The US and Google prepare to clash in monopoly trial. Both have a lot to lose.
One of the most consequential antitrust trials in decades begins Tuesday as federal and state prosecutors try to prove that Google (GOOG, GOOGL) illegally stifled competition in the world of online search.
A lot is on the line for both sides.
The lawsuit against Google is a supreme test for the US government, which is trying to use a 133-year-old law to rein in several of the country’s most dominant tech giants. For Google, it is a threat to a core profit engine that sits at the heart of a trillion-dollar empire amassed over the last quarter century.
That drama will unfold over the next nine weeks before federal district Judge Amit Mehta in the US District Court for the District of Columbia; he will decide whether Google broke the law and what any consequences might be for the company.
It could also involve testimony from Google CEO Sundar Pichai and other well-known tech executives.
The case closely resembles the government's attempts to rein in Microsoft (MSFT) during the late 1990s, when the US alleged that the tech giant boxed out rivals by making its browser the default on its dominant Windows operating system. It resulted in a settlement that opened the door to broader competition in the internet browser software market.
That 2001 pact — which required Microsoft to design its Windows operating system to interoperate with competing browsers — created an opportunity for Google, then a startup formed by Stanford students Sergey Brin and Larry Page, to begin its period of meteoric growth in the 2000s.
The government now argues Google broke the law as it became the dominant way most people searched for information on the web, abusing its power through contracts that secured its search engine as the default on computers and mobile devices.
With that scale, the government claims, Google created nearly insurmountable barriers to the search market and then used that monopoly to build a lucrative advertising business. The government says the company's conduct harmed consumers by reducing the quality and choice of search services, impeding innovation, and driving up the cost of advertising.
One key way it did this, the government alleges, was by paying various companies to make Google the default choice on their devices, including Apple’s iPhones and computers. That made it more challenging for consumers to find other search engines.
Prosecutors cite an agreement between Apple (AAPL) and Google in which Apple must make Google’s search engine the default for Safari and use Google for its voice-activated assistant service Siri.
In exchange for the placement, according to government prosecutors, Google pays Apple through an ad revenue-sharing agreement that nets Apple $8 billion-$12 billion. That revenue accounted for 15% to 20% of Apple’s worldwide net income the year prior to the Justice Department's suit.
The government also cites similar search default agreements Google has with device manufacturers that license its Android operating system, including LG, Motorola, and Samsung, and contracts for default status with US wireless carriers AT&T, T-Mobile, and Verizon as well as browser developers Apple Safari and Mozilla Firefox.
Google's core defense is that the company does provide consumers with choices; they are able to choose different search engines by changing their default settings.
The company also says it faces plenty of competition from browsers created by Microsoft and Apple that are free to choose alternate search services and notes that Apple's mobile operating system iOS, unlike Android, is a closed system that isn't licensable to other device manufacturers.
Google's current dominance in search and search advertising is unquestioned. As of July 2023, Google's search engine was responsible for returning roughly 89% of all US general search engine queries across computer and mobile devices. Google was used on 95% of all US mobile device queries, according to Statista.
The next largest competitors, Microsoft’s Bing and Yahoo Search (an affiliate of Yahoo Finance), hold 6.4% and 2.3% shares, respectively.
Google, according to government prosecutors, also controls more than 70% of the markets for search advertising and search engine text advertising.
'That Google is long gone'
The case against Google began under the Trump administration with an October 2020 lawsuit focused on its alleged abuse of online search and continued under the Biden administration.
"Two decades ago, Google became the darling of Silicon Valley as a scrappy start-up with an innovative way to search the emerging internet," the Justice Department said in its suit. "That Google is long gone."
A group of 38 state attorneys general also filed suit that year, making similar allegations about Google’s abuse of search as well as search advertising.
The state case is consolidated with the Justice Department's case and will be heard at the same time starting this week before Mehta, the federal district judge overseeing the trial. Some of the Justice Department and state claims have already been dismissed by Mehta.
Google faces other legal challenges from the US and other states. The Justice Department and a group of state attorneys general filed a separate suit in federal district court in Virginia earlier this year targeting Google’s monopoly in the market for online advertising technology that is used to sell, buy, and broker advertising space online.
Another group of state attorneys general that sued Google in 2021 for alleged violations of antitrust law targeted Google's dominance in mobile app store distribution and in-app payments, via Google Play.
Google and those states said Tuesday they had reached a tentative settlement in the mobile app store case and would disclose its terms next month.
'A last resort, not a first resort'
US prosecutors face a major hurdle in the antitrust trial that starts Tuesday: the presumption that lower, even free, prices are a consumer advantage and not necessarily anticompetitive. Consumers don't pay Google to search for information on the web.
"The fact that Big Tech's effect is to offer these services for free, then it makes it harder to challenge," Rutgers Law School professor Michael Carrier said.
However, advertisers do pay for Google's services and could be a strong focus for prosecutors. Antitrust law has evolved over the past decade, he said, to allow judges to consider multiple sides of a market.
The judge could theoretically order a break up of the company, but Carrier considers that "a last resort, not the first resort" to remedy antitrust violations.
"The agencies might have a goal of breaking up these companies, but that's hard to do," Carrier said.
What is more likely, Carrier added, is that business practices could change if the judge sides with the government's arguments.
"If you look at what's at issue in the Google trial, it's focused on these exclusive deals with browsers or OEMs, and even if Google is found to violate antitrust law that would mean an end to those deals, not a break up of Google."
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