DOJ

Reining in Big Tech

March 31, 2023
Antitrust, Litigation

Shawn Zhang, MJLST Staffer

Introduction

On Tuesday January 24, 2023, the United States Department of Justice, along with the Attorneys General of eight states, have jointly filed a civil antitrust lawsuit against Google for monopolizing multiple digital advertising technology products in violation of Sections 1 and 2 of the Sherman Act.

Background

The Sherman Act (the Act) is the first antitrust statute of the U.S., passed in 1890 as a “comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade.” The alleged violations are for Sections 1 and 2 of the Act.

Section 1 is broad and sweeping in scope. Section 1 declares restraint of trade involving “contract, combination, or conspiracy” to be illegal. A key feature of Section 1 is that the words “contract, combination, or conspiracy” are all concerted actions that require more than one party to engage. Therefore, Section 1 cannot apply to unilateral actions. An example of such concerted action would be horizontal price fixing; multiple competitors in the same market agree with each other to set the same price for a given product. The statute then describes the penalty for violating the Act of being a maximum fine of $100 million for corporations, and/or maximum imprisonment of 10 years.

Section 2, unlike Section 1, prohibits monopolization and the language “every person” indicates that it does not require concerted action. A single entity even attempting to monopolize will be penalized. Concerted actions for monopolization or attempts to monopolize are covered as well by the language “or combine or conspire with any other person or persons.” The penalties for violations of either section can be severe, resulting in massive fines and/or imprisonment. Most enforcement actions are civil, but individuals and businesses may be prosecuted by the Department of Justice. However, criminal prosecutions are typically limited in practice.

Analysis

Google’s business model is driven primarily from their search engine services. The purpose is to deliver users the answers they are seeking. Through this search engine function, Google gains the opportunity to sell advertisements, in which Google earns huge amounts of its revenue from. With its dominance in the search engine industry, Google has obtained dominance in selling advertisements as well.

The complaint alleges that Google monopolizes key digital advertising technologies, collectively referred to as the “ad tech stack,” that website publishers depend on to sell ads. Advertisers rely on this ad tech stack to buy ads and reach potential customers. The complaint also alleges that Google has engaged in a course of anticompetitive and exclusionary conduct over the past 15 years that consists of neutralizing or eliminating ad tech competitors through acquisitions. By doing this, Google has maintained dominance in tools relied on by website publishers and online advertisers. “The Department’s landmark action against Google underscores our commitment to fighting the abuse of market power,” said Associate Attorney General Vanita Gupta. The lawsuit seeks to hold Google accountable for its “longstanding monopolies” in digital advertising technologies that content creators use to sell ads and advertisers use to buy ads on the open internet.

The key contentions to be fought over in this lawsuit includes acquiring competitors, forcing adoption of Google’s tools, distorting auction competition, and auction manipulation. The Act seeks to maintain competition in the markets and eliminate monopolies; the Department of Justice attempts to enforce the spirit of the Act by eliminating the alleged monopolistic behaviors by Google and restoring competition. The agency ultimately seeks both equitable relief on behalf of the American public as well as treble damages for losses sustained by federal government agencies that overpaid for web display advertising.

In light of the developments in antitrust laws, a company must only be found to have violated the statute when it has “engaged in practices that extend beyond competition on the merits.” The plaintiffs must prove that Google’s conduct harms competition, restrains trade, or amounts to monopolization or attempts of monopolization. It is difficult to determine whether Google has engaged in those aforementioned practices, as they could be seen as efficient business conduct. But if the Department of Justice wins the case, it could have huge implications for Google and the rest of the tech industry.

Implications for the Tech Industry

If the Department of Justice succeeds in their lawsuit, Google may face several consequences including divestiture. Microsoft was found to have violated antitrust laws in the late 1990s, and was forced to break up its company into separate companies. Another possible relief would be to force Google to allow other search engines to be the default program for devices including phones and tablets  – which the DOJ has attempted to do in the past. “Alphabet Inc.’s Google pays billions of dollars each year to Apple Inc., Samsung Electronics Co. and other telecom giants to illegally maintain its spot as the No. 1 search engine … Google’s contracts form the basis of the DOJ’s landmark antitrust lawsuit, which alleges the company has sought to maintain its online search monopoly in violation of antitrust laws.”

This case could renew the scrutiny against other tech giants such as Meta and Amazon. If the Department of Justice succeeds, it’s highly likely that they will go after other tech giants as well. The victory of the government may begin an era of tech reform, making it easier for competitors to enter the market and thus offering more options for consumers. Tech giants may be forced to reduce their prices if there are more competitors in the market, which may lead to better consumer welfare.

On the other hand, the government’s victory may harm the tech industry. Google and other tech giants are highly efficient businesses that can provide services for lower costs through economies of scale. By forcing them to split up their companies and preventing them from reaching their efficiencies, their services may become more expensive. However, efficiency is not a justification for monopolies, as monopolies largely bring more harm than benefits to consumers  by being able to impose unreasonably high prices. An example of price gouging due to monopolistic practice was when Martin Shkreli thwarted competition for the drug Daraprim (used to treat HIV patients) and increased prices from $13.50 per pill to $750.00 per pill.

Conclusion

This lawsuit will be watched closely by regulators and tech giants as it could embolden regulators to go after other companies if this attempt is successful.  Regulators are actively looking to rein in big tech companies, as evident by all the antitrust investigations in the past decades, as well as the bill targeting big tech companies currently moving through Congress. The fight between regulators and the tech industry continues, and we look forward to seeing the courts determine a fair ruling that may pave the road for a better economy with greater consumer welfare.

