The Daily Telegraph
Google case tells us how it pays to do nothing at all
A lack of competition is the key to understanding how big tech knows it can make big money without a great deal of effort
How much money does it take to get you out of bed in the morning? A self-respecting barrister wouldn’t budge for less than £1,000 per hour. For a supermodel, it might be a cool $1m a job.
In one of the biggest business cases in decades, a court has been mulling over a tantalising variation of this question: how much would it take for you to stay in bed and do nothing at all?
This question has emerged in the competition lawsuit brought by the US justice department against Google, which is all about products that never got built – about dogs that didn’t bark.
Here’s one in particular: Apple has spent billions of dollars developing its own components – devices such as the iphone – and services, such as icloud, which give it a competitive advantage. For years, Apple was reportedly working on creating its own search engine too, which would give its users an alternative to the dominant market leader, Google. For an engineering company such as Apple, a search engine is a lot easier to make than a microprocessor.
Not surprisingly, Google wasn’t very happy about the prospect of a rival. The traffic Apple sends to Google from iphones is very valuable to the latter’s core advertising business.
Users rarely change the default options on their devices and Google has historically been the default search engine on the iphone.
To ensure it remained the default for Apple products, Google began to pay Apple a lot of money. Google now pays more than $26bn (£20.8bn) a year to third parties for default placement, the bulk of which is believed to go to the iphone maker. Apple watchers like Bernstein analyst Toni Sacconaghi estimate the company could get as much as $19bn a year from Google.
US prosecutors argue this annual windfall is a very powerful reason to stay in bed and not create a rival search engine. Not surprisingly, Apple has not launched its own search engine.
The trial has been bruising for Google, not least after its star expert witness in the case, economics professor Kevin Murphy, blurted out the terms of its Apple deal: Apple keeps 36pc of search revenue Google earns from iphone traffic. Google had fought to keep that detail private in the trial and one of the tech giant’s attorneys reportedly winced when Murphy let it slip in court – as well they might.
Google’s defence rests on the argument that Apple and its customers chose to use its search engine because it is the best in the business. But it all looks very cosy.
We should not be surprised to find the giants of big tech doing what may be judged to be colluding, any more than Captain Renault was “shocked, shocked” to discover gambling taking place on the premises of Rick’s Café Americain in Casablanca. It’s hard work to unseat an incumbent, so why bother? Particularly when you can be rewarded for doing nothing. It’s perfectly human to take the easier road.
We know from economic history that collusion is not new. For example, after devising a novel industrial process that made his employer, a multinational, a lot of money, my late father found himself being tapped for a secret project where he reported directly to the board. He discovered that the giants of the petrochemical industry would meet in private, and horse trade, agreeing which of their facilities to close. The fates of towns and communities across the globe were decided over cocktails in the Bahamas.
Often, there’s evidence in front of us and we don’t realise. Have you ever thought it curious that Apple products are the same price everywhere you go – and why no retailer cuts into their own margin to gain share? A recent lawsuit alleges that Apple struck a deal with Amazon for the online shopping giant to remove almost all of the merchants that offered Apple products at a discount, helping to maintain Apple’s high prices.
Amazon maintains the claim is “meritless”, while Apple has in the past said these sorts of deals are aimed at tackling counterfeit goods. However, the law firm pursuing the class action claim against the pair has been buoyed by €200m in fines handed down by Italian authorities to Amazon and Apple for alleged anti-competitive sales practices around Apple devices.
There are other investigations into suspected big tech collusion ongoing. The UK’S Competition and Markets Authority is investigating how Google allegedly carved up the digital advertising market with the Facebook-owner Meta.
The CMA estimates that a lack of competition in this market, which is dominated by the two Silicon Valley giants, has cost the average household £200 in 2019 numbers. It’s likely to be about twice that now. This is an invisible tax, making the goods and services we buy that are more expensive than they would otherwise be – even if you never visit Google or Facebook.
There are other costs, of course. The technology landscape resembles Plato’s cave, one competition lawyer laments. Policy-makers can’t imagine a world that isn’t defined by tech giants on their own terms. We don’t know what we can’t see – which products were never released because the technology giant found it more convenient to stay in bed all day?
Since Brexit, the UK has had an opportunity to forge a uniquely liberal approach toward tech and the economy, distinct from the heavyhanded posturing of the EU. But, after intense lobbying by big tech, powers to thwart anticompetitive practices have been watered down.
In the end, it seems it was easier for regulators to stay in bed.
Ever thought it curious that Apple products are the same price everywhere you go?