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The Government vs. Big Tech: Arguments Each Side Could Make

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09/09/2019 | 08:33am EDT

By James V. Grimaldi and Brent Kendall

WASHINGTON -- Are big technology companies using monopoly power to defend and extend their dominance over the U.S. digital marketplace?

That is the core question antitrust enforcers -- the Justice Department, the Federal Trade Commission and a number of state attorneys general -- are asking as they scrutinize four tech giants for potential violations.

Two separate groups of attorneys general are investigating Alphabet Inc.'s Google and Facebook Inc. The Google probe, led by Texas, is expected to be detailed at a news conference Monday. The Facebook investigation was confirmed Friday by New York Attorney General Letitia James, who is leading that effort.

Federal antitrust enforcers are also looking at Google and Facebook, as well as Amazon.com Inc. and Apple Inc.

If a case results from any of those avenues, as many experts predict, it will take antitrust enforcement into uncharted, digital-age territory. Courts haven't seen a major monopolization case since the Justice Department sued Microsoft Corp. two decades ago.

Federal antitrust laws are broadly written, giving the government flexibility to apply them to new forms of monopolistic conduct as the economic landscape evolves. The Sherman Antitrust Act of 1890, for example, outlaws monopolization and "every contract, combination, or conspiracy in restraint of trade" that is considered unreasonable.

Here is a look at arguments that antitrust enforcers could make, and the companies' potential rejoinders, based on testimony before Congress and the FTC, interviews with antitrust scholars and people familiar with the government's preliminary investigations.

The Potential Case Against Google:

--That Google has used its dominance in online search to solidify its dominance in internet advertising, creating an unfair advantage over publishers and rival tech firms that sell and place ads online.

Google, thanks in part to acquisitions of potential rivals such as DoubleClick, has come to dominate software tools at every layer between online advertisers and websites, including the main tech platform that connects buyers and sellers of display ads, this argument goes.

That middleman status has given it great power, especially because no one else has anything like the data Google possesses on publishers, advertisers and what consumers search for.

Advertisers are boosting their spending on digital ads, but much of the money goes to Google and Facebook, not publishers, whose ad revenues continue to decline. (News Corp, publisher of The Wall Street Journal, is among those raising objections.)

--That Google won or maintained its huge market share of online ad sales by excluding others that could have competed, including through contractual terms that make it harder for advertisers and publishers to work with other ad businesses that want to compete with Google.

Advertisers feel they must use Google's products, rather than tools from other companies, according to this argument. And in 2016, Google began requiring that advertisers use its tools to buy ads on its YouTube channel, which has by far the biggest audience for online videos.

--That Google uses its dominant core businesses to unfairly favor its other products and services at the expense of rivals.

Google biases its own search results in favor of Google offerings, the European Union found in levying a $2.7 billion fine in 2017. One recent study said that less than half of the mobile and desktop searches on Google result in a user clicking through to a non-Google site.

The EU also imposed a $5 billion fine on Google for requiring smartphone makers using Google's market-leading Android operating system to pre-install Google's search app and its Chrome browser on their devices.

Google's Defense:

--Google has an enviable place in online advertising, but it doesn't have monopolistic pricing power.

Google competes with other big tech companies including Facebook and Amazon for ad dollars, and weak demand for old advertising models -- not its role in the ad-tech machinery -- is the reason publishers haven't reaped more of a windfall from digital ads.

--Google's actions are geared toward goals like giving users the information they want, as quickly as possible. Sometimes that means directing consumers to Google sites and services, the company says.

Supreme Court precedent states that companies such as Google generally have no duty to assist in promoting a rival. In a 2004 ruling, the high court threw out antitrust allegations that Verizon Communications Inc. provided insufficient service to rival telecom companies using its phone lines.

--Many of Google's services are free to the public, with consumers effectively paying with the personal data they generate.

Judges may face challenges assessing the nontraditional products that companies like Google and Facebook offer. "It's not like having 90% of the market for toothpaste," said Cleveland State University law professor Christopher Sagers.

