UNITED STATES OF AMERICA FEDERAL TRADE COMMISSION WASHINGTON, D.C. 20580 Bureau of Economics August s,· 2012 MEMORANDUM To: The Commission From: Christopher Adams and John Yun, Economists1 Re: Google, Inc., Matter No. 1110163 Rec: Close the investigation POLITICO Executive Summary In June 2011, the Commission authorized bycompulsory process to determine whether Google is engaging in anticompetitive practices with respect to its online search, online advertisement, and mobile phone businesses. In February 2012, staff apprised the Commission of the numerous theories of harm being considered and the evidence gathered to date. In this memo, we update the evidence and offer our final recommendation. We analyze Google's market power in search advertising and consider four theories of . harm regarding Google's business practices: (1} preferencing of search results through the practice of favoring its own web properties at the expense of rival content providers; Obtained(2} exclusive agreements with publishers and vendors in various distribution channels which deprive rival search platforms of users and advertisers; 1 Ann Miles provided valuable research assistance. We thank Jon Byars for his extraordinary work in programming the API feeds from c6mScore, creating data sets and analyzing the large amounts of data collected and provided. Thanks also to Matthew Chesnes and other colleagues in the Bureau of Economics for their assistance in various aspects of the case including data requests and analysis. 1 [ (3) restrictions on porting advertiser data to rival platforms through Google's terms and conditions governing the use of its AdWords API (application programing interface) software; (4) misappropriating content from Yelp and TripAdvisor. r I As we consider these theories, ou·r guiding approach must be beyond collecting I~ complaints and antidotes from competitors who were negatively impacted from a firm's various business practices. It must be determined that a firm's practices can plausibly be shown to have an adverse impact on competition, i.e., on the c:ompetitive constraints imposed by rivals. Moreover, any weakening of rivals' ability to compete that is a consequence of legitimate aggressive conduct by even a dominant firm cannot in of r itself be sufficient to allege an antitrust violation. Market power in search advertising L i Each of the theories of harm is premised on Google having significant market power in a I I well-defined antitrust product market. L • We find that Google has significant market share in a search advertising market, I_ with 65% of paid clicks and 53% of search adPOLITICO impressions among the top five U.S.-based search engines. L • We find that Google's market power in search advertising is derived from its 65% share of user queries, but that thisby power may be mitigated by the fact that 80% use a search engine other than Google. • We find empirical evidence consistent with search and non-search Internet advertising being substitutes, and documentary evidence that Google considers L vertical search providers to be competitors. These findings raise questions about the evidentiary support for search advertising as a well-defined antitrust product market. \.... The preferencing theory · The preferencingObtained theory is that Google is blending its proprietary content with its customary blue links and demoting competing content sites such as Nextag, eBay, Yelp, and TripAdvisor in a manner that significantly impedes their ability to exercise a competitive constraint on Google.2 2 Traditionally, Google's search results would provide "ten blue links," which are hyperlinks to websites [ that are crawled and indexed by Google. [ 2 r 1.. • We find that Google has limited ability to impose significant harm on vertical rivals as it accounts for only 10-20% of traffic to them. Results do suggest that a shopping blend significantly reduces the likelihood of a click from Google to shopping comparison sites, but the effect on traffic from Google to local sites is very small and not statistically significant. • Google's blends represent a significant quality improvement for users. • Google's documents show that Universal Search was a procompetitive response to pressure from vertical sites and general search sites and an improvement for users. The exclusive agreements theory The alleged exclusive agreements involve conduct in three distribution channels: desktop search distribution, search syndication, and mobile search distribution. In all three channels, the assertion is that Google is depriving sales to Microsoft in an anticompetitive manner. • We find that direct access to a search engine'sPOLITICO site, i.e., access that is not dependent on a third-party agreement, is the most efficient and most common distribution channel. This method to access rivals is not being impeded by Google's conduct. Additionally, we find strong reasons for doubting that search toolbars and default status on webby browsers (both desktop and mobile) can be properly viewed as "exclusives" in the sense that users are unable, with relatively low cost, to access rival search engines. • . In search syndication, Microsoft and Yahoo have a combined share greater than Google's. • We find no support for the assertion that rivals' access to users has been substantially impaired by Google. Microsoft and Yahoo combined have accounted for a reasonably steady 30% of all searches for a number of years. Since the announcement of Microsoft and Yahoo's search alliance, the alliance has grown query volume faster than Google, and has approximately the same Obtained 3 number of search engine users per month as does Google. 3 In July 2009, Microsoft and Yahoo announced a ten-year syndication agreement where Microsoft would exclusively deliver search results and search ads for Yahoo, but not blended results. In February 2010, the agreement received regulatory approval. 3 f I' l · • In December 2011, Microsoft had access to query volume equivalent to what Google had less than 2 years ago. It is thus difficult to infer that Microsoft is F I below some threshold level of query volume. L_ • We assess whether Google is using distribution agreements to buy up users and r I advertisers so as to raise the input costs of rivals and, by depriving them of l_ feedback effects, make them less effective competitors. 4 We find that the characteristics of the online search market are not consistent with this theory of i harm. L r I Restrictions on porting advertiser data via the AdWords AP/ L The restrictions on porting advertiser data to rival platforms theory is that Google's terms and conditions for its AdWords API software anticompetitively disadvantages Microsoft's competing adCenter platform. Google's AdWords API allows advertisers and intermediaries, such as search engine marketing firms (SEMs), to more effectively L interface with Google's advertising platform, AdWords. Google prohibits intermediaries, however, from creating products that "co-mingle" data from Google's ad platform with other platforms. POLITICO L • We find that the introduction of the API with the co-mingling restriction lowered transaction costs, made users and Google better off, and rivals' costs were l unaffected. Consequently, any objection to the restriction on its own would imply that when Google introducedby the API it had an obligation to do so in a way that allowed its rivals to also benefit from this increased functionality. We see significant risks to long term innovation incentives from imposing such an obligation on innovators. I l • We find that the advertisers who are responsible for the overwhelming majority of spending in the search ad market use both Google and Microsoft despite r these co-mingling restrictions. Additionally, multi-homing advertisers of all sizes L spend a significant share of their budget on Microsoft. r I I L • Evidence from SEMs and end-advertisers suggests the policy's impact on ad spending on Microsoft's platform is negligible. r Obtained I L r I I. l;; 4 This theory differs from the Microsoft and Dentsply version of raising rivals' costs which is premised on a -dominant firm pushing fringe competitors into less efficient distribution channels. F 4 l r L The misappropriation theory The "scraping" allegation is that Google has misappropriated content from Yelp and TripAdvisor in order to advantage its own local blend and local site. • We have substantive concerns regarding Google's behavior and the implication for competition in this industry. To address these concerns we present an industry-wide solution that is discussed in Annex 11. • In order for Google's action to be an antitrust violation there must either be evidence that it increased users on Google at the expense of Yelp and/or TripAdvisor or decreased incentives to innovate. We find no strong evidence of either. Recommendation Given the above evidence, we respectfully recommend that this investigation be closed. POLITICO by Obtained 5 r i I... f L Table of Contents I The preferencing theory .................................................................................................. 2 L The exclusive agreements theory ............................................................................. '. ..... 3 Restrictions on porting advertiser data via the AdWords API ........................................ 4 r I The misappropriation theory .................................................................. '. ....................... 5 L Recommendation ...........................................................................................................