The recent antitrust ruling against Google — the first major tech antitrust decision since Microsoft in 2001 — found the company guilty of anticompetitive practices. It also provided a wealth of information on arguably the most lucrative market in the technology space: search.
Many questions still remain, like what penalties Google will have to pay, the possibility of court-mandated breakup of the company and the specifics of how such actions might unfold. Interestingly, some potential penalties may end up benefiting Google more than harming it (or hurting other competitors, such as Apple, more).
Google has already declared its intent to appeal the decision, so I expect this case to drag on for a while.
I had a chance to go through the full ruling this past week. In this post, I’d like to discuss some of the most interesting notes from the trial regarding Google and the search market as a whole.
Google’s market dominance is tied to several factors
Before we jump into some of the details of the antitrust ruling, here’s a quick reminder of the scale of Google’s footprint in the search market:
- 3.5 billion searches run through Google every day.
- Google has approximately 90% of the search market share in the U.S.
- Google generated $146 billion in search revenue in 2021, at ~80% gross margins.
It’s hard to overstate Google’s dominance in the search market, which is why this ruling could be so consequential. Here are five key takeaways from the verdict that shed some light on how Google runs its business.
1. Google pays a lot of money for its default search engine status
One of the most eye-opening revelations of this case is just how much Google spends to maintain its position as the default search engine on various platforms, relative to other costs.
In 2021 alone, Google shelled out an eye-watering $26 billion to secure these default placements on devices and browsers — nearly four times more than all other search-specific costs combined.
These payments are structured as revenue-sharing agreements, where partners like Apple and Android device manufacturers get a cut of the advertising revenue generated from Google searches on their platforms.
In the words of the court:
“Google pays huge sums to secure these preloaded defaults. Usually, the amount is calculated as a percentage of the advertising revenue that Google generates from queries run through the default search access points. This is known as ‘revenue share.’ In 2021, those payments totaled more than $26 billion. That is nearly four times more than all of Google’s other search-specific costs combined.”
These payments played a significant role in Google’s guilty verdict, as they were seen as a way to lock out competitors and prevent them from achieving the scale necessary to compete effectively.
In fact, Google’s combined operational costs for running their search and ads businesses (approximately $19.5 billion per year) are still less than what they spend on securing default placements. The default payments are larger than all other costs associated with running the entire Google search and ads business.
2. Default bias gives Google a strategic advantage
Default bias refers to the natural tendency of users to stick with the preloaded or default options on their devices, often without considering alternatives, which I’ve written about before. The concept of “default bias” was a crucial factor in the court’s decision, as it explains why Google’s payments to secure default status are so effective.
The court noted:
“That users overwhelmingly use Google through preloaded search access points is explained in part by default bias, or the ‘power of defaults.’ The field of behavioral economics teaches that a consumer’s choice can be heavily influenced by how it is presented. The consensus in the field is that ‘defaults have a powerful impact on consumer decisions.’”
Google capitalizes on this bias by ensuring its position as the default search engine on major platforms like Apple’s Safari and Android devices. The ruling highlighted that approximately 50% of all general search queries in the United States flow through these default search access points, making it incredibly challenging for other search engines to gain traction. As the court explained:
“Individuals often are not aware that they are acting out of habit. Consequently, when users are habituated to a particular option, they are unlikely to deviate from it.”
By securing its default status on so many devices, Google effectively ensures that a majority of users continue to use its search engine. This strategy reinforces its market dominance.
3. Google uses its financial leverage to block competition
Microsoft has long tried to challenge Google’s supremacy in the search market with its own Bing search engine, but with limited success. Despite Microsoft investing nearly $100 billion in Bing over the past two decades, the search engine has struggled to capture significant market share.
The ruling highlights:
“Bing is Google’s largest general search competitor today. It is the only rival that crawls the web and generates its own search results. The next two largest search engines, Yahoo and DDG, syndicate their search results from Bing.”
However, Bing’s market share has never exceeded 12% — and on mobile devices, it’s even lower, at just 1.3% of search queries.
Despite Microsoft’s massive investment, Bing has struggled to secure the distribution deals necessary to significantly increase its market share. Microsoft made serious attempts to position Bing as the default search engine on Apple’s iOS devices — a potential game-changer given Apple’s vast user base. However, these efforts were largely unsuccessful due to Google’s dominant financial position and willingness to outbid competitors.
As the ruling notes:
“Microsoft has tried at various points to win over Apple by offering higher revenue shares or significant investments in Apple’s ecosystem, but Google has been able to outbid Microsoft and maintain its default status on Apple devices.”
In fact, during the course of the trial, Microsoft executive Jon Tinker testified that Microsoft was willing to pay Apple in excess of 100% of the revenue/gross profit that Microsoft earned in order to secure default status. But they still couldn’t match Google.
This underscores the enormous challenges Bing faces in competing with Google, particularly when it comes to securing critical distribution channels. Google's financial leverage and long-term agreements made it nearly impossible for Bing to displace Google as the default search engine on key operating systems like iOS.
4. The cost of replicating Google’s search engine is astronomically high
The ruling against Google also provided a rare glimpse into what it would take for a company like Apple to build a search engine that could compete with Google (if, say, they didn’t want to auction off default rights). Even an efficiently run competitor would require $20 billion in initial capital expenditure for infrastructure, plus $7 billion in annual operating costs.
As detailed in the ruling:
“Google estimated that the total capital expenditures required [for Apple] to reproduce [Google’s technical] infrastructure dedicated to search would be in the rough order of $20 [billion]. On top of that, if Apple could sustain a business with only one third of Google’s engineering and product management costs, it still would cost Apple $7 billion annually.”
These figures underscore the financial and technical hurdles that any company (yes, even Apple) would face in trying to rival Google’s search engine. The ruling clarifies why so few companies have made any serious attempts to build a search engine to rival Google’s, and why even a company like Apple may have been happy to receive their 100% margin (or approximately $15 billion in payments) for default access, rather than build a search engine of their own.
5. Google’s distribution agreements amount to anticompetitive practices
The crux of the ruling against Google was its use of its exclusive distribution agreements to maintain its monopoly in the general search services and general search text ads markets. The court found that Google’s extensive payments to secure default search engine status on key platforms effectively locked out competitors and stifled innovation.
The ruling states:
“Google’s distribution agreements are exclusive and have anticompetitive effects. These agreements foreclose a substantial share of the market, depriving rivals of scale. Google has used these agreements to maintain its monopoly power by charging supracompetitive prices for general search text ads, resulting in monopoly profits.”
By ensuring that no other search engines were preloaded on devices, Google created significant barriers for competitors to reach users, which the court found to be in violation of Section 2 of the Sherman Act. This behavior was deemed to harm both competition and consumers by reducing the incentives for innovation in the search market.
The verdict may be in, but the jury is still out
The antitrust trial against Google helps illustrate some of the market dynamics that underpin its dominance in the search engine market. While the trial verdict may be in, the way this ultimately plays out for Google isn’t written in stone.
For example, if regulators decide that users have to choose their default search engine when setting up a device or browser — rather than allowing companies to pay for that status — many users might still opt for Google. That would result in the company saving the more than $25 billion it currently spends, while only seeing a small drop in share. It will be fascinating to see how these scenarios unfold as the story continues.
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