; if sellers want their products to qualify for the "Prime" provided by Amazon, they must use Amazon's expensive delivery service. The FTC also believes that Amazon's monopolistic behavior also harms consumer interests, such as biasing search results toward Amazon's own products rather than better quality products; replacing natural search results with paid ads and "junk" ads, reducing search quality and affecting user experience.

On March 21, 2024, the U.S. Department of Justice, together with the attorneys general of 15 states and the District of Columbia, filed an antitrust lawsuit against Apple, accusing it of having a monopoly in the smartphone and high-performance smartphone markets and using its control over the iPhone to engage in extensive, ongoing and illegal behavior. This anti-competitive behavior is intended to maintain Apple's monopoly while obtaining as much revenue as possible. (See: Will Apple be split?)

Deng Zhisong believes that the Google case is the first major victory for the US government in recent years.FTCThe two major antitrust law enforcement agencies, the FTC and the Antitrust Division of the U.S. Department of Justice, have adopted a stricter regulatory attitude towards technology giants. The current FTC Chairman Lina Khan became famous for publishing "Amazon's Antitrust Paradox" and gained attention from academia and politics.The verdict in the Google case is undoubtedly a milestone. It will encourage the FTC and the U.S. Department of Justice to strengthen antitrust supervision of technology giants and provide a reference for U.S. judicial authorities in terms of case adjudication ideas and standards.

Deng Zhisong estimates that several major antitrust cases in the US technology industry may be adjudicated in 2024, and subsequent progress deserves further attention. In addition, these cases will also, to a certain extent, prompt other jurisdictions such as the European Union to continue to strengthen supervision of technology giants.