Commissioners, staff were split on Google’s search syndication exclusivity

26 March 2015. By Leah Nylen and Mike Swift.

US Federal Trade Commission investigators recommended the agency challenge Google's use of exclusive agreements for search syndication services, advice the FTC's commissioners ultimately didn't take up.

The search syndication recommendation is the only one of four
recommendations made by FTC staff after the agency's 19-month antitrust investigation of Google that the FTC's commissioners didn't adopt. The agency ultimately settled with the search engine on two other areas and opted not to bring a case related to search bias, in line with the staff's view.

Accidental release of the staff report led the FTC to issue a statement Wednesday that vociferously defended the agency's decision not to pursue an antitrust case against Google and expressed regret at the leak of the confidential recommendations.

The report has given more fuel to Google's detractors, who are still pressing the European Commission to bring a case, and could ultimately help any plaintiffs should they decide to file a  private action in the US.

The Wall Street Journal said it obtained part of the staff report as part of a Freedom of Information Act request. The FTC provided the newspaper with the even-numbered pages of a 160-page memo that was authored by antitrust lawyers in the agency's Bureau of Competition. The FTC's Bureau of Economics authored a separate report, which is referenced in several footnotes within the
document.

The WSJ published the report on its website Wednesday. In its statement, the FTC's commissioners said the release was "inadvertent" and the agency was taking steps to ensure such disclosures didn't recur.

Internal FTC inquiry 

The FTC has opened an internal inquiry into how the document came to be released, it is understood. The accidental disclosure may have come about as a result of a computer glitch associated with software used by the FTC to process its FOIA request.

"The decision that the commission made to close the investigation relative to Google was made after an extensive investigation that included considerable evidence, and the main focus of the investigation related to Google's search practices," FTC Chairwoman Edith Ramirez said after a speech in Berlin Thursday.
"And in fact the commission did take a decision that was consistent with recommendation with various parts of our staff. The document that was quoted related to certain other practices, and the commission actually obtained relief following commitments that Google made and has abided by."

Investigating Google 

The FTC formally opened an investigation into Google's search and advertising practices in June 2011, sending a subpoena to the search company. The staff report indicates the agency also sent requests for documents to Microsoft, Yahoo, Amazon, eBay, NexTag, TheFind, LivingSocial, Yelp, Expedia and TripAdvisor.

Also, Facebook "has complained, among other things, that Google's preferencing of Google Plus results over Facebook results on Google's search page is negatively impacting its ability to compete for users," the FTC staff reported noted.

The report released by the Journal is dated August 2012. After reading the report, the FTC's commissioners sent it back to staff in September asking them to rework the recommendations.

In January 2013, the FTC's five commissioners voted unanimously to close the agency's investigation into Google's search practices without taking action. The agency also accepted voluntary commitments by the company to remove restrictions in its AdWords advertising platform that make it difficult for customers to coordinate their online ads across different advertising platforms, and to allow websites an option to keep their content out of Google's vertical search offerings.

The commission's decision to accept a non-binding letter from Google in lieu of using its regular consent decree process was roundly criticized at the time, including by several of the agency's then-commissioners.

The staff report looked into four main allegations against Google: that the search engine manipulated search results to disfavor rivals; that it unfairly copied content from rivals' websites; that it engaged in exclusive search-advertising contracts; and that it prevented users from switching out of its AdWords advertising platform.

In its conclusions, the staff recommended bringing action against Google related to three of the allegations — scraping, exclusive contracting and AdWords. On the most serious allegation, that of manipulating search results, the staff recommended against taking action, although the staff added, "it is a close question."

"The evidence paints a complex portrait of a company working toward an overall goal of maintaining its market share by providing the best user experience, while simultaneously engaging in tactics that resulted in harm to many vertical competitors, and likely helped to entrench Google's monopoly power over search and search advertising," the report concluded. "The determination that Google's conduct is anticompetitive, and deserving of condemnation, would require an extensive balancing of these factors, a task that courts have been unwilling — in
similar circumstances — to perform. Thus, although it is a close question, staff does not recommend that the commission move forward on this cause of action."

Two of the staff recommendations, related to scraping and AdWords, were ultimately resolved by Google's voluntarily commitments in January 2013.

Search syndication 

But the commissioners didn't accept the staff recommendation related to search syndication, the technology by the two major horizontal search providers, Google and the Microsoft-Yahoo search partnership, that offer their search platforms to
websites by embedding a search query box on their website.
In such arrangements, the website shares advertising revenue from the syndicated searches with the horizontal search engine, a form of advertising that the FTC report found "monetizes better than display advertising or other content they might place on their websites."

The report noted that Google had exclusive agreements with 12 of the top 20 companies. Those top 20 account for 94 percent of the market for search syndication. Most of the publishers interviewed by the FTC said they weren't opposed to Google's exclusive contracts because they wanted to use the search engine for all their business. However, a few companies — including eBay and NexTag — did object, and indicated they would have used Microsoft's Bing for some of their business if not for Google's exclusive contracts. Amazon, too, voiced similar concerns, although at the time it didn't have an exclusive contract with Google, the staff said.

