Android, Google and bundling: some follow-up thoughts
[By Pablo Ibañez Colomo (LSE)]
The following thoughts were inspired by Alfonso’s recent post on bundling allegations against Google. As usual, it is tightly argued and persuasive. I wish competition authorities took such points into consideration when assessing tying and bundling claims. My objections are of a different nature. The fact that I agree with most, if not all, of what he writes does not mean that his points would be conclusive or even relevant in practice after the Microsoft saga. More than anything, Alfonso’s post reminds one (or at least me) of the uncertainties that remain in the field of Article 102 TFEU even after the adoption of the Guidance Paper.
Alfonso starts by wondering whether the complaint brought by Google’s rivals involves a bundle in the first place. Following the GC judgment in the first Microsoft decision, I would be tempted to reply by saying that anything under the sun can be constructed as a bundle or, put differently, that the legal construction around third party claims need not make sense for Article 102 TFEU to apply. If a tying claim is valid even when nobody wants an operating system without a media player or a web browser, it probably follows that the plausibility of the bundling claim would not be – unfortunately, may I add – a conclusive aspect in the hypotheticals he discusses.
He goes on to argue that Google Play is not the only means through which one can download applications. I am sure more than a reader reacted to this argument in the same way I did. Could not one also claim that it is possible to download web browsers or media player and that the tying of these applications with an operating system are unproblematic as a result? Well, of course, but this fact did not prevent the Commission from taking action against Microsoft not once but twice. All that remedial action would require is an analysis of consumer behaviour allegedly inspired in behavioural economics (the flavour-of-the-month that I fear most, by the way).
If the above arguments are not decisive, we are left with the issue of foreclosure (the ‘everybody does it’ and the ‘business rationale’ arguments would not be relevant even before the wisest of competition authorities, as what matters in contemporary competition law, or so I want to believe, is not the motivation behind the behaviour, but its effects on the market). Besides the fact that foreclosure is plain irrelevant in tying cases according to the General Court, I will mention that, according to what I read the other day, Android’s market share is approaching 80%. This does not mean in any way that Android is dominant, let alone superdominant (and, again, very sensible arguments can be developed to show why this is not the case). But we all know strange things happen to law and policy when firms reach such market share levels.
What conclusions do I draw from the above? It seems to me that self-restraint is the only limit to the ability of the Commission to interfere with product design in high-technology industries. The second reflection relates to the behaviour of complainants. They cannot be blamed for taking advantage of the confusion created by the Microsoft saga around tying and bundling (i.e. for behaving opportunistically). One could even go as far as to claim that this saga created the expectation that the Commission will intervene when a firm’s market share approaches or exceeds 80%.
A true Belgian story
When did the new Belgian competition Act enter into force?
If you run a Google search most results (notably a few dozen law firm’s newsletters saying exactly the same things) will tell you that it did on September 1st, 2013.
Wrong answer.
You can’t blame them, though. On August 30th The Belgian official journal (Moniteur Belge) published a Royal decree providing that the new Act would enter into force on the first working day following the said publication (that is, on September 1st).
However, it seems that the Royal decree wasn’t really Royal, because no one realized that the King had not yet signed it (apparently he was on holidays, elephant hunting, or doing whatever it is that Belgian Kings do), and that therefore it was devoid of legal effects.
That’s why on September 4th a new Royal decree was published on the official journal stating that the publication of the previous Royal decree (actually there were two of them) shall be considered null and void (“il y a lieu de considérer la publication des deux arrêtés royaux susmentionnés comme nulle et non avenue. Ces arrêtés ont été retirés avant leur signature”).
And then, on September 6th, yet another Royal decree was published providing that the Act would enter into force on that very same day.
So, between September 1st and September 4th people thought that the Act had entered into force, when in reality that wasn’t the case.
We hear there were hearings held in those days in which lawyers were pleading on the basis of the new Act, but were told that they were misinformed.
