An Analysis of Google-Admob
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Merger Review in Technologically Dynamic Industries: An Analysis of Google-AdMob 1 I. Introduction The Federal Trade Commission concluded its investigation into Google’s purchase of AdMob on May 21, 2010, after an extensive review in which the FTC sought to assess competitive effects in a particularly challenging context. One challenge facing the FTC was that the mobile advertising industry in which these firms participated was and is a rapidly changing, nascent industry. AdMob, which the FTC described as the leading firm in the industry, had been in existence for only four years when the FTC completed its review of the merger.2 The difficulty inherent in identifying and weighing potential anticompetitive effects in a very fluid environment was evidently one the FTC was not shy about confronting. Another challenge, less evident at the beginning of the review process but certainly more salient now, is that the competition in mobile advertising is linked to competition in other markets. The acquisition of another mobile advertising firm by Apple near the end of the FTC’s merger review provided clear evidence that competition to monetize software loaded on smartphones was part of a larger competition between mobile operating systems (“mobile OS” vendors such as Apple, Google, and Microsoft. In this article, we discuss some of the economic issues that arise in undertaking a competitive effects analysis in technologically dynamic industries such as mobile advertising. 1 Kostis Hatzitaskos is a Manager, Neill Norman is a Senior Manager and Andrea Shepard is a Vice President at Cornerstone Research. 2 See ADMOB, http://www.admob.com/home/about (last visited Nov. 16, 2011). This article originally appeared in Threshold, vol. XIV, no.1, Fall 2013, American Bar Association This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without express written consent of the American Bar Association. 52 THE THRESHOLD Volume XII, Number 1, Fall 2011 II. Merger Review in Rapidly Evolving Industries Mergers in rapidly changing industries pose a challenge to the antitrust agencies and the parties because there is often substantial uncertainty about the path the industry will take even in the near term. The usual steps in merger analysis – defining a relevant market, assessing potential unilateral and coordinated effects, and determining the likelihood of entry – may require confronting substantially more uncertainty in a fluid, innovation-driven industry. At the same time, there are large and potentially durable welfare effects from failing to prevent mergers that would reduce the incentive to innovate. High rates of innovation can both make the effects of the merger more difficult to assess and make predicting the effects correctly particularly important. Before turning to the more difficult issues presented in the Google-AdMob merger, we first turn to the simple context of the Thoratec-Heartware merger to explore how merger analysis has responded to the need to account for both the effect of innovation on the expected path of industry evolution and the effect of innovation on competition. Thoratec-HeartWare Rapid innovation does not always make the application of standard competitive effects analysis difficult. Sometimes the likely path of competition that an industry will follow can be foreseen with some confidence even though the industry is experiencing innovation and change. The proposed Thoratec- HeartWare merger, which was abandoned by the parties after the FTC announced its intent to challenge the transaction, is a case that has been cited by the FTC as an example of how to apply the competitive effects analysis called for in the updated Horizontal Merger Guidelines.3 In 2009, Thoratec Corp. supplied the 3 Joseph Farrell, Janis K. Pappalardo, & Howard Shelanski, Economics at the FTC: Mergers, Dominant-Firm Conduct, and Consumer Behavior, 37 REVIEW OF INDUSTRIAL ORGANIZATION, 263, 265–266 (2010). See also Richard A. Feinstein, Antitrust Enforcement in the Health Care Industry, Prepared Statement of the FTC before Congress (Dec. 1, 2010), available at http://www.ftc.gov/os/testimony/101201antitrusthealthcare.pdf. 53 THE THRESHOLD Volume XII, Number 1, Fall 2011 only FDA approved left ventricular assist device, a mechanical heart assist device implanted in patients with end-stage heart disease. While supplying the currently dominant device, Thoratec was also developing a next generation device. HeartWare International, Inc., a small research firm with no FDA-approved products, was also developing a next generation product in competition with Thoratec and several other medical device companies. In early 2009, the companies announced