Relaxing whilst doing Competition Law is not an Oxymoron

Google Books Settlement- It’s the search market, stupid!

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As in most instances, this snowclone is a bit of an oversimplification: to be sure, the GBS brings to the fore extremely interesting issues such as those related to copyright law, privacy, or the function and limits of the class action mechanism, which are unrelated to the competitive impact of the GBS on the search market. However, also like in most instances, it helps us not lose sight of the important stuff. Indeed, the antitrust objections to the settlement raised by the DOJ other than those dealing with the search market (fundamentally those related to the ASA’s pricing system) seem to me somehow weak (see first comment to this post below).

As Gary Reback –one of the most prominent leaders of the opposition to the settlement- noted in a blog post last week: “at bottom, the Google Book Settlement is not really about books. It’s really about search, the most important technology in the new economy”. The transcript of the fairness hearing held last week conveys the impression that the DOJ shares the same main concern.

I’m no expert on the GBS and wouldn’t dare to comment on all of its aspects here. However, some of the issues raised in Reback’s post caught my attention.

Reback’s post points out that the search market, allegedly dominated by Google (how do you define the search market? Note, for instance, that on the fairness hearing AT&T claimed to be Google’s competitor because of its Yellow Pages), is “difficult to enter because of powerful network effects and scale characteristics” . He then insists on how access to books covered by the settlement would grant Google a tremendous competitive advantage. The said advantage would stem from the fact that Google would be improving its ability to support “obscure” or “tail queries” by virtue of its “exclusive” (?) access to in-copyright books whose authors are unidentified (that’s what some have labeled as the “orphan works monopoly”, a term that not only assumes that there exists a market for “orphan works” and that competitors would be barred from accessing to such works, but which also, by putting together the words orphans and monopoly, adds a bit of Dickensonian dramatism to the debate).

Non-commercially available books are, obviously, the least commercially attractive ones, and paradoxically it is Google’s alleged monopoly over these works that seems to be at the core of the controversy. Lack of commercial attractiveness means that Google’s competitors wouldn’t have in principle the incentives Google had to engage in this venture, since, presumably, replicating Google’s scanned database of “orphan books” would not be profitable even if it were feasible.

Nonetheless, as noted by Reback, “whatever the publication value of these books, they provide an enormous advantage in search”. Indeed, thinking about the search market as Google’s main interest  would help explain why, contrary to its competitors,  Google decided to scan those books without prior permission thereby risking to be sued, as it later happened. Google was probably more conscious of the relevance of having access to such books with regards to the improvement of its search engine. As many firms in network markets do, it entered a different market with the aim of enhancing its core network business (didn’t Microsoft do something similar?). As also many firms do in network markets, it decided to incur risks in doing so.

Reback’s main objection is that the increased ability to support “tail queries” as a consequence of the settlement would “produce a disproportionately large increase in overall user satisfaction.” (!) In other words, Google’s advantage would derive from the fact that it would have a better product. Interesting.

It’s also interesting to note that on the same day the fairness hearing was taking place, the DOJ and the European Commission announced their decision to close their investigation of the internet search and paid search advertising agreement between Yahoo! and Microsoft, pursuant to which they will combine their back-end search and paid search advertising technology. The decisive factors on which the DOJ grounded its decision not to object to this deal are strikingly similar to the ones used by Reback to oppose the GSB; look at this excerpt from the DOJ’s statement:

“The search and paid search advertising industry is characterized by an unusual relationship between scale and competitive performance. The transaction will enhance Microsoft’s competitive performance because it will have access to a larger set of queries, which should accelerate the automated learning of Microsoft’s search and paid search algorithms and enhance Microsoft’s ability to serve more relevant search results and paid search listings, particularly with respect to rare or “tail” queries. The increased queries received by the combined operation will further provide Microsoft with a much larger pool of data than it currently has or is likely to obtain without this transaction. This larger data pool may enable more effective testing and thus more rapid innovation of potential new search-related products, changes in the presentation of search results and paid search listings, other changes in the user interface, and changes in the search or paid search algorithms. This enhanced performance, if realized, should exert correspondingly greater competitive pressure in the marketplace”.

One could therefore argue that the settlement would be simply contributing to the improvement of Google’s search system in the same way as the horizontal agreement between its two main competitors (through combination of their technology) or network effects inherent to the market (more users=more queries=enhanced ability to improve the search system) do: enabling firms to better support “tail queries”. Nonetheless, the DOJ’s stance seems to deem that having Google unilaterally fostering the improvement of its search engine would cause a restriction of competition, while letting Microsoft and Yahoo! agree on achieving comparable efficiencies would foster competition.

