Between 2010 and 2022, the combined revenue of the top five digital titans in the United States (US) (Amazon, Meta, Apple, Alphabet, and Microsoft) exploded from US$ 181 billion to US$3.9 trillion a scorching growth of 29 percent per year. This rapid accretion of economic power invited deeper scrutiny and rethinking of whether the regulatory arrangements for ensuring “competition in the market” were adequate.
Shifting regulatory challenges
Four developments torpedoed technical regulatory solutions honed over the previous century whilst regulating railways then aviation and finally telecommunications. First, rapid growth in venture capital and private equity funds privileged headline growth in revenues over profits. Second, globalisation created the space for rapid growth, shrinking the present value of current profits to a small fraction of future profits. Third, a lively startup ecosystem provided opportunities for growth through the acquisition of enterprises. Google—a search engine—acquired content provider YouTube in 2006 for US$1.6 billion, thereby locking into new revenue sources. Fourth, tech costs are front-loaded and marginal costs are low. Expanding to adjacent markets serves the tech monopolist best rather than price-gouging existing consumers to maximise revenue. The added advantage is that monopolists maximise profits without generating visible negative consumer welfare metrics like an increase in the price of goods or services.
Integration across business lines produced new regulatory challenges. Measures to avoid unfair discrimination became necessary. If a search engine acquires an operating system – an example of vertical acquisition in an adjacent market (Google acquired Android in 2005 for US$50 million) the OS develops an incentive to discriminate in favour of the owned search engine and disadvantage other search engines. Similarly, if a search engine (Google) acquires a content provider (YouTube) it acquires the incentive to direct users to the “self-owned” provider harming other content providers. The unresolved downside remains that frenetic innovation in the markets does not easily convert into competition in the market. Instead, aggressive, private equity-funded tech titans often neutralise competition by acquiring nascent competitors.
By 2020, the United States House of Representatives subcommittee on anti-trust recommended significant changes in anti-trust legislation to “restore competition in the digital economy”. Over the years, judicial action had liberalised the legislative restraints on monopolies. The prevailing “rule by reason” methodology, which requires anti-trust action to be justified by empirically sound evidence proving net damage to competition, loads the dice against litigants given the asymmetry between the resources of the tech titans and the litigants.
Protecting public interest
Controlling the power of big corporates is universally popular. In June 2021 President Biden appointed Lina Khan, the youngest-ever chair of the antitrust entity—Federal Trade Commission. Ms Khan won her laurels in anti-trust law by authoring an influential paper in 2018 advocating the reintroduction of “structural segregation” to preserve competition in digital markets. In 2021, Google was fined US$ 2.8 billion by the EU Competition Commission for discriminating against third-party price comparison shopping services.
In India, the Competition Act 2002 created a market-friendly, autonomous anti-trust entity—the Competition Commission of India (CCI)—by repealing the Monopolies and Restrictive Trade Practices Act 1969 which had constrained the growth of private businesses under the guise of controlling monopoly power. The new Act celebrates competitive markets and is neutral on market dominance. Anti-trust action becomes legitimate only when market dominance is used to constrain competition or technological innovation or indulge in unfair or discriminatory trade practices.
CCI penalizes Google
In October 2022, the CCI ruled that Google had indulged in anti-competitive practices by misusing its dominant position in multiple markets associated with the Android Mobile ecosystem and imposed a penalty of INR 13.4 billion being 10 percent of Google’s average revenue in India, over the previous three years.
In an associated case against Google Play Store a penalty of INR 9.4 billion was imposed for misuse of its dominant position in the Play Store market by (1) Imposing the Google Bill Pay System (GBPS) as the sole payment mechanism for in-store app purchases and for all subsequent in-app purchases even after an app is downloaded by a user (2) Privileging YouTube (a Google-owned content provider) by not charging it service fee for use of GBPS, unlike third-party apps (3) Privileging its own UPI app over other UPI apps for payments (4) Constraining apps hosted on the platform from “steering” users towards alternative payment options for follow-on in-app purchases, post download.