The Potential Case Against Facebook

--That Facebook has achieved and maintained its dominance through a pattern of acquiring upstart firms that had become competitive threats.

Of the roughly 90 companies Facebook bought in 15 years, two stand out as rivals that could have risen to challenge Facebook: Instagram, the world's largest photo-sharing service (2012), and WhatsApp, the largest instant-messaging app (2014).

While antitrust enforcers believe it is illegal for a company to buy startups for the purpose of killing emerging rivals, neither the FTC nor Justice Department has brought such a case after the fact.

--That Facebook acquired monopoly power through deceptive promises about privacy.

Facing competition from other social-media websites in the early 2000s, Facebook stood out among rivals such as MySpace by promising consumers superior privacy protections. (From 2005-2011, MySpace was owned by News Corp, which owns The Wall Street Journal.)

Then, as Facebook became the dominant social-media platform, it didn't always honor those privacy pledges. The FTC levied a record $5 billion fine against Facebook this year for privacy violations.

Under the Sherman Act, it is illegal for a company to acquire monopoly power by engaging in conduct beyond "competition on the merits."

--That Facebook abused its market dominance to effectively require consumers to allow tracking of their internet usage and exclude competitors in online advertising.

Facebook, the argument goes, can exploit its dominance to persuade consumers to accept terms allowing the company's use of their personal data that they would reject if there were a truly competitive social media platform available.

This allegation led Germany last year to order Facebook to stop tracking user's web information without consent, though the company recently won a favorable appellate ruling. The litigation is ongoing.

--Facebook leverages the power of its data by sharing it with strategic partners while cutting off access to hobble potential competitors, such as Twitter Inc.'s Vine, a video app that is now closed, the claim goes.

Facebook's Defense

--Facebook says it doesn't have monopoly power and faces numerous rivals, including Twitter, Snapchat, Apple, Pinterest, Microsoft's Skype, Google and Amazon.

Competition is vigorous because "barriers to entry for digital platforms are low," said Matt Perault, public policy director of Facebook, testifying before Congress.

The company also faces growing competition for its members' time: "Users increasingly spread their time between more and more services," Mr. Perault said.

--Facebook has acquired companies that have complementary strengths to make its social-media platform a better experience for consumers -- and not with the intent of putting a competitor out of business.

Also, Facebook likely would argue that the companies it bought wouldn't have grown to the same extent without Facebook's investment and know-how.

The Potential Case Against Amazon

--That Amazon's rise -- and the tactics that facilitated it -- have squeezed suppliers and harmed rival sellers, creating different types of disadvantages for consumers, such as lower product quality and reduced innovation.

Amazon sells not only its own products, but also is a dominant platform for non-Amazon, third-party sellers. Those vendors now account for more than half of the company's global sales, and the platform is crucial to their survival.

Third-party sellers say Amazon imposes fees and terms that the company couldn't sustain if it faced a real online competitor, and benefits from an omniscient view of these companies' sales data and customer relationships.

"It would be as if Walmart owned our malls and Main Streets, decided which firms could operate in these spaces and on what terms, and surveilled every move they made," Stacy Mitchell, co-director of the Institute for Local Self-Reliance, an advocacy group for independent businesses, said in recent congressional testimony.

A study published by Harvard University found that Amazon used its data to identify independent sellers' best-selling products and then introduce its own version. The Amazon brand often then became the default search option on the platform, the study found.

--That Amazon's tactics can lead to higher prices on other websites.

Some vendors that could sell their products more cheaply elsewhere, thanks to fees lower than Amazon's, say they are fearful of doing so.

"If we sell our products for less on channels outside Amazon and Amazon detects this, our products will not appear as prominently in search," toy vendor Molson Hart, who has spoken with the FTC, wrote in a post on Medium in July.

--That Amazon has limited competition by removing some vendors from its site.

(MORE TO FOLLOW) Dow Jones Newswires

09-09-19 0832ET

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