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Market Definition in the Google Android Case
Auteur : Lamesch, Joé Promoteur(s) : Gautier, Axel Faculté : HEC-Ecole de gestion de l'ULg Diplôme : Master en sciences économiques, orientation générale, à finalité spécialisée en Economic Analysis and Public Governance Année académique : 2015-2016 URI/URL : http://hdl.handle.net/2268.2/1812
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Market Definition in the Google Android Case
Jury Mémoire présenté par
Promoteur : Joé Lamesch Axel Gautier
Lecteurs : En vue de l’obtention du diplôme de Master en Nicolas Petit sciences économiques Sébastien Broos
Année académique 2015-2016
ABSTRACT
The definition of a relevant market is crucial in many antitrust cases. The assessment whether a firm is in a dominant position or not depends highly on the market that has been defined as comprising all competitive constraints to its behaviour. The ongoing case of the European Commission against Google’s mobile operating system Android is an example of such a case, which additionally includes a very specific type of product: multi-sided platforms. The particular nature and functioning of such platforms leaves most common methods of market definition useless and inappropriate. This thesis will use the growing literature on multi-sided platforms to assess the functioning of these products. Further, a prominent precedent case and a close consideration of the general business strategy of Google will help to reveal and to understand how Android works. What role it and other adjacent software play in this wider business strategy of Google. And what the competitive environment is in which these products are operated. The main insights will be that it makes little sense to consider these products without taking into account their interdependent relationship and the competition they face from firms operating with a different business model. It are in fact these various business models that are competing with each other on a higher level, rather than the single products with each other. Comparing these findings with the markets the European Commission has defined as being the relevant markets in this case, hints that the Commission might possibly be missing important aspects of the competition that is taking place between these products and their parent firms.
La définition du marché est un élément crucial pour la plupart des procès touchant les lois de la concurrence. L’évaluation d’une éventuelle position dominante dépend fortement du marché pertinent sur lequel se fond l’analyse suivante. Le procès actuel de la Commission européenne contre le système d’exploitation Android de Google constitue un exemple d’un tel cas. En plus, des produits d’une nature très spécifiques sont impliqués : des plateformes bifaces. La nature et le fonctionnement particulier de ces derniers rend la plupart des méthodes du marché traditionnels inutiles et inaptes pour la définition du marché. Le présent mémoire va utiliser la littérature croissante des marchés bifaces pour évaluer le fonctionnement de ce type de produit. De plus, un fameux cas précédent et une considération précise de la stratégie d’entreprise générale de Google vont aider à révéler et à comprendre comment Android fonctionne, quel rôle le système et d’autres systèmes liés jouent dans le contexte de cette stratégie d’entreprise et à établir l’environnement concurrentielle dans lequel ces produits sont exploités. Les conclusions principales seront que, une considération isolée ignorant les interdépendances de ces produits entre eux est inadéquate afin d’évaluer la concurrence à laquelle ils font face car cette concurrence peut provenir de firmes suivant un modèle d’entreprise tout à fait différent. En fait, la concurrence se déroule entre ces différentes stratégies d’entreprise à un niveau plus élevé qu’entre ces produits en question. En comparant ces résultats avec la définition actuelle du marché effectuée par la Commission européenne, on constate qu’il y manque plusieurs aspects importants à l’égard de la concurrence entre ces produits et leurs sociétés mères. CONTENT I. Introduction ...... 2 II. Multi-Sided Platforms ...... 4 1. Definition and Aspects of Multi-Sided Platforms ...... 5 2. Antitrust Implications ...... 9 III. The Microsoft Precedent ...... 13 1. Legal Proceedings and Antitrust Accusations ...... 13 2. Microsoft’s Windows Software ...... 14 3. The Market Definition ...... 15 IV. Google’s Strategy ...... 19 1. The Google Universe and Business Model ...... 19 2. The Android Software ...... 20 3. Antitrust Concerns and European Commission’s Investigation ...... 22 V. Market Definition in the Android case ...... 26 1. Android as an Multi-Sided Platform ...... 27 2. The Whole Picture ...... 30 3. Markets for different Platforms ...... 33 4. Competition between Systems...... 37 5. Comparison to the Market Definition of the European Commission and Differences to the Microsoft Case ...... 39 VI. Concluding Remarks ...... 41 Rerences...... 42
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I. INTRODUCTION
When talking about the economic reality we live in, the word ‘market’ figures surely among the most used words. It is used to describe sets of economic transactions of more or less one specific kind and in some geographical area. As a synonym for words like industry, branch, sector or field of activity, this economic term has entered our everyday language. In contrast, however, to this mostly vague use of the word, the term has a very specific and precise meaning in the sphere of competition policy. A market includes all products in a geographic area which exert competitive constraints on each other. In merger cases or alleged abuses of dominant position, the definition of the market relevant for the case is often of considerable importance. Whether a firm can be found as being dominant depends highly on the market which it is found to operate in. A metaphorical illustration would be the question whether a football club is dominant. Defining the sphere of competition as being of national extent (i.e. the Belgian Jupiler League), clubs like Anderlecht or Club Bruges could be seen as dominant. Extending the competition, however, to a European level (i.e. the Champions League or Europa League), the picture changes quite tremendously.
The topic of the following thesis is the market definition in the ongoing case of the European Commission against Google’s mobile operating system Android. This analysis aims at assessing the type of competition Android takes part. Thereby, it attempts to identify the relevant sources of competition and compare it to the definitions the European Commission has defined as relevant in the current case. To assess the competitive constraints software like Android faces is not that obvious as it might seem at the first moment. The world of IT or online firms is characterised by various products given away for free to users. Intuitively though, a price is a vital characteristic of a market. It is therefore that traditional methods of market definition reveal themselves as useless in such cases. In most cases, this free distribution is caused by the nature of these products which operate as platforms.
The growing literature on multi-sided platforms will be used to understand how such platforms work and what consequences derive for antitrust purposes. Furthermore this theory will provide guidance on how markets can be defined in the absence of prices.
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When talking about the current Google case, one has to inevitably mention the antitrust accusations Microsoft faced about 15 years ago. Microsoft was alleged to be in a dominant position for desktop operating systems and faced similar charges as Google’s Android software today. In this sense, the Microsoft cases represent an important precedent in terms of substance, form and scope. At that time, however, the economic literature of multi-sided platforms was still in its early stage of development. Moreover, the overall industry of IT firms was structured and functioning in quite a different way. In order to understand not only the differences to the Microsoft cases, but also to catch the whole picture of the economic environment in which Android is operating, a closer look at the overall business strategy of Google imposes itself. Since Android is just but one element of this wider course of action.
By considering these different aspects, the platform literature, the precedent Microsoft case and the overall business strategy of Google, the following analysis will be provide some insights on the sort and sources of competition Android is facing. The findings suggest that the Commission might be missing important competitive aspects in its market definition. Its view seems to be focused on a quite narrow perception of markets ignoring the competition taking place on a higher level. In other words, the competition for the link or path between users and the contents on the internet. By neglecting this form of competition between various firms, antitrust authorities’ perception of relevant markets might be flawed. More precisely, two aspects seem to be left out by European officials. First, the similar service browsers and app stores provide in accessing the internet. Secondly, products of closed systems, like the ones of Apple, are excluded from the markets.
The thesis will be structured as follows. Section II will summarise the main insights from the literature on multi-sided platforms. Section III will look back on the proceedings in the Microsoft cases. A more wide perception of Google’s overall business model will be provided in section IV before section V attempts to assess the competitive constraints and the markets for mobile operating systems and adjacent software. Concluding remarks can be found in section VI.
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II. MULTI-SIDED PLATFORMS
The case at hand is an example of economic activities with quite remarkable characteristics. Remarkable in the sense that they contrast with classical economic theory. For instance, as in the present Google Android case, there seem to be no prices, or zero prices. A rather counterintuitive feature when we think about economic markets. Nevertheless, this phenomenon appears to be not that rare and may even be perceived as becoming more and more frequent in the various business models of the ‘new economy’ of the internet. They often come without direct monetary prices for consumers. Examples of such models would be: search engines, comparison portals, software, social networks, etc. All these businesses are thought of as being platforms, where different type of consumers, or users, can interact. Although the prominence of this platform perception has increased with the emergence of the internet and its new economic activities, the concept of platforms can be found in various industries and at all times in human history. A traditional market place would be one example, here buyers and sellers can meet and trade. Dating clubs are often described as being platforms for men and women to meet. Another classical example would be payment card systems like Diners Club, VISA or MasterCard, which allow clients and merchants to conclude transactions. Further examples would be gaming consoles, software, money or even languages. From these illustrations above, a defining aspect of platforms becomes already clear, the presence of different types of consumers willing to interact with one another. Hence the denomination ‘multi-sided platforms’.1 Despite the fact that academic research had already vaguely tackled the issue of MSP, the interest in the topic really took off with a 2002 paper by Richet and Tirole.2 This was the beginning of an amplified treatment by scholars. Albeit this increased interest led to a
1 These platforms are also often referred to as „multi-sided markets“. However, since a platform not necessarily constitutes a market on its own, this term might be misleading for the purpose of market definition. Furthermore, the platforms used as examples are normally linking two different sides. Therefore, it has become standard to use the terms „two-sided“ and „multi-sided“ interchangeably. In the following thesis, the term „multi-sided“ will nonetheless be preferred and the term multi-sided platform will be abbreviated by „MSP“ 2 (Rochet & Tirole, 2003) 4 deeper research, no overall accepted definition or general theory has established itself so far.3 The following section will outline the main aspects of the theory of multi-sided platforms, how it compares to other branches of literature and highlight the implications for competition policy.