 

Call of Regulation: How Microsoft and Regulators Are Battling for the Future of the Gaming Industry

February 21, 2023
Agencies, Antitrust, EU Law, FTC, Video Games

Caroline Moriarty, MJLST Staffer

In January of 2022 Microsoft announced its proposed acquisition of Activision Blizzard, a video game company, promising to “bring the joy and community of gaming to everyone, across every device.” However, regulators in the United States, the EU, and the United Kingdom have recently indicated that they may block this acquisition due to its antitrust implications. In this post I’ll discuss the proposed acquisition, its antitrust concerns, recent actions from regulators, and prospects for the deal’s success.

Background

Microsoft, along with making the Windows platform, Microsoft Office suite, Surface computers, cloud computing software, and of new relevance, Bing, is a major player in the video game space. Microsoft owns Xbox, which along with Nintendo and Sony (PlayStation) is one of the three most popular gaming consoles. One of the main ways these consoles distinguish themselves from their competitors is by categorizing certain games as “exclusives,” where certain games can only be played on a single console. For example, Spiderman can only be played on PlayStation, the Mario games are exclusive to Nintendo, and Halo can only be played on Xbox. Other games, like Grand Theft Auto, Fortnite, and FIFA are offered on multiple platforms, allowing consumers to play the game on whatever console they already own.

Activision Blizzard is a video game holding company, which means the company owns games developed by game development studios. They then make decisions about marketing, creative direction, and console availability for individual games. Some of their most popular games include World of Warcraft, Candy Crush, Overwatch, and one of the most successful game franchises ever, Call of Duty. Readers outside of the gaming space may recognize Activision Blizzard’s name from recent news stories about its toxic workplace culture.

In January 2022, Microsoft announced its intention to purchase Activision Blizzard for $68.7 billion dollars, which would be the largest acquisition in the company’s history. The company stated that its goals were to expand into mobile gaming, as well as make more titles available, especially through Xbox Game Pass, a streaming service for games. After the announcement, critics pointed out two main issues. First, if Microsoft owned Activision Blizzard, it would be able to make the company’s titles exclusive to Xbox. This is especially problematic in relation to the Call of Duty franchise. Not only does the Call of Duty franchise include the top three most popular games of 2022, but it’s estimated that 400 million people play at least one of the games, 42% of whom play on Playstation. Second, if Microsoft owned Activision Blizzard, it could also make its titles exclusive to Xbox Game Pass, which would change the structure of the relatively new cloud streaming market.

The Regulators

Microsoft’s proposed acquisition has drawn scrutiny from the FTC, the European Commission, and the UK Competition and Markets Authority. In what the New York Times has dubbed “a global alignment on antitrust,” the three regulators have pursued a connected strategy. First, the European Commission announced an investigation of the deal in November, signaling that the deal would take time to close. Then, a month later, the FTC sued in its own administrative court, which is more favorable to antitrust claims. In February 2023, the Competition and Markets Authority released provisional findings on the effect of the acquisition on UK markets, writing that the merger may be expected to result in a substantial lessening of competition. Finally, the EU commission also completed its investigation, concluding that the possibility of Microsoft making Activision Blizzard titles exclusives “could reduce competition in the markets for the distribution of console and PC video games, leading to higher prices, lower quality and less innovation for console game distributors, which may, in turn, be passed on to consumers.” Together, the agencies are indicating a new era in antitrust – one that is much tougher on deals than in the recent past.

Specifically, the FTC called out Microsoft on its past acquisitions in its complaint. When Microsoft acquired Bethesda (another video game company, known for games like The Elder Scrolls: Skyrim) in 2021, the company told the European Commission that they would keep titles available on other consoles. After the deal cleared, Microsoft announced that many Bethesda titles, including highly anticipated games like Starfield and Redfall, would be Microsoft exclusives. The FTC used this in its complaint to show that any promises by Microsoft to keep games like Call of Duty available to all consumers could be broken at any time. Microsoft has disputed this characterization, arguing that the company made decisions to make titles exclusive on a “case-by-case basis,” which was in line with what it told the European Commission.

For the current deal, Microsoft has agreed to make Call of Duty available on the Nintendo Switch, and it claims to have made an offer to Sony, guaranteeing the franchise would remain available on PlayStation for ten years. This type of guarantee is known as conduct remedy, which preserves competition through requirements that the merged firm commits to take certain business actions or refrain from certain business conduct going forward. In contrast, structural remedies usually require a company to divest certain assets by selling parts of the business. One example of conduct remedies was in the Live Nation – Ticketmaster merger. The companies agreed not to retaliate against concert venue customers that switched to a different service nor tie sales of ticketing services to concerts it promoted. However, as the recent Taylor Swift ticketing dilemma proves, conduct remedies may not be effective in eliminating anticompetitive behavior.

Conclusion

Microsoft faces an uphill battle with its proposed acquisition. Despite its claims that Xbox does not exercise outsize influence in the gaming industry, the sheer size and potential effects of this acquisition make Microsoft’s claims much weaker. Further, the company faces stricter scrutiny from new regulators in the United States. Assistant Attorney General Jonathan Kanter, who leads the DOJ’s antitrust division, has already indicated that he prefers structural remedies to conduct ones, and Lina Khan, FTC commissioner, is well known for her opposition to big tech companies. If Microsoft wants this deal to succeed, it may have to provide more convincing evidence that it will act differently than its anticompetitive conduct in the past.

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