A series of “cease and desist” directions were issued:
(1) Licensing of the Android OS to smartphone manufacturers must not be linked to mandatory pre-installation of the entire suite of Google apps or made conditional on prominent placement for Google apps with no option for uninstalling the apps by retail customers.
(2) Licensing of Play Store (including Google Play Services) to manufacturers must not be linked with the requirement to pre-install the entire suite of Google apps.
(3) Google must not offer monetary or other incentives to manufacturers for ensuring exclusivity for its search services.
(4) Google shall not impose anti-fragmentation obligations on manufacturers to inhibit the use of “Android Forks”.
(5) Manufacturers under license from Google must not be barred from developing Android forks-based smart devices.
(6) Google must not incentivise or otherwise obligate manufacturers to not develop or sell smart devices based on Android forks.
(7) Google must enable final users to set the default search engine of their choice at the time of initial device setup.
(8) Google must allow the developers of competing app stores to distribute their app stores through Play Store.
Google has appealed the decision to the National Company Law Appellate Tribunal (NCLAT) but failed to get a stay from the Supreme Court of India on payment of the penalty. Hearings in the NCLAT have started. Google needs to rework its contractual arrangements. Presently manufacturers get the Play Services suite for free. In addition, Google shares with manufacturers, the revenue it earns from advertising services making them “virtual” in-house Google manufacturers. Cleverly designed legal sticks and financial carrots have transformed Google’s open ecosystem into a virtually integrated citadel, as secure from competition, as Apple’s. Regulatory agencies are pushing back in Europe and now in India- albeit somewhat unfairly- using different competition yardsticks for similar services like the Apple Store and Google Play Store.
What next for smartphone manufacturers?
Manufacturers will look for profits from sources other than revenue sharing by Google. They could then choose which apps not to install but might have to pay to buy Google Mobile Services, like European manufacturers, who reportedly, pay US$40 per phone. They would however be free to partner with Android fork systems under their own brand name, which is not permitted by Google today. Google shall lose the uninstall protection its apps and services presently enjoy, masquerading as system apps and also its privileged, compulsory, prominent placement on the home screen.
Whether Indian smartphone manufacturers and app developers choose to liberate themselves from being in-house suppliers, depends on the amended terms Google offers. It has the resources to do that via legally kosher voluntary agreements, sans the existing compulsions of linked supplementary agreements.
Chinese phone manufacturers optimize business returns by adhering to Google’s restrictive arrangements for overseas brand-conscious sales, whilst developing hybrid Android options at home. India aspires to be a major smartphone exporter. Investing in developing a hybrid Android mobile ecosystem makes sense to prosper beyond the, now disrupted, spoon feed from Google.
What’s in it for retail consumers?
It is unclear what price-sensitive Indian retail customers stand to gain. If the net impact of the regulatory changes is an increase in the retail price of Android smartphones, it will be a thumbs down for the CCI. In the near term, it will also disenfranchise millions of users from graduating to a smartphone just as 5G services are being rolled out. Not exactly a happy outcome for an anti-trust body. The potential for more competition in future is insufficient compensation for an immediate increase in consumer prices.
Retail consumers might look for protection under the active industrial policy model, presently favoured by the government. A public-private partnership could offer a low-cost, open, substitute for Google Android services. A similar venture in digital commerce – The Open Network for Digital Commerce (ONDC) – is now a not-for-profit company, jointly promoted by the government and industry. It seeks to become one of a kind open platform for digital commerce competing with Amazon and Walmart. It is being evaluated across fifteen cities in India with 25,000 registered sellers for more than 1.8 million products.
The woke option
Google is a global titan like Apple. Tightening regulatory prohibitions threaten to eat away at its unique ecosystem, which allowed it to behave like a monopolist and earn monopoly profits sans public opprobrium. Recreating the collaborative spirit, reminiscent of the Open Handset Alliance, which Google conceived in 2007, as an alternative, open ecosystem, would be the woke option,
This opinion piece was first published in orfonline.org on March 11, 2023 https://www.orfonline.org/expert-speak/taming-digital-titans/