1. DEFINITION AND ASPECTS OF MULTI-SIDED PLATFORMS4
The most important and defining feature of MSPs is the specific interdependence between different groups among its customers or users.5 For a firm to qualify as MSP, at least one group of consumers has to value the presence of another group. This circumstance distinguishes such businesses essentially from common single-sided undertakings, where such a connection is not existing. To give an example, any one sided shop, a restaurant for instance, serves various kinds of consumers who may differ considerably in terms of socio-economic or demographic characteristics, such as sex for example. However, none of these different consumers is particularly concerned about the attributes of the other guests or their presence in the restaurant. In contrast, for a dating bar or club (which are considered to function as MSP), the picture is quite different. For them it is vital to attract men and women at the same time. Men will only enter when they know they can meet women inside and vice- versa. Hence, each group values the presence of the other.
This specific characteristic of interdependent consumer groups, makes MSPs a quite particular type of business with noteworthy aspects and features. First, the interdependence between consumers results in an externality. For each consumer, the value of joining a platform depends on the number of consumers on the other side. For the platforms, this means that they face two distinct demand functions which are interdependent. Therefore, the demand elasticity of each function is higher than it would be without these externalities. Consider a platform that serves two groups of consumers, group A and B. A price increase on one side will lead to a direct reduction
3 (Auer & Petit, 2015) (Rebecchini, 2014) 4 Thi spart is based on (Evans, 2003) (Rochet & Tirole, 2003) (Rysman, 2009) (Evans & Schmalensee, 2005) (Evans & Schmalensee, 2012) (Hagiu & Wright, 2015) 5 Hereafter, the terms „users“ and „consumers“ will normally refer to the end-users of devices. Unless indicated otherwise. 5 of consumers on that side. Since the drop of consumers on side A makes the platform less attractive to side B, the number of consumers of type B will drop as well. This will again lead to a further reduction of type A consumers. Thus, this phenomenon is commonly referred to as an indirect network effect.
Second, since the nature of a MSP is to enable different consumers to interact in one way or another, the efforts of a platform are most of all devoted to achieve this pivotal goal of attracting all sides necessary for its functioning. As a consequence, the costs of a platform are mainly borne in order to facilitate the interaction between consumers. It is very difficult or even impossible to attribute these costs to a side which would have caused the costs. Therefore, the computation of marginal costs on a certain side makes little or no sense in the case of MSPs.
Thirdly, the need to ‘get all sides on board’ causes pricing strategies of MSPs to deviate considerably from that of single-sided companies. As the consumers of platforms differ in some basic aspects, they do not value the platform in the same way. Hence, to appeal to all and to induce clients from all sides to join the platform, the MSPs have to price them differently. It is quite common for such platforms to charge one side substantially less than the other side. It might in fact be that one side is not charged at all, or even subsidised to join the platform. As an example, viewers of free-to-the-air television do not pay anything to see the TV programs. On the other side, advertisers are charged huge prices for advertisement slots that the TV station sells to them. In multi-sided businesses it is therefore not only the price level but the price structure that matters in order to maximise profits. In more formal words, the price structure of MSPs has to be non-neutral, meaning that a price increase on one side accompanied by a corresponding drop in the price on the other side, changes the overall number (i.e. is non-neutral) of consumers. A first important implication is that for one side, there might be no prices, or in other words, prices are zero. Another important consequence is that on one side prices could be below marginal costs. Although these measures cannot be computed for either side, it is nevertheless reasonable to assume that an additional consumer on any side entails some non-negative costs to the platform. In the case of zero prices, these would then be below the marginal costs.
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All these features might sound familiar and in fact, the treatment of MSPs touches various other topics of economic literature. For instance, the description of platforms may remind one of firms selling multiple products. Software perfectly illustrates this point. As in the case of Microsoft which tied its internet browser to its software system (cf. Section III), the parallels seem striking. “But firms that make multiple products for several one-sided markets [...] or several complementary products for a distinct set of consumers [...] do not secure profit opportunities from internalizing indirect network effects.”6 Furthermore, the fact that platforms charge different consumers different prices prompt the conclusion that the strategy of a platform can be classified as well-known price discrimination. After all, the goal of price discrimination is as well to increase revenues by increasing the number of consumers, notably by attracting different kinds of consumers. However, for a MSP, it is not only a strategy to increase its revenue, but first of all a necessity to ‘get all sides on board’ and to generate demand on any of its sides. Most of all, the theory of MSPs seems to relate to the literature of network goods. These contributions discussed the implications of such externalities, the fact that the value of a good depends on the number of consumers using it. It might seem that the treatment of MSPs is an additional contribution to this literature. This perception, however, would not account for the distinguishing fact that MSPs serve more distinct consumer groups. Although related, this clearly differentiates the two branches of theory. Finally, the discussion of MSPs and the internalisation of externalities obviously evokes the Coase theorem. This explains how well defined property rights can lay the ground for the internalisation of externalities. It therefore becomes clear that MSPs arise in situations in which this theorem does not hold and individuals are unable to internalise the externalities between them on their own.
Despite the lack of an all-inclusive, generally accepted definition of MSPs, several contributions have tried in finding one.7 This thesis will refrain from discussing them all. Since, they are quite complementary, the common main aspects of these definitions will be outlined instead. According to these contributions, a firm is multi-sided when
6 (Evans, 2003) p. 338 7 (Evans, 2003) (Evans & Schmalensee, 2005) (Rochet & Tirole, 2003) (Hagiu & Wright, 2015) 7
• there are two or more different groups of consumers • between whom arise externalities • which these groups are unable to internalise on their own • the MSP serves then as intermediary, • enabling direct interactions between these groups • the MSP applies a non-neutral price structure • each side is affiliated in some way to the MSP (through membership fees, opportunity costs, etc.)
At the end, it has to be noted that unlike the above thoughts (and the term ‘multi-sided market’) might suggest, multi-sidedness is not an inherent characteristic of some markets or industries. The decision to operate as a MSP is a genuine choice for a certain business model. MSPs and single-sided businesses can end up competing for the same consumers in the same markets (at least on one side).8 This decision is a quite complex one as it involves choices about which sides a platform wants to serve, how open it wants to be and through which pricing strategy and which precise prices it wants to achieve this.9 Furthermore, the theory of MSPs unifies various aspects of other well-known economic activities (price discrimination, multiple products, network effects) which are quite, if not all at the same time, common in the real economy. Multi-sidedness might be considered more as a question of degree rather than a clear-cut business model in which a firm fits in or not.
Obviously, all of this makes the treatment of MSPs a rather complicated issue. This complex nature has therefore several implications on antitrust policy and the handling and approach of cases in this field.
8 (Hagiu & Wright, 2015) (Rysman, 2009) 9 (Rysman, 2009) 8
2. ANTITRUST IMPLICATIONS
As MSPs have their own distinctive properties and characteristics, they alter the features and nature of antitrust cases involving multi-sided firms. An appropriate treatment of a case involving a firm, which is or could be seen as a MSP, one should first assess whether network effects are present, how strong and how important they are. Not all businesses with similarities to MSPs will impose a fundamentally different form of the investigation than normal one-sided ones, simply because the externalities might not be that relevant for the case. Nevertheless, some substantial differences and challenges can arise for competition policy.
The traditional use of market share as a first proxy for market power is even more problematic than it already is in single-sided environments. Since two or more, possibly very diverse, sides are served by a MSP, a figure of ‘market’ share or user share on one side gives an only incomplete picture of the economic power of a platform, or its position compared to competitors. Moreover, the very nature of MSPs gives rise to various sources of barriers to entry. First of all, it could be very costly to start a platform in terms of capital requirements and fixed costs (development costs for software, construction of a shopping mall, costs of printing presses and distribution for a newspaper). Additionally, in order to get a platform started, the firm would have to reach, at least on one side, a critical mass of consumers. A further issue in this respect is the possible coordination problem that arises. Consumers on one side might be reluctant to join the platform when there is uncertainty about whether consumers on the other side are likely to join. This ‘chicken and egg’ problem has to be solved before a platform can be successful. However, if at least one side engages in ‘multi-homing’10coordination poses no real problem. As we can see, the handling of a platform is quite demanding in terms of technical as well as economic skill and knowledge. All of these aspects could impose conceivable barriers to entry for newcomers. These theoretical considerations should, however, not lead to premature allegations of
10 ‚Multi-homing‘ refers to the fact that a user group on one side is affiliating with several simliar platforms to reach users on another side. ‘Single-homing’ in contrast means that a group of users only uses one side to reach users on another side. 9 anticompetitive barriers. Rather, they represent possible ways through which entry could be impeded. A more closer investigation should be undertaken in order to check whether these barriers actually materialise and constitute a real anti-competitive behaviour.
