Antitrust and Aggregation

Fifteen years on, perhaps the most pertinent takeaway from Microsoft’s antitrust battles with both the United States and Europe is how little it seems to have mattered. From a financial perspective, Microsoft grew revenue unimpeded from $15 billion in 1998 when the case was initiated to $95 billion last year.1 Internet Explorer, meanwhile, peaked at 95% market share in 2004, two years after the U.S. case was settled; in Europe, Windows XP N, which excluded Windows Media Player, sold only a few thousand copies, and browser choice did nothing to change underlying market trends.

What ultimately undid Microsoft — and why that $95 billion revenue figure was a peak; the current trailing twelve month number is $87 billion — was that even as Windows continued to have a monopoly on laptops and desktops the definition of a computer was dramatically expanded to include smartphones (and, to a lesser extent, tablets). And while many Microsoft partisans argue that the antitrust-related restrictions caused the company to miss mobile, the truth is Apple’s iPhone succeeded by being a very different product than Windows, and Android leveraged a very different business model; if anything Microsoft’s PC dominance meant their mobile failure was inevitable as the company was ill-equipped to think differently.

Antitrust and the Google Play Store

This history is pertinent in light of the news that the European Commission has sent a Statement of Objections to Google alleging antitrust violations in how the company has leveraged monopolies in smartphone operating systems (Android), app stores (the Google Play Store), and search (Google Search). As I detailed on Thursday my preliminary takeaway is that Google is very likely to lose the case, not necessarily because of Android’s dominance or even search, but rather because of the Google Play Store; that is the linchpin on which the Commission’s case turns. The Play Store is the one part of the Google Mobile Services suite that is irreplaceable and thus the leverage enforcing the various requirements the Commission objected to, like making Google Search and Chrome defaults, and forbidding AOSP forks.

To be sure, Google Mobile Services has other world class apps. The difference, though, is that those other apps are products, not platforms. In the case of Google Maps, for example, the quality of the service is solely under the control of Google; by extension, the quality of a competitor like HERE Maps is similarly controlled by its owners. Presuming HERE invests sufficiently OEMs will have alternatives when it comes to mapping apps.

What makes the Play Store indispensable, on the other hand, are the millions of apps that reside there; to build an equivalent is not simply a matter of will and resources but of network effects: the more customers who use a particular app store, the more likely developers are to put their apps in that store, which will attract more customers and thus more developers in a virtuous cycle. And while the biggest factor in Google Play Store achieving this dominant position was its default inclusion in Android from the beginning, the effect I just described is a familiar one: aggregation theory.

Aggregation Theory and Antitrust

To briefly recap, Aggregation Theory is about how business works in a world with zero distribution costs and zero transaction costs; consumers are attracted to an aggregator through the delivery of a superior experience, which attracts modular suppliers, which improves the experience and thus attracts more consumers, and thus more suppliers in the aforementioned virtuous cycle. It is a phenomenon seen across industries including search (Google and web pages), feeds (Facebook and content), shopping (Amazon and retail goods), video (Netflix/YouTube and content creators), transportation (Uber/Didi and drivers), and lodging (Airbnb and rooms, Booking/Expedia and hotels).

The first key antitrust implication of Aggregation Theory is that, thanks to these virtuous cycles, the big get bigger; indeed, all things being equal the equilibrium state in a market covered by Aggregation Theory is monopoly: one aggregator that has captured all of the consumers and all of the suppliers.

This monopoly, though, is a lot different than the monopolies of yesteryear: aggregators aren’t limiting consumer choice by controlling supply (like oil) or distribution (like railroads) or infrastructure (like telephone wires); rather, consumers are self-selecting onto the Aggregator’s platform because it’s a better experience. This has completely neutered U.S. antitrust law, which is based on whether or not there has been clear harm to the consumer (primarily through higher prices, but also decreased competition), and it’s why the FTC has declined to sue Google for questionable search practices.

The European Commission, on the other hand, is much more concerned about protecting competitors with the assumption that will, in the long run, benefit consumers; it sounds like the same thing but as I noted last year, the way these approaches manifest themselves differ tremendously when it comes to aggregators:

Given that [aggregators’] “monopoly” is based on consumer choice it is highly unlikely that any of them will ultimately have antitrust problems in the U.S. absent a substantial shift in antitrust doctrine. And, on the flipside, it is very possible that all of them will ultimately have problems in Europe: Europe’s doctrine of prioritizing competition isn’t so much challenging U.S. tech company dominance as it is challenging the very structure of Internet-enabled markets.

