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Free market champions or a cosy cartel?

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Andrew Orlowski
·6-min read
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big tech 'cartel'
big tech 'cartel'

It had been a long night, but Google’s executive chairman Eric Schmidt could look back at his work in the Democratic Party’s election night ‘boiler room’ with quiet satisfaction. Schmidt’s corner was the dubbed the “cave”, where a crack team of 30 hand-picked analysts had pored over their laptops.

Now they could relax. After a nerve-racking autumn in which President Obama’s Republican rival Mitt Romney was level with, or ahead of the incumbent, Obama had won by a larger majority than anyone expected: five million votes. Schmidt was happy to take the plaudits. Bloomberg News credited the Google chairman’s team for the “surprising” margin.

What happened next was remarkable. Within weeks, the second Obama administration wrapped up multiple competition probes into Google, promising not to revisit the company for five years in exchange for voluntary changes giving rivals fair access to crucial patents and lifting restrictions on advertisers. It would appoint Google executives and senior counsels to several top administrative positions overseeing the tech sector, including competition policy and intellectual property.

Sensing the political weather, Microsoft, Google’s most tenacious public foe, made peace. Over the next few years, the large tech platforms grew and grew. And with the market becalmed, investors turned away from funding competitors that could challenge them, towards ideas based on regulatory loopholes, like Uber and WeWork, or to wildly speculative new fads, such as the blockchain.

Scott Cleland, a former George HW Bush administration official and veteran Google watcher, says: “It’s a $4 trillion question – how did Google, Facebook, Microsoft and Apple go from a $1 trillion valuation to a $5 trillion valuation today?” For Cleland the answer is simple: “They beat the antitrust rap”.

From documents that have only now leaked in full and by accident, we know that the Federal Trade Commission (FTC) walked away from taking competitive action against Google days after Obama was re-elected despite the recommendations of its own antitrust experts. America’s monopolies watchdog abandoned its probe into the mobile market, again defying its staff. Renata Hesse, a former Google outside counsel brought into the FTC’s antitrust unit, signed off on the deals.

Google was effectively left to bundle and integrate search and its other products into its mobile software, Android, as it wished. Today Android accounts for seven out of eight smartphones used in the world.

The most damaging of the accusations to land on the tech giants is incendiary. It’s the accusation that they do rather more than peacefully co-exist – that today, they step aside to assure each other’s interests. They have been caught once before, being fined $325m in 2011 for conducting a wage-fixing cartel that kept Valley engineers' salaries low. But these new allegations involve entire markets.

Trouble in Texas

A lawsuit brought by a coalition of Texas and other US state Attorneys General shed new light on the hitherto secret world for the first time. It is underpinned by academic work by a former entrepreneur turned legal scholar, Dina Srinivasan, whose company was bought by WPP.

The Texas lawsuit describes an agreement between the two giants of the ad duopoly, Google and Facebook, dubbed Jedi Blue. This headed off the threat of an auction called “header bidding” that had worried both of them, as it allowed a publisher to choose a better price. Under the contract Facebook received preferential treatment when bidding in auctions. Srinivasan says the absence of regulation in ad exchange markets, the trading desks that fill the blank white boxes in your browser with adverts is striking.

What is 'Jedi Blue'?
What is 'Jedi Blue'?

“Ad exchanges are the highest volume trading platforms in the world – they handle a higher volume of transactions than forex or equities. Google is acting as the seller’s broker. It’s acting as the buyer’s broker. It’s running the exchange.

“It has also traded ahead of orders (‘last look’), which is similar to front running.”

Google share of digital ads in UK
Google share of digital ads in UK

Not everyone agrees this means foul. Aurelien Portuese, author of the book Antitrust Populism and director of antitrust and innovation policy at think tank ITIF, which lists Google as a funder says that “the media portray it as a conspiracy but it’s really a vertical loyalty rebate made possible by Facebook’s buyer power”.

Yet even Portuese agrees that a market maker owning so much privileged information is not ideal, and welcomes transparency moves. “There’s a need to make the market more transparent and have some regulation so we can minimise the advantage of the information you use for yourself and deliver to partners.” It just isn’t evidence, for him, of collusion.

“I’m sceptical there’s evidence of collusion, but remember, there doesn’t have to be,” one Brussels antitrust veteran told us.

The Texas case was amended to include Google’s new architecture for personal data processing, Privacy Sandbox, which rivals fear handicaps third party competitors by increasing control over tracking and sign-ins. It’s a case UK competition watchdogs are investigating. Apple has been happy to help Google by speeding up the obsolescence of third-party tracking cookies in Safari – the lawsuit details an Apple employee stating that “our vision is that we work as if we are one company”.

Searching for answers

Tim Cook - Yui Mok /PA
Tim Cook - Yui Mok /PA

Regulators are also examining the extraordinary payments that Google pays the iPhone maker to be the default search engine on iOS.

When asked for comment on the Texas disclosures Apple pointed to a 2018 interview in which its chief executive Tim Cook said “I think their [Google’s] search engine is the best”.

The European Commission has been looking at each of the incumbents’ dominance over app stores. Both take a 30pc cut of revenue from small developers.

Apple's app fees: at a glance
Apple's app fees: at a glance

The collusion accusation is incendiary because it goes to the heart of business culture.

Think tank Open Markets Institute’s executive chairman, Barry Lynn, rejects the theory that Obama felt he owed Schmidt’s data wizards anything. If anything, Google was pushing at an open door. “Google were new and what was cool, what was clean and what was great in the world. They were supposedly the best and the brightest – and Obama was a sucker for that.”

For Srinivasan, the United States’ Government’s generosity to Google weakens its moral authority on the world stage.

“Securities regulators from over a hundred countries cooperate through IOSCO to develop rules for fair trading in exchange markets,” she says. “What does it mean to apply one set of rules to equities or even crypto exchanges, but a different set to ad exchanges?”

Andrew Orlowski is research director of Think of X.