Market Definition
The first important step in merger or abuse cases is the definition of the relevant market which is quite different to the single-sided cases. The nature of MSPs cause the traditional instruments used for this purpose to be of no or only limited use. For instance, the indirect network effects between the different sides lead to a higher demand elasticity. Given a two-sided business, a price increase on the first side, directly reduces the number of type 1 consumers. But through the indirect network effect, it decreases the number on the other side as well, which again reduces the attraction to consumers of type 1. Therefore, the profitability of a price increase is far more limited in a multi-sided setting than in a single-sided one. An imprudent use of conventional methods of market definition, notably the SSNIP test, would possibly lead to too narrowly defined relevant markets. Moreover, the fact that the platform serves different consumers on different sides makes it clear that competitive constraints for actions can arise from any of the different sides of the platform. It would therefore be inappropriate to ignore these constraints from other sides of the platform. Ultimately, the special pricing forms used by MSPs could lead to hasty and flawed perceptions of relevant markets. As seen above, one side of a platform is charged less than the other, often even charged at zero prices. This absence of prices could lead to the view that there is no market at all to investigate on that side. Examples are the difficulties national competition authorities have with defining appropriate markets for free-to-air TV markets.11 The first contributions to the MSP literature mostly limited themselves on highlighting these problems for traditional methods of market definition, when confronted with multi-sided firms, without attempting to solve them. Only after a while did scholars tackle the challenge of defining markets in multi-sided environments.
11 (Rebecchini, 2014) (Filistrucchi et al., 2013) 10
Most contributions were thereby concerned about the problems traditional methods such as the SSNIP test face with MSPs. Either on a formal and general basis12 or using a precise industry as field of application.13 These insights are only useful in an environment where consumers pay monetary prices, this is, however, not the case for the Google Android software. [cf section IV and V] This absence of prices can easily lead to the premature conclusion that there is no market to be defined and investigated. But, as has been shown above, a price of zero is not necessarily an odd thing for a MSP. In fact, for such businesses charging one side a price of zero might be a profit maximising strategy. Hence, the price of zero is no sign of an absence of markets but “it is exactly because the market is two sided that one side does not pay”.14 Thus, even if there are altered methods of market definition suited for the case of MSPs, they may not be applicable. This puzzle was tackled by Filistrucchi in a first paper in 200815 for the case of media products. And further treated in 201316. The course of action proposed for such settings will play an important role in the following analysis. In his works, Filistrucchi argues that, as already mentioned, in cases with MSPs, it is important to take into account all sides of the platform and the possible competitive constraints that can arise from all these sides. But with MSPs, the question would arise whether one should define only one relevant market, comprising all sides of the platform or whether two or more markets need to be defined. According to these papers, the answer to this question lies in the assessment of the type of a MSP. Platforms which offer a way of interaction between different groups could be classified as a ‘two-sided transaction market’17 when the interaction between the groups is an observable transaction. In these cases platforms are able to charge an access fee as well as a usage fee (although they do not necessarily have to). On the other hand, a platform can be characterised as a ‘two-sided non-transaction market’ when the interaction between the groups is no traditional transaction and the interaction is not observable.
12 (Evans & Noel, 2005) among others 13 (Argentesi & Ivaldi, 2005)(Filistrucchi, 2008) 14 (Filistrucchi et al., 2013) p. 25 15 (Filistrucchi, 2008) 16 (Filistrucchi et al., 2013) 17 This terminology can again be misleading when applied tot he purpose market definition. The terms „transaction plaform“ or „non-transaction platform“ will therefore be used instead. 11
The distinguishing feature between both types of MSPs is that in a transaction market a firm is necessarily on both (all) sides of the market, whereas in non-transaction markets, it is possible that a firm is just on one side of the market. In other words, this distinction could answer the question, whether a service a MSP provides on one side should be seen as being in the same market as the service provided on the other side. As an example, in the media scenario, a free-to-the-air TV station can be seen as being in the same market for advertising as newspapers. Advertisers may regard both as a substitute. But the TV station would not be in the same market on the user/reader/viewer side since consumers would not consider it to be a real substitute for newspapers. This view would be justified since the interaction between advertisement and readers/viewers (people seeing advertisements) would not be a transaction and could not be observed. In contrast, a payment card system, such as VISA, should be seen as being in the same market on both sides, comprising the provision of payment cards for consumers and the provision of payment terminals for cards for merchants. The reason would be that the interaction between both groups would constitute a real transaction which would be observable. From these thoughts derives the main suggestion: “In two-sided non-transaction markets, two (interrelated) markets need to be defined. In two-sided transaction markets, only one market should be defined.”18
Other challenges for antitrust policy arise in the sphere of actual enforcement. Despite the fact that considerable scientific attention has been devoted to the study of multi- sided businesses, no general approved, ‘unified’ theory has emerged so far. While this is surely due to the complex issue at hand, it makes it difficult to use these theoretical insights in a systematic manner in legal cases. As a consequence, the lack of clear and unambiguous definitions and terms leave the door open for arbitrary use of the insights of this branch of theory in antitrust cases. This shortage of theoretical consistency and the rather common aspects of multi-sided businesses, notably the network externalities, could even lead to a kind of overuse of multi-sided theory and a kind of policy bubble.19 Finally, leaving these conceptual uncertainties aside, the already stressed complex nature of cases involving MSPs could likely lead to cumbersome and lengthy
18 (Filistrucchi et al., 2013) p. 10 19 (Auer & Petit, 2015) 12 investigations, increasing overall enforcement costs and decrease legal resilience of findings.
III. THE MICROSOFT PRECEDENT
The ongoing antitrust case against Google has had a prominent precedent. At the turn of the millennium, Microsoft faced serious antitrust accusations on both sides of the Atlantic. These were the first big cases in the ever-growing high-tech industry of information technology (IT) firms. Hence, they were and are thought to set out a first landmark on how such cases could or should be treated. And indeed, there are striking similarities between the charges Microsoft faced back then and the current accusations against Google. This section will outline the legal proceedings and economic issues of the Microsoft cases in the U.S. and in Europe. It will highlight the differences and parallels between them and take a look on how the relevant markets were defined.
1. LEGAL PROCEEDINGS AND ANTITRUST ACCUSATIONS
Already in 1994, Microsoft was under investigation by both, the U.S. Department of Justice (DOJ) and the EC. Object were its agreements with PC manufacturers. Both cases were settled between Microsoft and a joint team of the DOJ and the European Commission (EC).20 In the United States the case resumed in 1998, when several states and the DOJ filed suit against Microsoft. The accusation was that Microsoft was illegally tying its Internet Explorer to its OS through its agreements with PC manufacturers. They would have had to exclusively acquire Microsoft’s browser to the detriment of rivals.21 The case was settled in 2002 with a consent decree and behavioural remedies.22
20 (Rubinfeld, 2003) (Press Release IP/00/141, European Commission) 21 (Rubinfeld, 2003) 22 http://www.seattletimes.com/business/microsoft/long-antitrust-saga-ends-for-microsoft/ 13
In Europe, the EC was concerned that Microsoft would leverage its dominant position for PC OS into the market for server OS. In August 2000, Microsoft received the statement of objections from the EC. It was alleged to withhold interface and protocol information from competitors so that only Microsoft products could interoperate with its Windows software. This would have constituted a significant disadvantage for rival server OS given that Windows was the by far most used OS in the world. By this conduct Microsoft would foreclose the market for server operating systems and artificially construct barriers to entry for competitors.23 In August 2001, this statement of objections was extended by the accusation of illegally tying its media player to its OS. Thereby, it would offer to its own media player a powerful channel of distribution, which would not be available for rival players.24 Eventually, in March 2004, Microsoft was found guilty of the accusations and was forced to disclose its interfaces for its OS, to offer an alternative version of Windows 2000 without its media player and a fine of €497 million was imposed.25 Subsequently, in 2007 a browser rival filed a complaint against Google with the EC, accusing Microsoft of illegally tying its Internet Explorer to its dominant PC OS. By this conduct, it would foreclose the market for competitors. In 2009, a statement of objections was sent. Microsoft offered a series of commitments in order to resolve the alleged antitrust issues. After a year of negotiations, the case was settled.26
2. MICROSOFT’S WINDOWS SOFTWARE
At the heart of the Microsoft cases was its popular operating system for desktop computers, Microsoft Windows. Operating systems allow other software (applications) to access the hardware of a device. Users on the other hand can run these applications on their devices for various purposes, but only if these apps are compatible with the OS on their device. Developers can sell their software only to users if their application is compatible to the OS on costumers’ device. It is only through this enabled interaction
23 (Press Release IP/00/141, European Commission) 24 (Press Release IP/01/1232; European Commission) 25 (Press Release IP/04/382, European Commission) 26 (Case COMP/C-3/39.530 - Microsoft (tying), European Commission) 14 between users and applications that operating systems unfold their true commercial value.27 Hence, the product of operating systems is clearly characterised by network effects. On the one hand, users value it more, the more different applications are compatible with the software and increase the possibilities of their devices. On the other hand, it is more interesting for application developers to write software compatible with a certain OS, the more consumers are using it. The indirect network effects are quite obvious as each group of users cares about the number of users on the other side. The pricing strategy of Microsoft seems to endorse the first impression of an MSP. While users were charged to get a version of the software (though indirectly trough PC manufacturers as intermediate agents), application developers were charged almost nothing. They were even subsidised in one way or another by Microsoft which was actively encouraging the writing of Windows compatible applications.28 (Although some of the most popular applications were written by Microsoft itself). This course of action could fit the pattern of a non-neutral pricing strategy. From these descriptions it seems quite clear that Windows satisfies all the characteristics of a MSP from section II. There are more distinct user groups, between which network effects are present. And for the internalisation of these effects, both groups need the operating system as an intermediary. Microsoft charges different sides different prices in order to create demand on any of the sides and maximise the overall number of users. And through prices and agreements, each side is clearly affiliated to the platform. Accordingly, software in general and operating systems in particular are an often cited example of MSPs.