That last line seems like an invitation to slam “Europe’s anti-tech thinking”, but actually I have a lot of sympathy for the Commission’s approach. One more implication of aggregation-based monopolies is that once competitors die the aggregators become monopsonies — i.e. the only buyer for modularized suppliers. And this, by extension, turns the virtuous cycle on its head: instead of more consumers leading to more suppliers, a dominant hold over suppliers means that consumers can never leave, rendering a superior user experience less important than a monopoly that looks an awful lot like the ones our antitrust laws were designed to eliminate.

The Microsoft Remedy

The problem is that by the time aggregators establish monopolies worth investigating under today’s antitrust laws there is little that can be done to change the facts on the ground. Whatever happens in this Android case, for example, will do nothing to diminish Google’s dominant position, just as prior action against Microsoft didn’t really diminish Windows, at least not in terms of browsers or media players.

It should be noted, though, that there was one remedy from the European Commission settlement with Microsoft that actually worked out quite well: Windows was required to document interoperability protocols for work group servers, which while designed for the benefit of established competitors like Sun, was actually more important for the open-source Samba project. Samba made it possible for non-Windows PCs and servers to be fully compatible with Windows-based networks, making it viable to use a Mac or Linux machine in corporate environments, or (more importantly) in corporate data centers, one of the first areas where the Windows monopoly started to come apart.

Of course Windows remained dominant on the desktop thanks to its application lock-in (i.e. a monopoly on suppliers); in an interesting what-if the U.S. nearly upended this as well. Originally the government demanded that Microsoft fully disclose and document all of its APIs, which would allow alternative operating systems to recreate them and thus run Windows applications with no modifications, removing the application lock-in. Instead the final settlement was much narrower:

Microsoft shall disclose to [relevant developers and other industry participants] for the sole purpose of interoperating with a Windows Operating System Product, … the APIs and related Documentation that are used by Microsoft Middleware to interoperate with a Windows Operating System Product.

Basically, Microsoft agreed to not favor their own software on Windows, leaving open source compatibility layers like Wine to reverse engineer Windows APIs, ensuring they would never achieve the degree of reliability Samba did.

The Problem of Implementation

Both of these approaches — interoperability and API disclosure — could be solutions when it comes to defusing the market power of aggregators:

  • Mandated interoperability would significantly reduce the switching costs for consumers as they could more easily compare services. For example, a meta ride-hailing app would significantly weaken Uber’s lockin, and the ability to export your social graph could better enable social competitors to arise.
  • API disclosure would have a similar effect on the supply side. Imagine if you could export your host ratings from Airbnb to a competitor, or your driver rating from Uber to Lyft (Albert Wenger has proposed something similar)

What, though, should be the standard that ensure these measures are effective before it’s too late? Perhaps a 200 million user threshold would trigger interoperability and API disclosure, which leads to the question of how do you define a user? Who audits that? And shouldn’t different industries have different numbers? Who exactly is going to figure that out and what assurances do we have they won’t suffer from regulatory capture? And then there’s enforcement — who ensures that the aggregators are actually opening up in good faith? After all, it took years and hundreds of millions of Euros to extract the interoperability standards undergirding Samba from a recalcitrant Microsoft insistent its intellectual property rights were being violated. And to be fair, Microsoft had a point: the company was being asked to not simply stop bad behavior or pay a fine but to effectively empower a competitor with their own IP.

Remember, though, that the entire point of enshrining intellectual property in the law is to spur innovation: as I’ve argued previously with regards to patents, technology with its high fixed costs and strong network effects has massive incentives that drive innovation; there is enough reward for being first that the preservation of intellectual property is less important than it may be in other industries. On the flipside, the danger of slow-moving regulators is even greater.

Is This Necessary?

Given that, perhaps the biggest question is whether or not we will look back in 15 years and wonder what the point was. Microsoft’s revenue may have had a long ways to grow back in 1998, but the truth is the company’s relevance to the industry had already peaked; that year their successor on top of the industry and — via the browser, on top of Windows — was founded in Palo Alto. It was named Google.

Similar, I have made the case that while Google may still grow, the company has peaked in relevance as well, eclipsed by Facebook. So sure, the European Commission can prosecute Google, but it won’t dent Android’s dominance, and it won’t deter whoever else has the problematic monopoly in the future.2 The incentives and feedback loops that drive towards domination are simply too strong (one could make the case that the most effective monopoly killer is the next monopoly).

To that end, there is no question that the broader point underlying Aggregation Theory holds: the (metaphorical) rules have changed, and it’s fair to believe that at some point the laws may have to as well. It won’t be easy, though, and the possibility of unintended consequences will be strong, particularly given the self-corrective resiliency tech has shown to date that provides a compelling argument for leaving well enough alone.

  1. Both figures on a trailing twelve-month basis 

  2. Maybe Facebook should hope that VR isn’t as mainstream as they claim it will be