True story.
Convergence Rule – A Spanish Example
The convergence rule of Regulation 1/2003 (Article 3(2) sets that:
“The application of national competition law may not lead to the prohibition of agreements, decisions by associations of undertakings or concerted practices which may affect trade between Member States but which do not restrict competition within the meaning of Article 81(1) of the Treaty, or which fulfil the conditions of Article 81(3) of the Treaty or which are covered by a Regulation for the application of Article 81(3) of the Treaty“.
Often, I have struggled to find concrete examples of such situations.
Our friend Miguel Troncoso Ferrer (Gomez Acebo Pombo) has offered us a very good illustration of this.
A recent amendment to the Spanish Hydrocarbons Act sets out a blanket prohibition of non-binding price recommendations in distribution agreements in the hydrocarbons industry.
This prohibition covers agreements below the 30% market share threshold.
It thus prohibits conduct which is covered by “a Regulation for the application of Article 81(3) of the Treaty“.
And this amendment purports to regulate competition (according to the Preamble of the new statute).
It thus violates EU law. The full analysis is available here: Analysis_On the compatibility with Eu Law of the new Section 43 A
In light of the Italian Matches case-law, publics authorities, national courts and firms can disregard this legislative provision.
@Alfonso: an apology. I did not mean to promote of a rival shop.
New job (2)
Nico just got a new job, as an advisor of the Belgian Competition Authority. Other good friends of this blog, like Laurent de Muyter and Charles Gheur, have also been appointed as advisors to the new authority:
This means that every once in a while Nico will now get to decide over real cases. 
!!
Now that he belongs to the authority I guess he won’t be able to comment academically about their cases, for there could be a conflic of interest… 🙂
Now seriously, congrats to Nico, Charles, Laurent and all other newly appointed advisors.
P.S. And yes, he did get a new car as well, but he doesn’t want to post the pic (I guess he’s afraid that his students will want to scratch it…)
Some thoughts on the new anti-Google (Android) complaint (Post 3/3): Bundling allegations
[This is the third post in a series; click here for Post 1 (on background + market definition), and here for Post 2 (on predatory pricing claims)]
Even though the allegations over the free distribution of Android have predominantly caught the public’s eye, the complaint also appears to argue that Android is a “Trojan Horse” (a non-innovative yet effective metaphor…) used to pre-load Google apps. According to FairSearch’s press release, “Android phone makers who want to include must-have Google apps such as Maps, YouTube or Play are required to pre-load an entire suite of Google mobile services and to give them prominent default placement on the phone”.
This is, at least at first sight, more interesting than the allegations about predatory pricing. Tying/bundling issues in the smartphone industry have so far received some attention from enforcers -remember the investigation involving Apple and Flash?- and academics, but not so much. And yet they raise antitrust questions that take the discipline outside of its comfort zone.
One of the problems with this leg of the complaint is that publicly available info is scarce and that some issues are fairly technical. So don’t take what we say for granted. This is no more than an exercise for me to brag about Enrique’s industry/technical knowledge to discuss a case in detail on the basis of knowledge that not everybody has (at least I didn’t), and that I thought was worth publishing here. At the very least it has helped me learn about the industry (for some odd reason I only reflect properly about things when I write about them…). As always, happy to discuss. Btw, the post is again lenghty because I haven’t had time to write a shorter one.
1) In search of the bundle
Our understanding is that Google does not preload its apps in Android (like Microsoft actually does, for instance, with Skype and SkyDrive in Windows). This means that OEMs are free to take the Android OS without having to pre-install any of Google’s Apps (for example, Amazon has done so with the Kindle, and so has Barnes&Noble with Nook; a number of other examples are mentioned here). Android’s code is publicly available here and all OEMs can do what they please with it.