3. THE MARKET DEFINITION
During the described Microsoft cases, the relevant markets were defined as being the ‘market for PC OS’ (in the E.U.) and the ‘market for OS for Intel-compatible desktop PCs’ (in the U.S.). Moreover, according markets for media players and web browser were defined. Obviously, both competition agencies came to practically the same conclusion
27 (Evans & Schmalensee, 2005) 28 (Evans, 2003) p. 352 15 on behalf of the relevant market in question. And their reasoning was very similar as well. In the U.S., Apple’s OS was excluded from the relevant market since the DOJ saw no real substitutability between both software products, using the product characteristics as a method to define the market. Similarly, the EC concluded that PC OS could not be used as server OS, which would form a separate market on its own.29 Furthermore, on the demand side, the DOJ found it unlikely that non-desktop devices would be part of the market for PC OS, since it considered it not credible that a 5% - 10% price increase for Windows would lead a significant amount of users to switch the product. It should be noted that this argument actually treated the question whether consumers would switch devices not directly if they were to switch OS. However, manufacturers (the direct clients of Windows) indicated that such a price increase would not induce them to change the OS they used on their devices.30 Finally, on the supply side, both agencies came to the conclusion that it was unlikely that other firms could easily step in and offer a comparable product than Microsoft’s OS. The explanation was the alleged “applications barrier to entry”. To effectively challenge Windows OS, a potential rival product would have to offer a considerable amount of compatible applications, equivalent to the most popular applications for Windows, and this right from the start. Possible competitors could not engage in developing and supplying a PC OS as well as the required applications without bearing substantial risks and costs.
By some, this relevant market definition was viewed to be too narrow. The emphasis on the relations between Windows and PC manufacturers was criticised for ignoring the relationship between Microsoft and ISVs (independent software vendors).31 Likewise, Microsoft criticised the relevant market definition as to static and inappropriate for the fast evolving and dynamic nature of the industry. The view that there were no close substitutes for Windows would only hold if the number of applications available for software products would be fixed. This, however, would not be the case since numerous developers would write applications, not only Microsoft. Hence, it would be absolutely possible that new applications were written for rival software or
29 (Rubinfeld, 2003) (Gil-Molto, 2008) 30 (Rubinfeld, 2003), a similar reasoning was applied in Europe. 31 (Economides, 2001) 16 that existing applications would be adapted to them.32 Likewise, Economides found that “The dynamic view of market definition invites an examination of the incentives that ISVs have to create such applications”33 Microsoft claimed that the relevant market was in fact the market for software platforms as such, offering a platform to application developers and users. Operating systems were just one of these platforms but not the only one. Other middleware would serve the same purpose. Otherwise, Microsoft would not have needed to take actions to defend its OS against rivals such as Netscape Navigator.34 Ultimately, Microsoft tried to show it would face pricing constraints. Using a short-term model it claimed it would have priced its OS tremendously higher, were it to have possessed monopoly power. Since it did not, there must have been other important competitors imposing this price constraint. Hence, the relevant market had to be wider than the one alleged by authorities.35
Albeit the clear signs that Windows could be seen as a MSP, the definition of the relevant markets was based on rather traditional single-sided reasoning. The main focus were product characteristics and functionalities. Apple was excluded from the defined market (partly) on the basis of usage shares. The logic of a (one-sided) SSNIP test was applied by a kind of questioning of PC manufacturers whether a price increase would induce them to change the OS used on their devices. Only by referring to the ‘applications barrier to entry’ authorities showed that the present network effects did not escape their assessment. Despite this consideration of the special nature of the product under investigation, both competition agencies defined a quite narrow relevant market, focusing on OS as an input for PC manufacturers, ignoring the side of application developers. Further, they defined similar narrowly the respective impacted applications, namely separate markets for web browsers and media players. Again, by recognising these markets as complementary, it appears clear that the competition authorities were to some extend aware of the interdependencies between these products, but did not perceived them a MSP.
32 (Rubinfeld, 2003) (Economides, 2001) 33 (Economides, 2001) p. 14 34 (Rubinfeld, 2003) 35 (Rubinfeld, 2003) 17
The view of a single market for operating systems was not really challenged by Microsoft at first. Only later in the process, as an attempt to defend its actions, the company argued that these markets were defined too narrowly. Microsoft stated that applications were written for a whole range of software products other than Windows. Moreover, it claimed that all these products would serve as a platform between users and application developers, and that this platform functionality was the real economic service provided. Although these arguments come already very close to the meanwhile adopted description of MSPs, both parties, the competition authorities and Microsoft, were lacking a pronounced perception and awareness of the nature of MSPs.
This incomplete view of the character of these software products may be due to the fact that the meanwhile prominent literature on MSPs had not yet emerged at the time of the investigations. Yet, the European browser case stared only in 2009, at a time when already a lot of academic attention was devoted to MSPs. Still, the markets were defined in the same way. This commitment to the previous market definition could be due to the desire of being consistent with the previous investigations and not to undermine the reasoning in these cases. These defined markets could as well have been reflecting in an authentic way the economic reality. Whether these defined markets were appropriate or not it not of interest in this analysis.
18
IV. GOOGLE’S STRATEGY
1. THE GOOGLE UNIVERSE AND BUSINESS MODEL
Google was created at the turn of the millennium. Its initial activity was performing an internet search engine. By now, the company has evolved into being one of the most influential technology and internet firms. Google Search is the most successful search engine in the world.36 And Google expanded its field of activity in a considerable way, offering now a whole range of internet services including email accounts, map services, online videos, cloud computing, software, etc. Its revenues stem primarily from advertisement which generates around 77% of total revenues.37 These revenues include not just the mere offering of advertising space but also the revenues for key words firms buy in online search. This is a feature that distinguishes Google from some of its perceived competitors, for instance Apple, Amazon or Microsoft. Google does not primarily sell hardware (phones, PCs, tablets, etc.) or software to generate income. It’s business model instead is focussed on attracting internet traffic to its websites, applications and services. By owning highly frequented sites it is able to charge higher prices for advertising spaces and keywords. However, despite the fact that Google has a vast offer of websites and services, its core product and cash cow remains Google Search. To protect this highly profitable business and prepare the ground for further growth, Google tries to lock in as many internet users as possible in its online ecosystem.38 By linking and combining its offers to a more varied and all inclusive product, it aims to attract users, keep them using Google’s services and increase the monetary value of its additional services and websites. However, some market participants and observers regard this course of action as possibly anti-competitive. A widespread claim is that Google tries to leverage its market power in the online search market into other spheres of online activities in order to promote own services and prevent competition from secondary markets. By tying and bundling its services together it would abuse the dominant position of Google Search
36 http://www.statista.com/statistics/216573/worldwide-market-share-of-search-engines/ 37 https://abc.xyz/investor/news/earnings/2016/Q1_alphabet_earnings/ 38 (Auer, 2016), http://arstechnica.com/gadgets/2013/10/googles-iron-grip-on-android-controlling- open-source-by-any-means-necessary/ 19 which would be an infringement of competition law. Some examples of Google’s conduct in this regard are given hereafter. Google is blamed to favour its own services in its online search engine. Hence, Google services would get beneficial placements in the list of results and would benefit from an improved format. Accordingly, Google Maps (a web mapping service) appears with an oversized preview of the location researched, Google Shopping (a specialised or vertical search engine for products) appears with depicted images and product information, YouTube results appear with integrated videos ready to be played, etc.39 By this behaviour, Google would enable its services to become popular by leading a considerable amount of internet traffic to them on a free of effort basis. As a consequence, potentially more relevant rival services are less visible and users are less likely to click on them. Another accusation consists in the use of other websites’ content for Google’s own vertical search engines (e.g. Google News: Articles from news publishers, or Google Places: a search engine for local businesses) In order to stop this use by Google, to which internet publishers may have never agreed on, the only way for them would be to opt out from all Google services, including Google Search. This could reveal itself as an unfeasible option for several internet websites. The last two complaints relate to Google’s online advertisement business. Google is accused of forcing advertisers to exclusively lead online advertising campaigns on its AdWords40 service if they want to advertise on Google Search. And furthermore, Google would prevent internet content publishers (basically any site) from using rivals to its AdSense service in order to sell advertisement on their sites.41
2. THE ANDROID SOFTWARE
As seen above, Google proceeds in various ways to link its services and to promote them. This thesis will underlay the specific case of Google’s use of its mobile operating system (mOS) Android. This conduct is currently under investigation by the European
39 (Edelmann, 2015) 40 Ad Words is a service provided by Google for firms wanting to purchase advertising possibilities on the internet. Ad Sense, on the other hand, is a service for owners of websites to sell their advertising space to advertisers. 41 (Edelmann, 2015) (MEMO/13/382, European Commission) 20
Commission (EC). Before considering the Commission’s concerns, the way Android works and its role in the Google universe will be examined.