The staff report said that Google's exclusive contracts were problematic in part because an increase in search volume produces a corresponding increase in search quality, as the search engine gets better in responding to a more diverse array of queries. Better quality means more users, the FTC report said.

"More users also leads to an increased number of advertisers. And, as the number of advertisers that place ads — and the number of consumers who click on those ads — increases, the ad-serving algorithms improve their ability to predict what advertisements stimulate consumer 'clicks.' This, in turn, increases monetization
for the search engine, its advertisers and its syndication partners," the FTC report concluded, which in turn triggers a "virtuous cycle" of even greater participation by advertisers and web publishers.

"Indeed, according to Microsoft, its greatest barrier is obtaining sufficient scale through its collection of search and advertising data, and it faces an enormous task in trying to catch up to Google," the FTC staff concluded. Using comScore data, the staff estimated that Google's exclusive contracting foreclosed Bing from competing for about 51.5 percent of the market for search syndication services; the staff also suggested that a more aggressive estimate would indicate foreclosure from 66.1 percent of the market.

"Google has effectively created the rules of today's game, and Microsoft's substantial monetization disadvantage puts it in a poor competition position to compete on an all-or-nothing basis," the staff report said recommending a case to the commissioners. "We believe that Google's exclusive and restrictive agreements have not only helped to maintain, preserve and enhance Google's monopoly power in the market for search and search advertising syndication (search intermediation), but also in the underlying markets for search and search advertising."

Ohlhausen statement 

The commission's January 2013 statement closing the Google search manipulation investigation made no reference to the search syndication allegations. In her separate concurring statement, Commissioner Maureen Ohlhausen, however, included a footnote agreeing with the agency's decision not to pursue a case in that area.

"I also agree with the commission's decision to close the investigation into, and ultimately not to pursue any type of remedy with respect to, Google's allegedly exclusive arrangements in the search syndication and mobile search areas," she wrote. "In neither area did the investigation reveal evidence that Google was coercing its partners into restrictive arrangements; rather, the evidence showed that virtually none of Google's partners are seeking to switch any of their business to non-Google providers."

The European Commission has also expressed concerns about Google's search syndication practices. In a May 2012 speech outlining four concerns with Google's practices, Joaquin Almunia highlighted the exclusive contracting of search syndication, indicating they could impact advertising services purchased by
online retailers.

Google has offered three sets of commitments to the European Commission to resolve its concerns, but the EU has yet to accept any of the proposals. A Google spokeswoman said the search giant had no further comment on Thursday.

FTC on the defensive 

The inadvertent disclosure of the FTC staff report has left the agency's commissioners on the defensive, and is particularly embarrassing for the agency as it was also chastised by the FTC's inspector general in 2013 regarding leaks related to the Google case. The agency's inspector general had opened an investigation into unauthorized disclosures at the request of Republican
Representative Darrell Issa, chairman of the House Oversight Committee, and the FTC agreed to revise its staff training to prevent future leaks.

The Wall Street Journal first published a story March 19 disclosing some of the key findings from the report. The newspaper followed up Wednesday with another story detailing how frequently Google executives have visited the White House during President Barack Obama's term. The story highlighted various visits by senior Google officials and lawyers as well as visits to the White House
by the FTC's then-chairman Jon Leibowitz.

While the FTC didn't respond to the first Journal story, the allegations in Wednesday's piece led the agency to issue a statement on behalf of Ramirez, Ohlhausen and Commissioner Julie Brill — the three current commissioners who were involved in the Google decision — calling the story "misleading."

"The article suggests that a series of disparate and unrelated meetings involving FTC officials and executive branch officials or Google representatives somehow affected the commission's decision to close the search investigation in early
2013," the commissioners said. "Not a single fact is offered to substantiate this misleading narrative."

In her speech in Berlin Thursday, Ramirez reiterated that statement.

"I do want to refute the notion that politics plays any role in antitrust
enforcement. It certainly plays no role at the FTC," she said.
Google General Counsel Kent Walker, speaking at the same event in Berlin, also criticized the Wall Street Journal, saying, "you shouldn't believe everything you read."

"The FTC has said very clearly that this review, and the unanimous and bipartisan decision, that there was no legal basis for action on the search issues,"

Walker said. "It was a result of careful and thorough analysis by professional staff on all sides, including the economists. I think it's inappropriate to suggest that it wasn't the result of an analysis."

Although the report's disclosure was inadvertent, its recommendations that the FTC bring a case could give fodder to private plaintiffs if they want to bring a private antitrust action in the US. In most private antitrust cases, the defendants
first move to dismiss the complaint. Under US law, plaintiffs must show that the allegations in the complaint are at least "plausible." The FTC staff conclusion that an antitrust case was warranted for some of the allegations would likely help plaintiffs overcome that first litigation hurdle.

– With assistance from Matthew Newman in Berlin.

	Eliot Gao

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