I’m really not so sure this is the correct way to look at it. Isn’t the effect of those practices essentially the same? Should it only be challenged when undertaken by the leading firm in the market? Wouldn’t Google’s alleged advantage derive from the fact that it was the firm which first saw the potential of these books in relation to their core business and therefore had the incentives to incur higher risks and to invest more heavily on this venture? In my view, Google’s course of action could fit into the notion of “superior foresight”, unless, of course, one believes in the “conspiracy” theory –which assumes a secret side deal between publishers and Google- advocated by Reback. But that’s another story.

Finally, contrary to Reback’s claim, I don’t think network externalities are such a meaningful barrier to entry in this case. Amongst other reasons, unlike in the Microsoft case, there’s no possibility of consumers being temporarily “locked-in” to the network. After all, competing search engines are only one click away.

PS. For those interested on what went on at the fairness hearing, take a look at James Grimmelmann’s superb summary (Part I ; Part II)

Written by Alfonso Lamadrid

2 March 2010 at 10:11 am

Posted in Guest bloggers

2 Responses

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  1. For GBS freaks, some further comments on the arguments contained in the filing submitted by the DOJ on Febrary 4th with regards to the pricing system envisaged in the ASA:

    The DOJ’s views regarding the assessment of the pricing system depart, in my view, from a mistaken and simplistic categorization of horizontal agreements as being per se restrictive of competition. Leaving aside the issue of whether the agreements at stake are vertical, horizontal or rather have mixed features, it seems to me that the novelty and complexity of the issues raised in this case (and in many other “new economy” markets) should lead to undertaking rule of reason analyses and to abandon per se related preconceptions.

    On the contrary, the per se logic pervades the DOJ’s reasoning to the detriment of its persuasiveness.

    For instance, when the DOJ criticizes in its lates filing the fact that Google does not have the right to renegotiate the revenue sharing formula for “non commercially available books”, it compares such practice with price fixing arrangements that would automatically be prohibited pursuant to a per se rule. Probably conscious of the weakness of such a simplistic categorization, the DOJ asserts that even under a rule of reason granting Google the said right “hardly seems onerous” (even if in footnote 14 of the filing submitted on Febrary 4th the DOJ admits that the category of “commercially available” books is surprisingly narrow in comparison to “non-commercially available” books). In this sense, given that it appears that granting Google the right to ask for bilateral renegotiation of unregistered books could lead to an enormous burden for Google’s counterpart, should this be a relevant element to consider in a rule of reason analysis as claimed by the parties to the settlement?

    The DOJ also seems to ignore the role that avoiding transaction costs should have in rule of reason analysis (recall the Supreme Court’s decision in BMI) when it questions whether there are sufficient efficiency justifications for allowing publishers to bring unavailable works into commerce via the ASA instead of by bilateral agreements, as well as when it argues that bilateral negotiations must be preferred to the setting of default prices “at least when authors or publishers can be identified”.

    Also the argument that reliance on a class-wide negotiated price is necessary to counter Google’s buying power is rejected by the DOJ as an invalid justification with the arguable support of certain precedents related to per se violations. Nonetheless, assuming that the practice at stake should rather be assessed under the rule of reason, wouldn’t the justification put forward by the parties to the settlement deserve serious consideration?

    With regards to the control of the price for orphan books by known publishers and authors, the DOJ fears that in absence of enhance authority and independency on the part of the “Unclaimed Works Fiduaciary” (“UWF”), the defaults set by the Registry would also govern unclaimed works. Would that be necessarily wrong? In as much as conditions negotiated by more powerful members of the class would be applying to unregistered books, wouldn’t granting the UWF more authority be akin to leaving unregistered books less protected against Google’s buying power?

    Alfonso Lamadrid

    2 March 2010 at 5:43 pm

  2. […] It was indeed predictable that antitrust authorities wouldn’t resist the temptation to act against them (in antitrust law, as in the laws of gravity, mass increases attraction).  In fact, in a short period of time Google has faced investigations regarding its advertising agreement with Yahoo!  (which could not be implemented precisely as a consequence of the antitrust concerns); the existence of interlocking directorates with Apple, and the GoogleBooks project. For my comments on the last two of see here and here    […]

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