Android is a company founded in 2003 with the aim of developing an operating system for mobile devices. In 2005, the company was bought by Google and in 2007 (the year the first iPhone came on the market), Google launched the Android Open Source Project (AOSP). Thereby, the source code of the mOS was made freely available. Simultaneously, Google founded the Open Handset Alliance (OHA), a consortium of hardware, software and telecommunication firms. The goal of the OHA is to oversee the project and promote further open source standards for the Android software and mobile devices. From this regard, the AOSP comprises more than the sole operating system. The AOSP is perceived as being composed of the mOS, middleware (particularly app stores) and applications to run on the mOS.42 In 2008, the first smartphone running on Android was released. Since then, Android has become the most widely used mOS in the world. About 290 million smart phones sold in the first quarter of 2016 were Android devices, giving it a share of around 80%.43 Furthermore, the number of available applications on Google Play has recently overtaken the number available for Apple’s iOS, the long time leader in this field.44 These figures illustrate the immense success of Android in one of the most important segments of the internet economy. In 2014, the number of people using the internet on a mobile device surpassed for the first time that of users on a fixed one.45 Consequently, a lot of application developers have engaged in developing applications compatible with the Android mOS (cf. Figures on Applications above). Google itself is not only developing the mOS but is contributing as well to the abundance of applications available for it. However, some of these applications are proprietary, i.e. the source code is not free (e.g. its app store Google Play, YouTube, Gmail, etc.). Furthermore, Google is switching more and more from developing applications in the open source form (AOSP)to further develop them as proprietary applications. This means which were initially developed under open source licenses, are now being
42 (Auer, 2016) 43 http://www.statista.com/statistics/266136/global-market-share-held-by-smartphone-operating- systems/ 44 http://www.zdnet.com/article/ios-versus-android-apple-app-store-versus-google-play-here-comes- the-next-battle-in-the-app-wars/ 45 http://www.smartinsights.com/mobile-marketing/mobile-marketing-analytics/mobile-marketing- statistics/ 21 developed as Google’s own proprietary applications. (e.g. Google Search application, Google Music, Google Calendar, etc.)46 While these different parts of mOS, middleware and applications are definitely interrelated an inclusion into a single product definition seems nonetheless questionable. In the following, the term Android will always refer to the sole mOS.
3. ANTITRUST CONCERNS AND EUROPEAN COMMISSION’S INVESTIGATION
General antitrust concerns
The precise antitrust concerns related to Android lead to three accusations towards Google. According to these, Google’s use of Android would prevent rival applications from gaining ground, prevent the growth of rival mOS and finally would prevent the creation of viable alternative versions of Androids (so-called ‘forks’). The source of these antitrust concerns stems from the closed part of Android, namely Google’s proprietary applications. Since some of these applications are quite important to the functioning of the platform (e.g. Google Play offers by far the most applications for Android) or are highly popular (YouTube) and face practically no close substitutes, these applications could be considered as ‘must-have-applications’. A lot of hardware makers use Android due to its free accessibility and they want to offer their clients ready to use products. Hence, they will want to use these must-have-applications and possibly want them to be pre-installed on their device.
To be able to pre-install these proprietary applications, device manufacturers enter into agreements with Google to license these applications. These agreements are known as Google’s Mobile Application Distribution Agreements (MADA). However, these agreements oblige the manufacturers to install a whole suite of Google applications. Hence, a lot of Google’s applications are only available as a bundle.47 Manufacturers could feel the need to pre-install this bundle of applications in order to have a commercially viable product. Not only are they required to pre-install certain Google applications, but some of them also have to be placed in prominent positions on
46 http://arstechnica.com/gadgets/2013/10/googles-iron-grip-on-android-controlling-open-source-by- any-means-necessary/ 47 (Edelmann, 2015)(Auer, 2016) 22 the device’s user interface. Moreover, some Google applications have to be set as the default service on the device48. Although other applications and services are allowed and can be downloaded by users, there is a strong suspicion that the privileged placement and default setting prevents users from doing so. Since some services are already available, users would see no need to have redundant services on their device and hence, would not engage in searching for possibly more apt rival offers.
An example for this accusation is the case of the Korean search engines Daum and Naver. In 2011, they filed complaint against Google, claiming that the imposing Google Search as default search engine on the growing number of Android devices, would make it impossible to convince consumers to switch.49 Another example is given by the fate of Skyhook, a company offering location based services (for instance, providing location data even if the user has no GPS function). In order to promote its own location service (Google’s Network Location Provider), it imposed manufacturers to use it as default. As a consequence, major manufacturers which were so far using the Skyhook service, switched to the Google service.50
Moreover, Google is accused of preventing rival mOS to grow by tying its Android software to popular applications. In fact, it refuses to supply meta-data for its YouTube website so that rival mOS are unable to offer a competitive YouTube application. Since YouTube is one of the most visited websites and an accordingly popular mobile application this constitutes a serious competitive disadvantage for rivals. Microsoft filed complaint against this behaviour with the EC in March 2011.51
The last accusation is the prevention of viable alternative Android versions (forks). Some see these forks as the fiercest potential competition for Google’s Android software.52 Again, its power over its proprietary applications is the mean by which Google achieves this goal. Google has brought together major device manufacturers and
48 (Edelmann, 2015)(Auer, 2016) 49 (Edelmann, 2015), http://www.nytimes.com/2011/04/16/technology/16google.html?_r=0 50 (Edelmann, 2015), http://arstechnica.com/tech-policy/2010/09/skyhook-google-made-oems-break- business-deals-ripped-patents/ 51 http://www.foxnews.com/tech/2011/03/31/microsoft-files-antitrust-suit-google.html 52 http://time.com/money/3093863/google-android-biggst-threat-aosp/ http://arstechnica.com/gadgets/2013/10/googles-iron-grip-on-android-controlling-open-source-by-any- means-necessary/ 23 software developers in the OHA. It eases their dealing with Android and its Google applications but binds them to refrain from developing alternative Android software.
While many observers and market participants share these views of Google’s anti- competitive behaviour, there are of course other voices downplaying these allegations.53 Firstly, the claim that Google would foreclose the carrying of other applications on Android devices is criticised since Google would not force manufacturers to use its applications. For instance, Amazon’s Kindle runs on an Android based operating system, and comes without any Google application. Another example would be Yandex, a Russian search company which offers a whole application suite for Android devices, which is pre-installed by a Russian manufacturer. Furthermore, users are free to download and use any application they like on their devices, even if Google applications are pre-installed. The view that consumers would hesitate to do so in order to save on their device’s storage capacity is mostly seen as invalid, since an average application takes up only about 0.07% of an average device’s capacity. Secondly, the allegation that devices without Google applications would be commercially unviable and would therefore, among other things, prevent other mOS from spreading, seems again less convincing with the examples of Yandex & Amazon in mind. An additional example would be the case of China where 70% of (mostly forked) Android devices are used without any Google applications. Finally, the prevention of forks and the encouragement to pre-install a defined set of Google applications could also be seen as the standard way of competing in this particular industry. Other mobile devices offered by Apple, Black-Berry or Microsoft all come with a pre-installed set of applications, offering consumers a complete device and a so called “Apple experience” or “Microsoft experience”. In order to be able to compete with these firms, and to meet user’s expectations, Google has to ensure that Android devices come with the same basic functionalities and that the underlying mOS is compatible with a maximum of applications.