If our understanding is correct, it’s only when OEMs wish to pre-load the Google Mobile Services suite (“GMS”) that they need to pre-install its “core-apps”. In sum, if OEMs want a non-Google Android experience they can have that. If they want a sort-of-Google experience on Android (i.e. if they want the GMS) then Google asks them to preload (on a non-exclusive basis: they can preload any others) a minimum set of apps. Accordingly, it’s difficult to argue that there is a bundle of Android+Apps; at most there could be only a bundle of apps.
[Intermission 1: It’s not easy to find out exactly what’s included in the GMS/ “core apps”. The references that we’ve found (page 12) seem outdated as, for instance, they refer to Android Market (now Google Play), Google Talk (now Hangouts) and call “apps” things that we understand are rather non-user facing services (like the service that synchronizes contacts or the calendar with the cloud)].
But is there really a bundle of apps? In order for “pure bundling” to exist it would be required that the components of the bundle are not also available outside of the bundle, but that doesn’t seem to be the case either. Most of the apps in the GMS can be obtained separately from the bundle and for free (that’s the case of Youtube or Google Maps).We may be wrong here, but we think that Google Play may be the only exception, or at least the only relevant one (on this, see our point number 2 below).
Finally, since OEMs’ decision will not be affected by any financial incentive on the part of Google (because the “core apps” in the GMS are all free of charge apps), there’s no mixed-bundling either.
[Intermission 2: in my view, and in contrast to this case, mixed bundling of proprietary non-free software by certain dominant firms can actually pose serious competition problems (due to the existence of market power, the ability to toy with monopoly prices, resale prohibitions, switching costs and higher barriers to entry) and nevertheless remains mostly unaddressed by enforcers, but that’s another story].
That said, the complainants may have a point in that most OEMs will in practice want to have the GMS (see below).
2) It’s all about Play
If any of the complainants were to read the reasoning above, they would probably respond: “sure, the choice for OEMs is theoretically there, but OEMs that choose Android would always want to have the GMS, because otherwise they wouldn’t have Google Play, which means that they’d be renouncing to the very large number of apps written for Android (indirect network effects, etc)”
[A bit of background: Google Play is an application clearinghouse, an Appstore or app marketplace. These apps are a repository of other apps that you can download with a simple click. This avoids users having to obtain software from every developer; instead, there’s an intermediary that facilitates finding/acquiring/installing software. The intermediary (Google in the case of Play, Apple in the case of Appstore, etc) obtains a percentage of sales of non-free apps and facilitates the sale of free ones].
We don’t know whether the complainants have focused on that point of not. If not, they should hire us to give them more ideas 😉 . If they have –as we’d assume- then that’s a fair point.
And so what? On the other hand, however:
Some thoughts on the new anti-Google (Android) complaint (2/3): Predatory pricing claims
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):
Some thoughts on the new anti-Google (Android) complaint (Post 1/3)
At Chillin’Competition we have paid considerable attention to a number of IT-related competition developments, and –like most other followers of these matters in Europe and elsewhere- we have shown predilection to comment on the pending EC investigation over Google’s search practices. Nicolas, Pablo Ibañez-Colomo and myself have devoted tenths of posts to offering our –often conflicting- views on a number of issues raised in that case.
We –or at least I- had until now not really paid attention to the more recent FairSearch complaint regarding Android, and this despite the repeated warnings of Enrique Colmenero (our new associate and a geek who knows a bit about Android (he says not sufficiently well, I say it’s unbelievable), who was also the real author of my Google ppt), and who kept on telling me that the allegations in this complaint merited some public discussion. I first looked into it last week while writing the post about Skype’s integration with Windows, and realized that he’s right.
Given that all things Google raise the number of visits to the blog and spur more debate than other topics, we’re decided to comment on this yet non-case. We devoted a weekend to writing our preliminary views, and since the result is fairly lengthy we’ll be breaking the discussion into three separate posts: Today we will provide some background and deal briefly with market definition issues. Tomorrow we’ll discuss the predation claims. And Monday we’ll address the bundling allegations.
