UNITED STATES OF AMERICA FEDERAL TRADE COMMISSION WASHINGTON, D.C. 20580 Bureau of Competition Project Code: DXI MEMORANDUM TO: Commission FROM: Barbara R. Blank, Gustav P. Chiarello, Melissa Westman-Cherry, Matthew Accornero, Jennifer Nagle, Anticompetitive Practices Division; James Rhilinger, Healthcare Division; James Frost, Office of Policy and Coordination; Priya B. Viswanath, Office of the Director; Stuart Hirschfeld, Danica Noble, Northwest Region; Thomas Dahdouh, Western Region-San Francisco, Attorneys; Daniel Gross, Robert Hilliard, Catherine McNally, Cristobal Ramon, Sarah Sajewski, Brian Stone, Honors Paralegals; Stephanie Langley, Investigator DATE: August 8, 2012 POLITICO SUBJECT: Google Inc. File No. 111-0163 1 by RECOMMENDATION: That the Commission Issue the Attached Complaint 1 Google is represented by Susan Creighton, Jonathan Jacobson, Lydia Parnes, Scott Sher, and Seth Silber of Wilson Sonsini Goodrich & Rosati in Washington, D.C., and by John Schmidtlein and David Kendall of Williams & Connolly LLP in Washington, D.C. Microsoft is represented by Charles ("Rick") Rule and Jonathan Kanter ofCadwalader Wickersham & Taft LLP in Washington, D.C., and Deborah Garza of Covington & Burling LLP in Washington, D.C. Yahoo! is represented by Hanno Kaiser of Latham & Watkins LLP in San Francisco, California. Facebook, Expedia, and TripAdvisor are represented by Thomas 0. Barnett of Covington & Burling LLP in Washington, D.C. Amazon.com is represented by Scott Gant of Boies, Schiller & Flexner LLP in Washington, D.C. eBay is represented by William H. Rooney ofWillkie, Farr & Gallagher LLP in New York, New York. NexTag, Foundem, and TheFind are represented by Gary L. Reback of Carr & FerrellObtained LLP in Menlo Park, California. Motorola Mobility is represented by Damian Didden ofWachtell Lipton Rosen & Katz in New York, New York, and Scott Sher of Wilson Sonsini Goodrich & Rosati in Washington, D.C. Apple is represented by Amanda Reeves and Hanno Kaiser of Latham & Watkins LLP in San Francisco, California. LG Display is represented by Beau Buffier and Vittorio Cottafavi of Sheannan & Sterling LLP in New York, New York. Verizon Communications is represented by Thomas O. Barnett of Covington & Burling LLP in Washington, D.C. Samsung Telecommunications America is represented by Gregory Huffman of Thompson & Knight LLP in Dallas, Texas. Research In Motion ("RIM") is represented by Logan Breed of Hogan Lovells in Washington, D.C. Sony Corporation of America is represented by M. Sean Royall of Gibson Dunn & Crutcher LLP in Washington, D.C. T-Mobile U.S.A. is represented by Douglas C. Ross of Davis Wright Tremaine in Seattle, Washington. [ EXECUTIVE SUMMARY Google Inc. ("Google") is the world's dominant Internet search engine and seller of [ search advertising. Staff has investigated several allegations of anticompetitive conduct by Google. Four of the five main areas are addressed by this memorandum, while Google's r· I mobile conduct will be addressed in a supplemental memorandum. L. Staffs recommendations are premised on our conclusion that Google has monopoly power in three relevant antitrust markets in the United States: Horizontal Search; Search r· I Advertising; and Syndicated S·earch and Search Advertising. L First, Staff has investigated whether Google has unlawfully preferenced its own content over that of rivals, while simultaneously demoting rival websites. Complainants F. have alleged that this conduct has impaired their ability to compete effectively in the markets for general search and search advertising. AlthoughPOLITICO it is a close call, we do not recommend that the Commission proceed on this cause of action because the case law is not favorable to our theory, which is premised on anticompetitiveby product design, and in any event, Google's efficiency justifications are strong. Most importantly, Google can legitimately claim that at least part of the conduct at issue improves its product and benefits users. Second, Staff has investigated whether Google has unlawfully ~'scraped/' or appropriated, the content of vertical rivals in order to improve its own vertical products. We conclude that Google's conduct should be condemned as a conditional refusal to deal under Section 2 because (i) Google's prior voluntary course of dealing with vertical rivals offers Obtained L clear evidence that the relationship was mutually beneficial, (ii) Google's threats to remove rival content from its general web search results was designed solely to coerce rivals into allowing Google to user their content for Google's competing vertical product, and (iii) the rt 11 rI natural and probable effect of Google's conduct is to diminish the incentives of vertical websites to invest