The European Commission’s Investigation The European Commission’s (EC) investigation into antitrust allegations about Google started on the 30th November 2010, following complaints by search service providers.54
53 http://www.project-disco.org/competition/030314-observations-on-the-economics-of-mobile-app- suite-bundling/#.VxDowzB942x 24
Initially, the complaints were only concerned about an alleged abuse of dominance in online search. By March 2013, the EC notified Google that it had isolated 4 concerns about Google’s behaviour in online search.55 At the same time, an anti-Google lobbying group, Fairsearch, filed complaint about Google’s Android software.56 And in April 2013, the EC acknowledged that it was examining whether these practices would also require a deeper investigation. On the 15th April 2015, the EC launched a separate investigation apart from the investigation of the online search concerns [IP2015]. Finally, on the 20th April 2016, the EC sent a statement of objections to Google where it expressed its views about Google’s alleged dominant position in the markets for general internet search services, licensable smart mobile operating systems and app stores for the Android mobile operating system. More precisely, the EC accuses Google of breaching EU competition law by: 1) Requiring the pre-installation of Google applications and the default setting of some of these applications on Android devices as a condition to license Google proprietary applications. 2) Hindering the distribution of alternative Android systems. 3) Giving financial incentives to manufacturers to exclusively pre-install Google Search on their devices.57
54 (Press Release IP/10/1624, European Commission) 55 (Press Release IP/13/371, European Commission) 56 http://fairsearch.org/fairsearch-announces-complaint-in-eu-on-googles-anti-competitive-mobile- strategy/ http://fairsearch.org/list-of-complaints-and-complainants/ 57 (MEMO/16/1484, European Commission) 25
V. MARKET DEFINITION IN THE ANDROID CASE
Before getting started, the reader should note that the geographical dimension is irrelevant in this case. The market can reasonably be perceived as a worldwide one. Furthermore, in contrast to the case of Microsoft’s Windows OS, this case is concerned with software for mobile devices. The main insights remain valid whether one would apply them to classical desktop or the mobile world. Clearly, devices or software designed for one sphere are useless in the other, justifying a separate treatment of both types. However, the sphere of desktop devices and software could be seen as a kind of submarket in the competition for the path between users and the internet.
As the emergence and growth of internet firms led to an increased interest in this field, as well as in the accompanying antitrust cases, some academic works have attended to the matter of market definition in these specific cases. Especially Google’s conduct and its antitrust cases evoked the interest of scholars. 58 These contributions were mostly interested in the topic of the search engine industry. Regardless whether their focus is on general search59 or specialised search for shopping60, they urge to take into account the multi-sided nature of these undertakings when thinking about the relevant market. Furthermore, (Broos & Ramos, 2015) and (Dewenter, Rösch, & Terschüren, 2014) explicitly mention the importance of the type of a platform (the role of observability and the distinction between transaction and non-transaction platforms) in correctly identifying the relevant market. In line with this approach, this section will assess the platform nature of Android, why it is able to charge no prices and how other software and services are related to it. Consequently, an attempt will be made to detect the competitive constraints all these products face and how the relevant markets might look like. Finally, the question will be answered how these findings compare to the market definition done by the European Commission. Additionally, some differences between this case and the former Microsoft case will be considered.
58 (Ratliff & Rubinfeld, 2014) (Broos & Ramos, 2015) (Dewenter, Rösch, & Terschüren, 2014) 59 (Dewenter, Rösch, & Terschüren, 2014) (Ratliff & Rubinfeld, 2014) 60 (Broos & Ramos, 2015) 26
1. ANDROID AS AN MULTI-SIDED PLATFORM
Accordingly, the starting point is to determine which user groups are affiliated to Android, which externalities are present between them and in which way Android enables them to interact.61 At first sight, Android seems to serve three different kinds of users. Manufacturers use it as a component to their devices. Buyers of these devices use it as middleware between additional software they want to use and the underlying hardware. Finally, application developers use it as a way to access consumers searching for additional software for their devices. Hence, unlike most illustrative examples, Android seems to be a three- sided platform rather than a two-sided one. To start, the more ‘classical’ relationship between consumers and applications. As already mentioned, a mOS, or any operating system enables users to operate additional software / applications 62 on their device. Developers are able to sell their product to users. The latter clearly value the presence of developers on the other side as a higher number of developers increases the offer of applications available. As consumers are not directly interested in developers but in applications and since the number of developers is a proxy for the number of applications, the terms ‘developers’ and ‘applications’ could be used synonymously. Developers, in the same way, value the presence of users on the other side since a platform with a high number of affiliated users increases the number of potential buyers of their applications. Thus, positive indirect network effects flow in both directions, from users to developers and from developers to users. Due to the open- source nature of Android, the prices on both sides are zero. This pricing structure might be seen as non-neutral. An increase of the price on one side with a simultaneous equivalent decrease on the other side is likely to affect the overall number of participants on both sides. On the issue of type of the platform, the matter appears less clear. Not only are the participating sides not charged any access fee, but the interaction between both sides seems to take place without any prices as well, hinting that we would be confronted with an non-transaction platform. The overwhelming majority, around 95%, of applications is given away for free.63 However, the interaction can very well be assessed as a
61 (Filistrucchi et al., 2012) 62 Both terms mean in fact the same thing. However, mobile applications are only useful on mobile devices. 63 http://www.gartner.com/newsroom/id/2648515 27 transaction in the sense of Filistrucchi. To clarify this statement, it appears advisable to leave for a moment the sphere of Android and mOS and look back in time to the days of the Microsoft case for instance. A consumer who bought a PC with an installed desktop OS, like Windows, had the possibility to add applications to his device buy buying such software. Typically, this would had involved visiting a PC shop and buying the desired software on a CD. Thus, with the intermediate of the PC shop, this takes clearly the form of an ordinary transaction. The application developer sells its software to the consumer. The same logic applies to the case of OS or mOS today. The more powerful internet connections nowadays offset the need for an intermediate agent such as the PC shop, consumers are able to download the requested software directly from a website. Therefore, even with zero prices, this constitutes a transaction, which is observable as well and hence could enable the platform to charge usage fees. In the case of downloads from a website, the observability is quite straightforward. And even in the ‘offline’ version of the example, an OS producer could require royalties from developers for every application sold. In this way, it could observe the transaction as well (though in an indirect way). Although such usage fees were not a strategy pursued by Microsoft, it nevertheless would have been possible. For these reasons, an OS or mOS can be assigned in the category of transaction platforms.
The second relationship of interest is the interdependence between device manufacturers and application developers. Manufacturers will value a mOS more if more developers will write applications compatible with its software. On the other hand, developers are interested in reaching a maximum of users. Therefore, they value the number of manufacturers opting for a specific mOS since the higher number of manufacturers will enable them to reach more consumers. Hence, positive network effects are present. The mOS enables the applications to access the hardware for the device. And through the higher number of applications for an mOS, the functionality of a device increases for end-users. Again, neither side is charged any monetary price due to the open-source nature of Android. Whether the interaction between device manufacturers and application developers can be seen as observable is not immediately apparent. Since the analysis will not depend on this aspect, this question will be left unanswered.
28
Finally, between manufacturers and users seem to be no externalities. Users surely value a greater number of manufacturers offering different devices. But this is a feature common to any product and not particular induced by the mOS. Users do not opt for a certain mOS in order to get a certain phone. As well an mOS does not enable manufacturers to sell their devices to consumers, it is merely one component of the product. At most, mOS may be considered as one among many quality aspects of a device. In fact, both groups are interdependent in another way. By choosing their device, users choose their mOS from which they interact with applications. And it is through the sales to consumers that manufacturers develop their value for applications on the other side of a mOS. In a more simplistic view, users and manufacturer could possibly be seen as composing one side on their own. This would restore the more familiar notion of a two- sided platform and facilitate the conceptual treatment. Of course, this view would leave out some aspects and not reflect the economic reality. Figure 1 summarises the above assessment.
Figure 1
All this reasoning would also apply approximately to the case of Microsoft’s Windows about 15 years ago, with one substantial difference. At that time Microsoft would charge manufacturers a monetary price for using its OS. In the same way as it does today for its OS or its mOS ‘Windows Phone’. Also, users would be charged directly for additional applications by the developers. Thus, that model of an OS as a platform is a commercially viable MSP on its own since it generates revenues on at least one side (the side of
29 manufacturers or users).64 In other words, Windows has a ‘profit centre’ on one side enabling it to not charge the other side or even to subsidise it (the side of application developers). With Android operating as an open-source program, such a ‘profit centre’ is absent on the Android platform. No side is generating any revenue. It appears clear that there must be more to it than this narrow depiction. Although Google tries to give itself the appearance of a more philanthropic company which tries not to be evil65 it seems implausible that it would invest considerable resources in the creation and the further development of such a software without the prospect of revenues and profits somewhere. Another interesting aspect is the fact that applications, or at least most of them, offer their services for free. This hints that the way applications are operated is also different from the time of the Microsoft case. In fact, nearly the whole internet industry seems to be driven by advertisement revenues. As outlined in section IV, the entire business model of Google is focused on attracting as much internet traffic on its sites and services as possible. This is indeed they key factor, internet traffic that enables businesses to sell advertising.
2. THE WHOLE PICTURE
Android is just one part in this wider mosaic which are destined to lead internet users on Google’s services. Consequently, the picture does not stop at the side of applications. As the absence of prices in the case of Android and the description of Google’s overall business strategy in Section IV indicate, the picture is a bit more complex than this three-sided platform. Android is one part of the path between users and the content and services on the internet. By buying a mobile device, they purchase the hardware which gives them the technical base for using additional software. One kind of such additional software is thereby of paramount importance, namely mobile browsers enabling the access to and the interaction of the content and services provided on the internet. Albeit a mobile browser is just one example of such additional software it is absolutely necessary in order to reach other software. This because nearly every service or content
64 End-users could pay the price in any case, when one assumes that manufacturers are able to pass the price through on them. 65 https://en.wikipedia.org/wiki/Don%27t_be_evil 30 is by now supplied via the internet. Hence it is a basic and vital function a device should provide and nearly all devices come with a pre-loaded browser. Other products offering a similar service in this regard are app stores. This kind of services enable consumers to access and download desired mobile applications (which are one form of additional software for a device). Even if no browser would be pre- installed, a software version of an app-store (i.e. the app store under the better known form of a mobile application) would enable the user to access firstly all applications offered on this app-store, and further, by downloading a mobile browser via this app- store, users would be able to reach all content they please. Figure 2 illustrates the path users have to take to reach the content and services of the internet.
