DO FREE MOBILE APPS HARM CONSUMERS? J. Gregory Sidak* ABSTRACT Google distributes proprietary applications for its open-source Android mobile operating system (OS) free of charge. Some of those applications (apps) are offered together as a suite of apps known as Google Mobile Services (GMS). Manufacturers of mobile devices can agree, pursuant to Google’s Mobile Application Distribution Agreement (MADA), to install the suite of apps on their devices at a price of zero. Some theorize that Google’s policy of offering some applications together as a suite of apps harms competitors or menaces consumer welfare. That theory is wrong. As a matter of economics, Google’s practice of distributing free mobile apps in the GMS suite benefits consumers (as well as manufacturers, mobile carriers, app developers, and advertisers) by stimulating demand, by reducing the risk of fragmentation of the Android OS, and by preventing Google’s competitors from free riding on its investment to make the Android OS and mobile apps a viable open-source competitor to closed and proprietary—“walled garden”—platforms for mobile devices. As a matter of antitrust law, Google’s distribution of apps as part of a larger whole— GMS—is lawful under the Supreme Court’s four-part test for such arrangements. Google does not force consumers to pay for apps they do not want, and the MADA’s requirements enhance competition overall. The same conclusion holds with even greater certainty under the rule-of- reason analysis for software integration that the D.C. Circuit adopted in its historic Microsoft decision. JEL: D4; D42; K21; L11; L12; L41; L86; O34 I. INTRODUCTION ............................................................................................................. 2 II. THE ECONOMICS OF TYING ARRANGEMENTS .............................................................. 4 A. Tying Usually Enhances Competition ................................................................... 4 B. Are Theoretical Models of Anticompetitive Tying Robust Enough to Justify Antitrust Intervention? ........................................................................................... 6 III. THE SUPREME COURT’S EVOLVING JURISPRUDENCE ON TYING ARRANGEMENTS ..... 9 A. Jefferson Parish ................................................................................................... 10 B. Kodak ................................................................................................................... 11 C. Illinois Tool Works ............................................................................................... 13 D. The Implicit Recognition of Efficiencies as an Affirmative Defense .................. 17 IV. THE D.C. CIRCUIT’S RULE OF REASON ANALYSIS FOR SOFTWARE INTEGRATION ... 18 A. Microsoft II .......................................................................................................... 18 B. Microsoft III ......................................................................................................... 20 1. The District Court’s Findings of Fact ............................................................ 20 2. The D.C. Circuit’s Unanimous En Banc Opinion ......................................... 21 V. THE MADA AND GOOGLE’S BUSINESS MODEL ........................................................ 25 A. The Android OS, Google Apps, and the Suite of Google Mobile Services ......... 25 * Chairman, Criterion Economics, L.L.C., Washington, D.C. Email: [email protected]. Google commissioned me to write this paper in 2014, but the views I express are solely my own, and portions of this article reprise legal and economic opinions that I first published in a 2001 article on the antitrust treatment of software integration, which Microsoft commissioned me to write during the pendency of its landmark antitrust case. © 2014 J. Gregory Sidak. All rights reserved. October 2014 J. Gregory Sidak 1. The Android OS ............................................................................................ 25 2. Google Apps .................................................................................................. 26 3. The Google Mobile Services ......................................................................... 27 B. Google’s Business Model .................................................................................... 28 1. How Does Google Monetize Its Free Apps? ................................................. 28 2. Why Did Google Enter the OS Business? ..................................................... 30 C. The MADA’s Basic Features ............................................................................... 33 D. Google’s Reasons for Offering GMS Subject to the MADA’s Restrictions ....... 34 1. Countering Intra-Platform Fragmentation ..................................................... 34 2. Meeting Consumer Expectations ................................................................... 36 3. Avoiding Free-Riding and Cherry-Picking ................................................... 36 VI. DO THE MADA’S REQUIREMENTS UNLAWFULLY RESTRAIN TRADE? ...................... 38 A. Allegations That the MADA’s Restrictions Are Unlawful .................................. 38 B. The Failure of the Prima Facie Case ................................................................... 40 C. The Benefits to Consumers, Manufacturers of Mobile Devices, and App Developers from the MADA’s Requirements ..................................................... 43 1. Benefits to Consumers ................................................................................... 43 2. Benefits to Manufacturers of Mobile Devices .............................................. 44 3. Benefits to App Developers .......................................................................... 46 VII. CONCLUSION .......................................................................................................... 49 I. INTRODUCTION Google, famous for its popular search engine, entered the mobile device business with its launch of the first Android-operated mobile device in 2008.1 Android, an operating system (OS) for mobile devices, is an open-source platform available under the Apache open-source license free of charge to any end user, manufacturer of mobile devices, or developer of applications (or “apps”).2 Google also develops mobile apps that enable users to manage various functions on their mobile devices, such as checking email, watching videos, browsing the Internet, and accessing instant chat services.3 End users can download the vast majority of Google apps on their mobile devices free of charge. Google also permits manufacturers to preload a set of Google apps—called Google Mobile Services (GMS)—on their mobile devices if they so choose. Google thereby makes its apps available to the end user “out of the box.” Google offers GMS to manufacturers free of charge, provided that the manufacturer accepts the conditions specified in its Mobile Application Distribution Agreement (MADA). In April 2013, FairSearch—an association founded by Microsoft, Nokia, and several other software and Internet companies—filed a complaint with the European Commission alleging that the MADA’s terms are anticompetitive.4 In April 2014, an antitrust class- 1. Erick Tseng, The First Android-Powered Phone, GOOGLE OFFICIAL BLOG (Sept. 23, 2008), http://googleblog.blogspot.com/2008/09/first-android-powered-phone.html. 2. See The Android Source Code, ANDROID, http://source.android.com/source/index.html; Licenses, ANDROID, http://source.android.com/source/licenses.html. 3. See, e.g., Google Mobile, GOOGLE, http://www.google.com/mobile/; Google Apps for Business, GOOGLE, http://www.google.com/enterprise/apps/business/. 4. FairSearch Announces Complaint in EU on Google’s Anti-Competitive Mobile Strategy, FAIRSEARCH (Apr. 8, 2013), http://www.fairsearch.org/mobile/fairsearch-announces-complaint-in-eu-on-googles-anti- competitive-mobile-strategy/; see also Foo Yun Chee & Alexi Oreskovic, European Regulators Training Sights on 2 Do Free Mobile Apps Harm Consumers? action complaint filed against Google by individual mobile device owners in the U.S. District Court for the Northern District of California presented similar allegations.5 The class-action plaintiff filed an amended complaint on August 1, 2014.6 The amended class- action complaint alleges that the MADA’s requirements enable Google to “maintain and extend” its alleged monopoly in the “general search” and “handheld general search” markets.7 In this article, I consider the economic and legal validity of claims that the MADA harms either competition or consumers. In Part II of this article, I review the economic literature on potential tying arrangements. Most economists recognize that tying usually increases competition and benefits consumers by reducing costs or improving quality control. Although some theorists describe models in which tying might have harmful effects, economists generally caution, first, that courts will find these models to have little practical value in antitrust inquiries and, second, that the effects of alleged tying be assessed factually on a case-by-case basis. In Part III, I analyze the development of the Supreme Court’s evolving antitrust jurisprudence on tying arrangements. Although the Court continues to label some tying arrangements as per se illegal, in fact the Court applies a rule-of-reason analysis that requires an analysis of foreclosure effects and includes an affirmative defense of efficiency