in, and _to develop, new and innovative content. In the alternative, Google's conduct may be condemned as a stand-alone violation of Section 5. Google has presented no efficiency justification for its conduct. Third, Staff has investigated whether Google has employed anticompetitive contractual restrictions on the automated cross-management ofadvertising-campaigns. Google's main rival (Microsoft) has alleged that Google is denying Microsoft critical scale by employing these restrictions, and thus impairing Microsoft's ability to compete effectively in the markets for general search and search advertising. We conclude that these restrictions should be condemned under Section 2 because they limit the ability of advertisers to make use of their own data, and as such, have i~duced innovation and increased transaction costs among advertisers and third-party businesses, and alsoPOLITICO degraded the quality of Google's rivals in search and search advertising. Google's proffered efficiency justification for these restrictions appears to be pretextual. by Fourth,. Staff has investigated whether Google has entered into anticompetitive, exclusionary agreements with websites for syndicated search and search advertising services. We conclude that Google's agreements should be condemned under Section 2 because they foreclose some portion of the market, and, although the agreements result in only modest anticompetitive effects on publishers, the impact of the agreements in denying scale to competitorsObtained is both competitively significant to its main rival (Microsoft) today, as well as a significant barrier to entry for potential entrants in the longer term. While Google presents efficiency justifications for these agreements, on balance, Staff finds them to be non­ persuasive. iii Staff has identified several possible remedies to Google's conduct. Specifically, for Google's scraping conduct, Google could be required to provide an "opt-out" feature to [ remove "snippets" of website content (i.e., user reviews, ratings) from. Google's vertical r L properties, while retaining the snippets in Google's web search results and/or its Universal r i Search results on the main search results page. Google could also be required to more L generally limit the use of the content it indexes for its web search results. For Google's campaign management restrictions, Google could be required to remove the problematic contractual restrictions from. its license agreements. For Google's exclusionary syndication L agreements, Google could be enjoined from. entering into exclusive agreements with search syndication partners, and required to substantially loosen restrictions surrounding syndication partners' use of rival search advertisements. There are a number of substantial risks associatedPOLITICO with bringing a case against L. Google. Most notably, GooglewiH be able to argue that Microsoft's most efficient r distribution channel is Bing.com.; and thatby any scale Microsoft might gain through the l elimination of the challenged restrictions and agreements will be immaterial to improving L Bing's competitive position. Nevertheless, Staff 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. r i L Therefore, Staff recommends that the Com.mission issue the attached com.plaint. r Obtained L r L i L r !L IV [ TABLE OF CONTENTS I. HISTORY OF THE INVESTIGATION AND RELATED PROCEEDINGS ... -1- A. FTC Investigation ...................................................................-1- B. European Commission Investigation ............................................-2- C. Multi-State Investigation .................... ~ ..................................... -3- D. Private Litigation .................................. ~ ..................................-3- 11. STATEMENT OF FACTS .................................................................-4- A. The Parties ........................................................................... -4- 1. Google· ...................................•.....................................-4- 2. General Search Competitors .............................................-5- a. Microsoft ............................................................-5- b. Yahoo! ....... , .......................................................POLITICO -5- 3. Major Vertical Complainants ...........................................-6- a. Amazon ..........•.......by ~ ..........................................-6- b. eBay ..................................................................-6- c. N exTag ..............................................................-6- d. Foundem ............................................................-6- e. Expedia .............................................................-