Figure 2
As this figure highlights, the link between users and the internet is not just one single MSP but instead it is composed of 3 interrelated platforms.66
The role of mobile applications Most services and websites on the internet fund themselves through advertisement. They again often rely on a platform model, further complicating the system of MSPs between users and the actual content on the internet. Either by producing content on their own (like newspapers, software producers, game developers, etc.) or by linking users to such content (search engines, comparison portals, etc.) they attract the attention of users. This in turn enables them sell advertising space or generate other
66 This relation between users and the internet is the general path between these two sides, independent of the business model particular firm pursues in this field. 31 forms of advertising revenues. Thus they are a platform enabling interactions between consumers, advertisers and possibly content providers. Advertisers value a high number of users visiting a website. Whether consumers for their part value advertisers seems unclear. The one externality flowing from users to advertisers is already enough to detect the platform structure of these websites. For the purpose of the present thesis, however, these platforms will not be treated further. The focus will be on the three MSPs of interest. Furthermore, no distinction between the different types of websites will be made. Whether they produce content on their own, only link users to them or provide another kind of content is not relevant. Therefore, they will only be referred to as the ‘content and services’ which populate the internet and users seek to reach.
For the providers of this content, the emergence of smart mobile devices has created another form of reaching users on their mobile devices. Namely, the format of a mobile application. These applications are software packages performing a specific task on a device. In other words, these mobile applications provide content providers with an additional mean to reach users apart from their initial website. For the following analysis, a distinction between the various forms of mobile applications seems advisable at this point.
Broadly speaking, one could distinguish two different categories. The first one will be called hereafter ‘genuine applications’. This category is composed of applications which offer real content of their own (independent of any website). Here, the software is the intended content or service. Examples would be the plethora of gaming applications, fitness applications which track and record someone’s workout, web browsers67 and others. In fact, here the application is the MSP itself. The second group of applications can be termed ‘redirecting applications’. In other words, these applications provide an access to content or services that is already available in some other form. The difference to the category above is that with these applications, the software itself is not the actually desired content, but rather a possibility to reach this content. Examples would be applications for social media, online search, messenger services, video services, newspapers, betting services etc.
67 This might be confusing at first sight, since the service a browser provides is exactly to redirect users on other websites. However, with a browser, the redirecting ist he actual service. The second category of ‚redirecting applications‘, in contrast are just one way to reach the actual service which is on a specific website. 32
‘Redirecting applications’ have in common that the application itself only functions as a way of reaching the actual MSP. Therefore, they are not the only method to participate in these platforms, but those could as well be reached by normal browsers via their websites.68
3. MARKETS FOR DIFFERENT PLATFORMS
As already stated above, the main interest is the interaction of mOS, browsers and app stores in their common destiny to offer users a link to the internet. Since the role of Android as an mOS was already laid out, a closer look is taken at the two other platforms before assessing the competitive constraints they face.
The nature of browsers and app stores Browsers are platforms enabling users to access websites on the internet. Users clearly value a huge number of websites. On the other side, it is also very plausible that owners of websites value the number of users visiting their website. Hence, externalities are present and the interaction between both groups is clearly observable since the browser actively executes it. Therefore, browsers can be seen as transaction platforms. A piece of evidence to this finding is the fact that browsers are able to charge usage fees. Consider the example of Mozilla Firefox, a freely available browser. Though no access fee is charged to any side, the company is able to charge usage fees to websites. More precisely, search engines sign contracts to be set as default option and pay royalties depending on the amount of traffic the browser leads to their website.69 App-stores on their turn, deliver to developers of mobile applications the distribution of their application on the website of the app store, as well as the server capacity for the applications to be downloaded. The users are provided with a kind of vertical search engine. The app-store enables them to search for desired applications and download them directly from the website. Most app stores are also available in the form of an online application themselves. This characterises these applications as being part of the
68 (Körber, 2014) already perceives such a difference between mobile applications (p. 13). However, he does not further pursues this thought. 69 http://www.computerworld.com/article/2850464/mozilla-tells-google-its-not-you-anymore-its- yahoo.html Interestingly, Google entered the field of browsers as well with an open-source product, its Chrome browser. 33
‘redirecting applications’. The externalities flowing between both sides seem again pretty clear. Users value app stores with a high number of applications available, developers value app-stores with a lot of traffic by users. Again, the interaction between both groups is observable and app stores are able to charge usage fees. Most app stores charge developers a share of the sale price of an app.70 Thus, they as well are transaction platforms and the services provided on both sides are to be seen as acting in the same market. To summarise, all three platforms could be identified as transaction platforms. Each of these three should therefore be considered in participating in a single market. In other words, the services any of those platforms provide on their different sides are to be included in the same market. Rather than arguing that a service on one side is on a different market than the one provided on the other side. At this point, the question arises about whether these different platforms constitute markets on their own, or whether relevant markets should be defined comprising two or even all three of them.
The market for mOS For the case of mOS, the specific nature of such a software (it offers the operating and handling of a device and its additional software) seems to suggest that no other product could offer the same functionality, except software explicitly written for this purpose.71 Which precise mOS products are to be included in this market of mOS is not clear. Apart from the freely available products such as Android or Symbian and Windows Phone which can be licensed for royalties, two other mOS exist.72 Apple’s iOS and BlackBerry OS, which are on their turn integrated parts of manufacturing firms, are not available for other manufacturers. At first sight, this circumstance should lead to the exclusion of these two products from the market since there is no substitutability for manufacturers. On the side of application developers however, they are clearly substitutes, since developers have to decide for which mOS their applications are going to be compatible with. In that view, developers have to affiliate with one or more mOS platforms to reach consumers. Assuming that every consumer would only use one device of a certain period of time, users could be seen as affiliating only to one mOS. Thus, mOS would be
70 http://www.techrepublic.com/blog/software-engineer/app-store-fees-percentages-and-payouts-what- developers-need-to-know/ 71 The fact that at the beginning of the mobile area so many manufacturers darted for the Android software instead of using or altering an already existing software seems to underpin this view. 72 This list is not exhaustive 34 competing against each other to provide applications with consumers. [users would then be seen as single-homing while developers would multi-home.] This would favour the inclusion of all mOS products into one market. More on the question whether to include iOS and BlackBerry OS will follow in the remainder of this section.
