Remedies in DOJ v. Google (Part I): Why a Breakup Is a Bad Idea
The U.S. Department of Justice (DOJ) has issued a proposed remedy framework in the DOJ v. Google search case to District Judge Amit P. Mehta, who in August held that Google illegally monopolized the search market in violation of Section 2 of the Sherman Act. In its filing, the DOJ proposes both structural remedies, specifically the divestiture of key businesses like Chrome and Android, as well as behavioral remedies that would, for example, “prevent Google from using products such as Chrome, Play, and Android to advantage Google search and related products and features—including emerging search access points and features, such as artificial intelligence.” While the enumeration of behavioral remedies is not surprising, structural remedies are not only unusual in monopolization cases but would be a disaster for American innovation amidst an increasingly dire techno-economic rivalry with China.
Forty years ago, to address concerns that AT&T would, among other things, leverage its power in local telecommunications markets to obtain an advantage in the long distance market, the District Court for the District of Columbia approved a structural remedy for AT&T that both separated AT&T's local network from its long distance network, as well as broke up its local network into seven regional holding companies or “Baby Bells.” While many would point to falling long distance rates as proof of the remedy’s success, as commentators have noted, in reality, rates fell more rapidly in the EU and Canada, where there was no similar breakup. Indeed, it was ultimately not antitrust enforcement but new wireless innovation creating competition in the long-distance market. Today, the telecommunications space is again constituted by large, vertically integrated firms across both local and long distance. This suggests that vertical integration is much more about the network and scale economics defining the telecommunications industry rather than enabling anticompetitive conduct.
While the AT&T remedy thus had little to no benefits, it came at a great expense to American innovation and competitiveness. As ITIF’s Rob Atkinson has recently explained, AT&T’s breakup led to the decline of Bell Labs, a global leader in innovation, which was supported by the scale and scope achieved by AT&T's large local network. The breakup also harmed Western Electric, AT&T's innovative equipment provider, which had similarly taken advantage of a captive market to invest in innovation. Following the breakup, however, Western Electric lost its share to European and Canadian competitors like Ericsson, Nortel, and Siemens, which harmed America’s overall competitiveness. Indeed, after being incorporated into Lucent, Bell Labs ultimately fell into European hands following its acquisition by Nokia.
Whereas the AT&T breakup harmed U.S. innovation and competitiveness, the remedy in U.S. v. Microsoft, which did not involve a breakup, had a totally different result. At one level, the central competitive concern in Microsoft was similar to that in AT&T: Microsoft leveraging its strong position in one market (operating systems) to gain a foothold in another market (browsers). While the district court recommended following the AT&T model of separating Microsoft's operating system from its browser and other applications business, the final remedies were behavioral. The court required Microsoft to make it technically feasible for original equipment manufacturers to remove Internet Explorer as the default browser and promote third-party browsers. It also prohibited Microsoft from contractually limiting or otherwise retaliating against third parties from distributing rival browsers and applications.
Unlike AT&T, the behavioral remedies in the Microsoft settlement did not hinder innovation and competition. Instead, they were followed by a U.S.-led digital revolution key to protecting America's global techno-economic leadership. Indeed, Microsoft today remains a leading American innovator and has committed billions of dollars in investments to drive the next great techno-economic wave in the form of artificial intelligence. What’s more, the Biden administration’s DOJ has even praised the Microsoft settlement in its lawsuit against Apple, claiming that the remedies “created new opportunities for innovation in areas that would become critical to the success of Apple's consumer devices and the company itself.” Indeed, in the words of Connecticut Senator Richard Blumenthal and former Biden administration official and neo-Brandeisian Tim Wu, without the Microsoft remedy, “Google, the tiny start-up, would have faced an unfair fight against Bing. Microsoft-Myspace might have become the default social network instead of Facebook. And who knows whether Netflix or any other online video service would have been started?”
The lesson from the AT&T and Microsoft remedies is clear: while structural remedies present a huge risk of harming U.S. innovation and competitiveness, behavioral remedies are much less likely to have this result. Nevertheless, the DOJ is pushing for a breakup of Google, which, analogous to AT&T, would negate the vast efficiencies of the network effects that flow across the highly integrated digital ecosystem Google has created. What’s more, the reason America is leading in today’s artificial intelligence revolution like it did in yesterday’s digital revolution is because, like AT&T before it was broken up, private firms like Google have the scale and scope to spend billions in R&D that includes Nobel Prize winning projects. A breakup of Google is thus poised to severely weaken the company’s ability to drive AI innovation and, as a result, America’s overall competitiveness in this critical industry.
Thankfully, as the Microsoft court intimated, to obtain a structural remedy the DOJ should face a high legal burden and specifically demonstrate a significant causal connection between Google's control of its Chrome and Android products and the creation and maintenance of its alleged monopoly power in search. On this score, a breakup is a far less justifiable remedy for Google than either AT&T or Microsoft. This is because the theory of the DOJ’s case is only that Google abused a monopoly position in search through agreements with third-party browsers and Android OEMs that secured its status as the default search engine. There was no allegation that Google used its position in Chrome or Android to maintain its search monopoly (or vice versa). Moreover, in the Microsoft case, there was a concern that Microsoft was stifling next-generation competition from the digital revolution or the infamous "internet tidal wave." However, there is no similar basis for thinking that Google's behavior hinders AI development, which Judge Mehta found was not constraining Google's alleged monopoly power in search.
At bottom, Judge Mehta’s flawed ruling on the merits of the DOJ v. Google search case has unfortunately provided the neo-Brandeisians at the DOJ an opportunity to repeat the mistakes of AT&T and break up one of America’s leading innovators. While doing so has long been the dream of the neo-Brandeisians, it would have disastrous consequences for consumers, innovation, and American competitiveness. Such a remedy would not just punitively cripple Google, but undermine the ability of the U.S. to retain its leading position in global high-tech innovation in the face of aggressive Chinese competition for techno-economic dominance in advanced technologies, as a recent ITIF report describes. Hopefully, as in Microsoft, initial fervor for a breakup will give way to a more sensible discussion of the behavioral remedies that Google should face—assuming Judge Mehta’s opinion survives on appeal—which we will delve into in a second commentary on this subject.