Before getting into substance, four disclaimers are necessary. The first is that by myself I wouldn’t have had the required technical knowledge to comment about this, so I’m borrowing Enrique’s (any errors, however, are only mine). The second is that we are not working for any party interested in this case and therefore comment on the basis of publicly available info (for fuller disclosure, some time ago I had two chats with someone on the complainants side as well as with someone working for Google; in both cases they let me know their views on the complaint). The third is that since we don’t want this blog to be a place to discuss cases in a seemingly one-sided way (much less when they are ongoing, like this one), we’ll be happy to open this platform to anyone willing to reason any disagreement with the opinions provided below. We don’t intend to defend a given position, but to reflect on issues that interest the antitrust community, and we are more than open to be persuaded that what we say is wrong. The fourth is that even if now criticize a complaint lodged by Microsoft FairSearch in the past we’ve also heavily critized complaints targeting Microsoft, like this one.
Bored already? If you’re stil reading I guess not, so let’s get started:
Some background to the complaint
Back in April the anti-Google alliance FairSearch (in this case only two of its members Microsoft and Nokia [Note: after I was done writing this post I learnt the news that Microsoft is acquiring Nokia’s mobile business] seem to have a real interest in the case) lodged a complaint with DG Comp alleging: (a) that by giving Android to device-makers for “free” Google engages in predatory conduct (making it difficult for rivals to recoup the investments made in developing competing mobile operating systems; and (b) that “phone makers who want to include must-have Google apps such as Maps, Youtube or Play are required to pre-load an entire suite of Google mobile services, and to give them prominent default placement on the phone”. Click here for FairSearch’s Press Release.
Rumor has it that the Commission recently sent out requests for information in relation to this complaint.
A business problem model?
In our view, this complaint can only be properly understood once one is aware about the existence of essentially 3 different business models for mobile operating systems (OSs). One is Apple’s vertically integrated model (iPhones run on Apple’s own iOS), another is Microsoft’s licensing model (OEM’s wishing to have smartphones running on Windows have to pay for a license), and the third is Android’s free software model (Android is distributed for free under a an open source license which enables licensees to do whatever they wish with the code), which has also been the model adopted by all new market entrants (Ubuntu, Firefox OS, Jolla’s Sailfish or Tizen –backed among others by Samsung and Intel-); Nokia’s Symbian (the market leader until 2011, now maintained by Accenture) was always and is also open source.
Manufacturers that are not vertically integrated at the OS level like Apple or Blackberry had to find a competitive OS, there being, until now, essentially two reliable options: Microsoft’s Windows (which they had to pay for), and Android (which OEMs obtain on a free-license basis; even if they have to pay some royalties….to Microsoft! ; some even say that Microsoft makes more money from Android than from the Windows mobile OS). Not surprisingly, the market tends to favor the open source model and, quite logically, Microsoft doesn’t like that (you’ll recall that it also “had issues” with open source OS for PCs). It’s against this background that the complaint comes, in what some see as an attempt to reverse the course of the business model that is proving most successful.
On market power/dominance as a pre-requisite.
Every press-clip citing FairSearch’s allegations refer to the claim that Android enjoys a market share of 70%. This is a bit equivocal. In reality, the fact appears to be that 70% of smartphones (leaving tablets, led by Apple, aside on the assumption that they belong to a different market) shipped in the last quarter of 2012 had Android. And in reality, usage market shares appear to show a duopoly of iPhones and Android phones (see here or here) rather than an Android monopoly; moreover, revenue-baded market shares clearly tilt the balance in Apple’s favor (as explained here) [As to the future trend: Android is certainly doing spectacularly well lately, but we bet iPhone sales will increase once Apple abandons its (rather Steve Job’s) exclusive-good marketing strategy, which is very profitable (see previous hyperlink) but has costs in terms of market share. Android phones sell very well, among other reasons, because they are often subsidized by operators; iPhones on the other hand have traditionally been quite costly. The moment iPhones are cheaper Apple’s share should increase significantly] So, in reality, Android seems to face rather intense competition from Apple’s iOS, Windows, Blackberry; even its main customer (Samsung) has also developed its own OS Bada/Tizen (it also “multi-homes” by licensing Windows for some devices).