Are browsers and app stores competing against each other? For the two other platforms, browsers and app-stores, the situation appears even trickier. Regarding their mere technical features, they appear fundamentally different. On the one hand, a browser is a software on a device necessary to access content outside of this device. Thus, it would classify as a ‘genuine application’ (a software offering a genuine functionality). On the other side, an app-store is above all a website offering specific services. Most app-stores offer simultaneously their service in the form of an application. These applications would therefore figure as ‘redirecting applications’. Despite these different technical aspects, they provide the same or very similar functionality. As apparent from figure 2, both platforms enable users to access content and services on the internet. However, the sphere of content accessible differs between both platforms. An app-store enables a user to access ‘genuine applications’ and ‘redirecting applications’. Thus, all software offered under the form of a mobile application and all websites offering their content or service as a mobile application are accessible through an app-store. Browsers make all websites accessible as well as software available via websites. Some mobile applications are accessible in this way, by directly downloading them from the website of the developer. Most mobile applications, however, rely on app-stores for their distribution. Hence, the common sphere of both platforms is the content and the services provided by ‘redirecting applications’ and their corresponding websites. For this part of internet content, they constitute substitutes for users. The best example illustrating this view would be the case of a newspaper offering its content as a website and as an application. From the view of a consumer it makes little or no difference in terms of form and substance whether he accesses the newspaper on its website or via the application. For providers of this kind of content, both types of platforms are clearly substitutes since they rely on both in order to be reached by users. Furthermore, languages as HTML5 make it easier to design websites that offer the content in an attractive and interactive
35 manner. This further strengthens the substitutability between the format of applications and websites.73 Are both platforms thus in the same market? The answer remains unclear, mostly due to the fact that an overwhelming number of applications are only available through app- stores.74 Thus, the content of ‘genuine applications’ is not available through the sole use of browsers. There seems to be no clear technical obstacle preventing developers to offer their applications on their own websites as some developers do and other software, like add-ons for browsers for instance are distributed in this way. The reason might be that the additional search function on app-stores makes it far more attractive to offer an application via an app-store as consumers are more likely to find it. For large applications (in terms of storage seize) developers might be reluctant to purchase the necessary server capacity to offer an mobile application via the download from their own websites. This capacity is integrated in the service of app-stores. Or it might have other reasons than these proposed. In any way, the substitutability of browsers and app- stores for accessing content on the internet (and if only the content of ‘redirecting applications’) seems to impose to take into account the competitive constraints browsers can impose on app stores when defining the relevant market for these app store services. Assessing which firms and platforms would operate within a market for app-stores (or possibly a wider market for ‘internet access’) faces a similar question as before with mOS. Should products for specific mOS be included? Apart from app-stores for Android like Google Play, Amazon App-store for Android, Slide Me or Aptoide, there are other app-stores. Examples are the Microsoft store, offering applications that run on Windows Phone. Or Apple’s iOS App-store and BlackBerry World which offer applications for the respective closed systems of these firms. As applications are additional software, intended to be used on a device, they have to be written to be compatible with specific mOSs. An application written for Android will not run on an iPhone, powered by iOS. Therefore, app-stores often specialise on one kind of applications. This might suggest that there are different markets for different app-stores depending on the targeted mOS. From the perspective of users, app-stores focusing on different mOS are clearly no substitutes. For developers, they appear obviously as substitutes. Most application developers are ‘multi-homing’ in the sense that they write
73 https://www.hswsolutions.com/services/mobile-web-development/mobile-website-vs-apps/ 74 And many websites do not supply an own mobile application 36 their applications compatible with at least two different mOS.75 Therefore, all app-stores are competing with each other to offer application developers the access to users. The choice of focusing on a single mOS appears mostly as a business strategy of vertical differentiation. This vertical differentiation takes place in terms of the number of reachable users (the number of people using a specific mOS on their device) and in terms of the kind of users (Apple seems to attract high-end consumers, which spend more time using applications and spending more money for them).76
4. COMPETITION BETWEEN SYSTEMS
Since, app-stores for iOS or Windows phones are provided by the same firm which also provides the mOS, the markets for mOS and app-stores are clearly interdependent. This business choice of app-stores on focusing on specific mOS leads to another level of competition. Recall figure 2, which illustrates that all 3 types of platforms are different parts of the same link between end-users and the internet with its content and services. If we were to introduce Apple for instance to this picture, it would appear clear that Apple with its integrated organisational form pursuits the same strategy as Google. Although they differ tremendously in terms of their organisational setting, the goal of both, Google and Apple, seems to be pretty similar. Both try to provide users with the link to the internet. Google does so using a complex system of different interacting MSPs, where the individual parts are open for other firms and platforms. For Google, its starting point is its flagship services (with Search as the most obvious example). Through advertising these services generate Google’s revenues. Therefore, Google tries to get some control over the way people access the internet in order to lead them to its own websites and services. In contrast, Apple started as a seller of its own electronic devices and corresponding software. As an integrated firm, it incorporates all the products necessary to provide the link to the internet for consumers. Hence, it uses the same kind of system of MSPs as Google and others, but with the difference that its system is closed in itself and not open to other firms. Its source of revenues is however located on the other end of the link. It
75 (Körber, 2014) p. 19 76 https://www.appannie.com/insights/market-data/app-annie-index-market-q3-2013/ 37 charges users considerable amounts for its devices, which consumers value so much because (beside of its marketing aspects) they offer an high-performance product to access the internet. Thus, although they are characterised by different business models, they seem to be competing for this same link between users and the internet. As several works have stressed, it is completely possible that different business models are competing with each other.77 From this perspective, the above markets for mOS and app-stores could be seen as kind of submarkets in this more overall competition. In this regard, Apple exerts surely competitive effects on all these markets and they should be taken into account at each step of the link and each distinct submarket.
Another possible piece of evidence (sustaining the above perception of a competition for the link between users and the internet) would be the circumstance that several prominent firms are trying to expand their grip along this link. A first example would be Google itself. Starting with a search engine and other services, it reached out for the way users access its service by launching its open-source projects Android and Google Chrome. Moreover, through its acquisition of Motorola Mobility in 2011, it entered the sphere of device manufacturers, completing its presence on all distinct components of the link to the internet. With its Google Fiber branch, providing broadband internet access in various cities, it seems to further deepening this strategy. Another example would be Microsoft which was for some time active merely in the field of mOS and additional software but it extended its reach as well. With Skype, Bing, etc. it firstly entered the sphere of content and services and by its 2013 acquisition of Nokia, a device manufacturer, it completed its strategic positioning along this path from users to the internet. Opposed to Google or Apple, Microsoft tries to collect its revenues a bit on every point along the straight to the internet, charging money for the sale of phones, royalties for the use of its OS, and generating advertising revenues with its services. Additionally, Samsung, a device manufacturer, which already developed own additional software (browsers, app-store and other starting applications for its phones) has
77 (Broos & Ramos, 2015) 38 developed an mOS on its own, Tizen OS, which it plans on increasingly using on its devices.78 As a consequence, all these firms seem to compete, sooner or later, in all concerned areas and markets against each other, with the overall goal of offering the best link for consumers to access the internet.
5. COMPARISON TO THE MARKET DEFINITION OF THE EUROPEAN COMMISSION AND DIFFERENCES TO THE MICROSOFT CASE
How do these thoughts and perceptions of markets for Android and its adjacent software compare with the markets defined by the EC in the ongoing case? Besides the market for ‘general internet search services’ which is not of particular interest in this analysis, the Commission defined two other relevant markets. The markets for ‘licensable smart mobile operating systems’ and for ‘app stores for the Android mobile operating system’.79 Firstly, these two defined relevant markets seem to fit the above perception of different spheres of activity along the link to the internet quite well. However, the fact that the EC defines a market for ‘app stores’ rather than, let’s say ‘app- access services’, seems to indicate that the authorities do not perceive that browsers and app stores deliver to some extent the same service. The service of accessing to the content on the internet. Browsers therefore can exert significant competitive constraints on app stores. Moreover, the terms used in the definition of markets (‘licensable mOS’ and ‘app stores for Android mOS’) hints that the Commission neglects the competitive effects that firms offering a closed system, like Apple, impose on these submarkets (iOS is not licensable and its iOS app store does not offer applications for Android). In the view of the Commission, the effects from this general competition for the link between users and the internet are not significant enough to include all products, regardless of the supplying firm, in these markets.
78 http://www.computerworld.com/article/2494545/smartphones/samsung-plans-high-end-tizen-os- phone.html http://www.cnet.com/news/samsungs-tizen-set-to-launch-on-more-smartphones-this-year-report/ 79 (MEMO/16/1484, European Commission) 39
The markets defined by the Commission remind one of the markets defined in the Microsoft case several years ago. Back then, the EC defined a market for ‘PC OS’ while U.S. authorities defined a market for ‘OS for Intel-compatible desktop PCs’. Both leaving Apple out of the picture on the basis of little substitutability and low usage shares. However, a lot has changed since then. Not only has Apple grown in size but the landscape of the industry has changed as a whole. At the time the Microsoft cases started, Google was not even founded. The fact that so many services and products are provided without directly charging users (Android, Chrome, Firefox, all Android app stores, most mobile applications etc.) Cleary hints at the changed nature of the industry. The role of advertisement has increased enormously, rendering the way people reach advertisement (by reaching the content on the internet) far more important than it was 15 years ago. Back then, the offering of an OS by charging end-users / manufacturers was seen as the only, or the most reasonable way to go. Today, by offering its Windows Phone for royalties, Microsoft is the exception in the jungle of software firms (all other firms have either opted for a product given away for free to end-users or established themselves as integrated firms offering the whole system). These considerable changes the internet industries has experienced in such a short period of time might be seen as further evidence to consider the wider picture of competition taking place. The Commission has not published any reasoning behind these markets definitions. However, it could be that the EC is perceiving the competition that is taking place between various firms in an only incomplete way. Therefore it might be missing or ignoring important competitive effects on the products in question in this litigation case. This could of course have important implications. Starting the investigation with an underlying market with or without Apple’s products could obviously influence the perception of dominance in that market.
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VI. CONCLUDING REMARKS
This thesis attempted to assess and define markets for mobile operating systems like Android and interdependent adjacent software. A complex task due to the multi-sided nature of these products.
To achieve this objective, a review of the main findings of the platform literature was undertaken. Furthermore, the precedent Microsoft case was presented and an extensive description of Google’s overall business strategy was provided.
The conducted analysis highlights the interdependence of various platforms as they serve one single need by consumers, the access to the content of the internet. Mobile operating systems, mobile browsers and app stores are all three different parts on the link between users and the products and services offered on the internet. In light of this finding, the defined markets of the European commission seem to be incomplete for two reasons. First, the competitive constraints browsers and app stores might exert on each other seem to be neglected in the assessment of the authorities. Although it can be shown that they provide similar services to some extent. Due to the role mobile applications play in this game of online firms, both services, browsers as well as app stores, are one way to access content on the internet. Hence, they might be used as substitutes in various situations, both by end-users and content providers. Secondly, the Commission seems to ignore the competition going on for the general path of consumers to the world of the internet. Although firms like Google, Microsoft or Apple differ considerably in terms of their organisational setting and their precise business models, they appear to be competing in providing the same overall service: the ability for users to access the internet-content. Seeing this path as a line composed of various different products interacting with each other, it appears clear that most involved firms try to be present in each field of activity along this path. The main consequence of the ignorance of this overall competition is the exclusion of Apple’s products from the defined markets. The markets defined on this fragmented view might therefore reflect the economic reality in an only incomplete way and hence, would be inappropriate.
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