Relaxing whilst doing Competition Law is not an Oxymoron

Some thoughts on the new anti-Google (Android) complaint (2/3): Predatory pricing claims

with 3 comments

This is the second post in a series; click here for Post 1 (on background and dominance)

According to FairSearch  (see here) “Google’s predatory distribution of Android at below-cost makes it difficult for other providers of operating systems to recoup investments in competing with Google’s dominant mobile platform“.

Unsurprisingly, this claim has spurred very strong reactions from the FOSS community, which regards it as a direct attack to the Open Source/FreeSoftware development model (see notably here, here and here). Android is indeed FreeSoftware, meaning not only that it is distributed for free, but also that it adheres to the so-called 4 freedoms: (i) the freedom to run the program, for any purpose; (ii) the freedom to study how the program works, and to adapt it to the user’s needs; (iii) the freedom to redistribute copies; and (iv) the freedom to improve the program and release the improvement to the public. This means that asking Google to start charging for Android would be akin to force it to stop supporting FreeSoftware.

A quick look, however, would reveal that this is a non-issue. It is undisputable that given Android’s FreeSoftware/public good nature Google doesn’t have the ability to set a price. The price is 0.

There are certainly interesting pricing issues to be discussed in the software industry, but, in our view, they arise with respect to proprietary software, not free software.

This should be enough to end the discussion, but if this interests you, click on the hyperlink below for more developed thoughts (if you’re lazy you can just stick to the arguments in bold to get the general idea):

Actually, there’s even a relevant precedent in the US in which someone already tried alleging that not charging for FreeSoftware (in that case Linux) was akin to predatory pricing and price fixing. The suit was summarily dismissed by a district court, and then Judge Easterbrook wrote the 7TH Circuit’s Opinion affirming the dismissal (see Wallace v IBM et al.) (the fact that it was summarily dismissed is quite relevant for a reason that we’ll explain at the very end of this post). The 2006 Opinion undertook the “quick look” approach and reasoned (a) that FreeSoftware licenses (in that case the GeneralPublicLicense) “keep price low forever and preclude the reduction of output that is essential to monopoly” (“if a manufacturer cannot make itself better off by injuring consumers through lower output and higher prices, then there is no role for antitrust law to play”); (b) that there cannot be predatory pricing with respect to free software because the alleged predator would be unable to recoup the “losses” incurred in as a result of the free distribution (because “free software” enables anyone to respond to an increase in price, reduction in innov/output); (c) that there was demand for proprietary software, which shows a willingness to pay for it should the quality of FreeSoftware ever decrease; (d) that FreeSoftware “facilitates production of new derivative works and agreements that yield new products that would not arise through unilateral action”.

That Opinion made a lot of sense. The complainants in the Android case would nevertheless probably respond that Easterbrook’s opinion doesn’t apply because in multi-sided platforms the competitive harm can take place in other closely related markets (after all, in the case of Linux funding came from voluntary donations rather than indirect monetization). However, even accepting that there ain’t no such thing as a free lunch, the question then is: does Google’s indirect monetization of Android’s sales give rise to any competitive harm? It would be upon the complainants to identify the consumer harm; we can’t say that they have or haven’t, but judging by previous statements that “Google does a very good job of hiding it” (5th parag. here), we seem not to be the only ones having difficulties finding it.

The fact is that Google’s ability to indirectly monetize its services certainly gives it a competitive edge in many markets and might hurt competitors, but would consumers be better off should Google and others be obliged to charge users for its services just because competitors want to keep charging? To us, and in this case, the answer is no.

Think about this: if the problem is that Google distributes Android for free, what would the remedy be? Considering that all market players (except Microsoft) have embraced FreeSoftware, would it make sense for the EC to oblige Google to charge for its licensing while all of its competitors (aside from Microsoft) continue distributing it for free? That, obviously, can’t be right.

If what has been released is true and has been framed so simplistically (which we doubt, because the complainants have very good and tech-savvy lawyers), the complaint not only challenges FreeSoftware, it actually runs counter the very logic of the digital economy, where many services are provided for free and monetized indirectly. Couldn’t the same theory of harm be brought against many other services that users get for free? It could, but, if you ask us, it won’t. The reason why similar allegations have not been brought against online search, for instance, is only that everyone understands that gratis is best, whereas in this case one player doesn’t. It’s a legitimate choice to remain in the traditional licensing model (it might even be smart judging by the persisting monopoly of this model in the PC), but it’s perhaps not so legitimate (or consumer welfare enhancing) to force others to adopt it.

We can safely assume that most people agree that the predation claim in this (for the moment non-) case is prima facie somewhat weak (understatement), even if this is the claim that has caused greater public fuzz. I’m certain that the complainants would also put their money, if any, on the bundling allegations. So, what to do with the predation claims in the complaint?

Esterbrooks’s opinion in Wallace v. IBM was regarded as important because it exempted open source developers from potential huge litigation costs. In fact, he was perfectly aware of that, which is why he concluded the Opinion saying:

“A quick look is all that’s needed to reject Wallace’s claim (…) The GPL and the open-source software have nothing to fear from the antitrust laws”.

As frequent readers of this blog now, I’m generally a defender of the EC. However, would you imagine the Commission saying anything similar in a decision rejecting a complaint? Very unlikely (and unfortunate when it comes to cases where bright lines would be needed)

On our next post we’ll discuss bundling, where complex -and arguably interesting- issues arise.

As always, happy to discuss.

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Written by Alfonso Lamadrid

6 September 2013 at 12:39 pm

3 Responses

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  1. Btw, if someone at Google reads this, which I presume will be the case, could someone please explain why the ads below our posts are so oddly targetted??
    I keep getting a washing powder ad (!) (my wife would be happy to confirm that I’ve never shown interest in that sort of products….)

    Alfonso Lamadrid

    6 September 2013 at 12:56 pm

  2. For the sake of it, let me just play the typical Legal Service counter-argument:

    Alfonso Lamadrid: “would it make sense for the EC to oblige Google to charge for its licensing while all of its competitors (aside from Microsoft) continue distributing it for free? That, obviously, can’t be right.”

    Legal Service lawyer: “Esteemed colleague, dominant firms have a special responsibility not to distort competition. Conduct that is lawful for non dominant firms may be deemed unlawful when implemented by dominant firms”

    Nicolas Petit

    1 October 2013 at 2:36 pm

    • Hi,

      It would be great to discuss and have some thoughts about the special responsibility. We can agree that “gratis is best” but what about the other side of the market? By bundling Android and other apps, Google enjoys profits from advertisers and more users on the others apps.
      It’s also true that the switching cost is very low but how many people will download an other application clearinghouse on an Android phone? How many people will use other app than Google Maps, YouTube etc..
      I’m really satisfied by these apps and these services but in a antitrust perspective, it seems not fair. Do we have to stick in “consumer welfare”? Because (if i’m not wrong), we can say that Google precludes a real competition on the tied products markets (Gmail, Maps, Google Agenda…)


      22 October 2013 at 11:44 am

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