Against the background of what would appear to be a competitive smartphone market, the way to come up with a monopoly-like share would require 1) to distinguish separate markets for tablets (where Apple is the leader) and smartphones; and 2) to also take Apple and Blackberry out from the smartphone-only calculation by defining a relevant market for licensable mobile OSs, which intuitively seems a bit of a Procrustean move.
More importantly, forget about market shares for a second. The truly relevant question is: does Android enjoy significant market power? Can it profitably raise prices or decrease output or innovation? Because Android is OpenSource/FreeSoftware (obtainable for free, its source code is entirely disclosed, it can be freely modified/”forked” [see here for “what the fork is forking”?] and appropriated by third parties: just look at Replicant, CyanogenMod, MIUI or at Amazons’ Kindle) we don’t see how Google would be able to exert market power in any way. Even Microsoft and Nokia could take Android and do what they please with it (they could even try to fork/improve it and compete with Google).
Actually, could we even say for sure that there is a “market” for licenseable OSs when all licenses (except Microsoft’s) are FreeSoftware licenses?
Moreover, and as regards innovation, there are very few markets with innovation cycles as fast as the one for smartphones’ OSs having featured a number of leaders in recent years: Palm, Symbian, iPhone, Blackberry and now Android. And this is because given the prevalence of FreeSoftware barriers to entry are extremely low. The moment someone comes up with a more innovative (better) product (including an improved version of Android unrelated to Google), Google would also lose its current lead.
But, for the sake of discussion, let’s assume that Android is dominant and look at the theories of harm, which bring up some interesting issues In our second post we’ll discuss the predatory pricing claims, and in our third post we’ll deal with the bundling aspects of the case.
Mens Sana in Corpore Sano
Our motto (above) says it all.
At chillingcompetition, we like people who combine business and pleasure.
And we are particularly fascinated by those who mix serious lawyering and sport.
Alfonso is perhaps the physical incarnation of this.
Sport, especially basketball, was always big in his life as a kid.
When he moved to Brussels as a young lawyer, he started socializing running at the Aspria.
And in more recent years he has seemed willing to explore new, extreme sporting territories like gastronomic orgies of jamon serrano and trappist beer drinking.
With this background, we are proud to post above a picture of the fastest competition lawyer in town.
Alfie pays a drink to the reader who finds the man behind the helmet.
Competition Law Everywhere
In Montenegro, where I spent my hols, the price of a liter of gasoline is €1.38.
This price is the same everywhere in the country. And it is the same in all petrol station networks.
Me find this reasonably cheap as compared to most Western EU countries. But me also find this price curiously uniform.
Two obvious explanations spring to my obsessed antitrust mind: 1. cartel; 2. government regulation.
There’s worse though: a well-known car rental agency has confronted me with a real life example of abusive unfair pricing.
If you don’t return the car with the initial quantity of oil, the car rental company charges three times the price per missing liter of gasoline (!) – unless you pay black cash, in which case they charge you €1.5/liter to refuel the car…
I fully grasp that car rental firms want to recover vehicles with a sufficient quantity of gasoline, so as to avoid the costs of refueling them constantly.
But the alternative would be to charge customers for the missing quantity of gasoline at a rate equal to 1.38€ liter + an average increment covering the cost incurred for refuelling the vehicles.
I have not done the math short of data on this (+ I was on hols), but the 3x price formula looks really excessive.
The bottom line: yet another tactic that seeks to exploit the lazy mind bias of locked-in consumers.
Chillin'Competition 