Google Loses U.S. Antitrust Case, Search is Illegal Monopoly

A federal judge ruled that Google’s search engine is a monopoly and that the firm’s agreements with Apple, Mozilla, and others violates U.S. antitrust laws.

“Google is a monopolist, and it has acted as one to maintain its monopoly,” U.S. district court judge Amit Mehta writes in his 286-page ruling. “It has violated Section 2 of the Sherman Act.”

The U.S. Department of Justice (DOJ) and 8 U.S. states–California, Colorado, Connecticut, New Jersey, New York, Rhode Island, Tennessee, and Virginia–sued Google in January 2023, alleging that the online giant violated the Sherman Antitrust Act by engaging in illegal behavior to protect its search monopoly. 9 more states–Arizona, Illinois, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Washington, and West Virginia–joined the suit in April 2023, though Judge Mehta also narrowed the case somewhat that month to focus it on Google’s cozy arrangements with device makers–especially Apple–and web browser makers.

This focus was devastating to Google and Apple: During the subsequent trial in late 2023, it came to light that the online giant paid Apple over $10 billion a year to be the default search engine on the iPhone, and that payment reportedly exceeded $23 billion in 2023. The revelation shocked Apple’s fans, who were told that “everything that happens on iPhone stays on iPhone.” But with this guilty verdict, it’s going to be further damaging to both companies. It could also harm Mozilla, which relies on Google search engine payments to stay in business.

“Google has thwarted true competition by foreclosing its rivals from the most effective channels of search distribution,” Judge Mehta writes in the ruling, comparing the company and its behavior to Microsoft, which used similar tactics in the late 1990s to harm Netscape. “Google’s distribution agreements are exclusionary contracts that violate Section 2 [of the Sherman Act] because they ensure that half of all [online search] users in the United States will receive Google as the preloaded default on all Apple and Android devices, as well as cause additional anticompetitive harm. The agreements ‘clearly have a significant effect in preserving [Google’s] monopoly’.”

What Google is doing with its search agreements–with Apple, Mozilla, and others–is paying for placement at such a high price that it prevents potential competitors from even trying. This is the “barrier to entry” argument common to antitrust, as it skews what would otherwise be a healthy competitive environment by skewing the choices in its favor. The ruling notes that Google spent over $26 billion on traffic acquisition costs in 2021 alone, four times the cost of all of Google’s other search-related costs, including R&D, combined.

This is bad enough for web browser makers, but it’s incredible for Apple and the iPhone: At $20 billion per year or more, Google is probably contributing over 25 percent of Apple’s total Services revenues and at no cost to Apple. The ruling notes Apple executive Eddy Cue’s testimony explaining that Microsoft literally couldn’t pay enough to get Apple to switch from Google to Bing: Google Search was superior because Google could improve its results using the massive amount of data it got from Apple’s users. Or, as Judge Mehta put it, “Google’s distribution agreements have constrained the query volumes of its rivals, thereby inoculating Google against any genuine competitive threat.”

“No profit-driven firm in Microsoft’s position would invest the substantial sums required to enhance its search product when there is little to no genuine opportunity for a default distribution deal,” the ruling continues. “Google’s distribution agreements thus appear reasonably capable of having significantly contributed to disincentivizing Microsoft from enlarging its investment in search.”

The ruling verifies that Google paid Apple $20 billion in 2022, 17.5 percent of Apple’s annual profits, so its payment last year would have been higher. And that Apple was financially disincentivized from creating its own search engine, as Google’s huge annual payments were all profit, with no risk or expenses.

Google did win on some minor points, and Judge Mehta declined to sanction the company. But because Google was found to have violated U.S. antitrust laws, it must terminate its exclusive distribution agreements, subject to a separate penalties phase and an expected appeal. If this ruling is upheld, Google, Apple, and Mozilla could all suffer greatly. Microsoft could find that its fruitless investments in Bing will suddenly pay off in a regulated market for search. And in an extreme outcome, Google might even face a breakup order, which the DOJ indicated was a possibility.

More soon: I need some time to analyze this ruling. I’m sure there’s more in there.