the planned acquisition of HeartWare by Thoratec Corp.4 The FTC review focused on competition involving next generation devices and the effect the acquisition might have on the prices as well as any potential reduction in the pace of innovation. This required the FTC to forecast whether HeartWare was likely to be an important supplier of next generation devices. Despite rapid innovation in these heart assist devices, which might have made this kind of forecast highly speculative, the regulatory requirements for approval of medical devices together with the FTC’s extensive interviews of investigators utilizing the devices in clinical trials provided the FTC with some guidance as to the path the industry would likely follow. The FTC concluded that, of the firms developing next generation products, “only HeartWare poses a potential threat [to Thoratec].”5 The FTC also concluded that if and when the FDA approved Heatware’s new device, commercial supply of HeartWare’s product could be expected to “rapidly erode Thoratec’s monopoly.”6 The FTC reasoned that the merged firm would anticipate the cannibalization of its profits from the introduction of the HeartWare device and would therefore have an incentive to delay its introduction. If, however, HeartWare remained an independent firm, it would have no monopoly profits to erode and would therefore push to get its product on the market as soon as possible. Given the available evidence on the probable path of innovation from the device approval 4 Compl. at ¶ 12, In the Matter of Thoratec Corp., No. 091 0064 (F.T.C. Jul. 28, 2009) available at http://www.ftc.gov/os/adjpro/d9339/index.shtm [hereinafter Thoratec Complaint]. 5 Thoratec Complaint, supra note 4, at ¶ 3. 6 Id. 54 THE THRESHOLD Volume XII, Number 1, Fall 2011 process and the FTC’s field investigation, the FTC decided it could adequately predict the path competition would most likely take and filed a complaint to block the merger. Although the analysis in this case was aided by information that may not be available in all instances, it is important to note that the FTC’s reasoning depended on a nuanced view of the likely innovation process. For the FTC’s logic to be correct, it is not enough that it correctly foresee that HeartWare would win the innovation competition by producing a superior device. It must also be the case that the hypothesized delay imposed by the merged firm in the introduction of HeartWare’s winning design would not allow a third competitor to introduce an effective competing device during the period of delay. If the competition were closely contested, the merged firm could not preserve its profits by delaying introduction of the new device. Although there appear to have been several other companies pursuing innovative treatments for end-stage heart failure, how this would have played out has the merger proceeded is impossible to know. At the time of writing, HeartWare’s device has still not received FDA approval. Google-AdMob The information available to the FTC for assessing future competition in the mobile advertising industry was quite different in the case of the Google- AdMob merger. There was no regulatory process to provide information on the probable path of innovation or on which firms would be future participants in mobile advertising. Nor was there a well-defined trajectory of innovation that suggests successive product generations as one sees, for example, in the microprocessor industry. While this heightened uncertainty was acknowledged by the FTC in its investigation of the Google-AdMob transaction,7 the FTC 7 Federal Trade Commission, Statement of the Commission Concerning Google/AdMob at 2, FTC File No. 101-0031 (May 21, 2010) [hereinafter FTC Closing Statement] available at http://www.ftc.gov/os/closings/100521google-admobstmt.pdf (“In any nascent market there will be uncertainty about the path of competition and the durability of early leads in market share. In 55 THE THRESHOLD Volume XII, Number 1, Fall 2011 nonetheless undertook an extensive merger review and, despite closing its investigation, apparently concluded that the deal had the potential to have substantial anticompetitive effects.8 According to reports, the FTC had been poised to block the merger,9 only to close its investigation after Apple entered the mobile advertising industry by acquiring an AdMob competitor. To understand the difficulty facing the Commission in its review of this merger, it is helpful to have some background on the industry. The small but rapidly growing mobile advertising industry exists to monetize applications and other software on mobile devices. Mobile ads are advertisements that appear on smartphones and on tablet computers. The ads appear in mobile search results,