Google Paid Apple Billions To Dominate Search On iPhones, Justice Department Says

Oct 22, 2020
Originally published on October 24, 2020 9:48 am

Buried on Page 36 of the Justice Department lawsuit accusing Google of abusing its monopoly power is this remarkable figure: $8 billion to $12 billion.

That's the hefty sum Google allegedly paid Apple for one of the most prized pieces of real estate in the world of online search: default status on iPhones and all other Apple devices.

Justice Department investigators say Apple, which does not have its own search engine, hammered out a multiyear deal making Google the default search engine on all iPhones and other Apple products. It meant that Web browser Safari, voice assistant Siri and device query feature Spotlight all made Google the default choice.

Clinching default search status on Apple products was a victory of historic proportions for Google.

"That is the window that the majority of commerce takes place on," said longtime Apple analyst Gene Munster. "It's hard to be more coveted than that."

From Google's perch, losing default status on Apple devices was a nightmare scenario that Google insiders dubbed "Code Red," according to the Justice Department's filing.

The sky-high stakes meant that before the agreement was finalized, Apple CEO Tim Cook and Google Chief Executive Sundar Pichai met in private, in 2018, to discuss how the two Silicon Valley powerhouses could collaborate to "drive search revenue growth."

Afterward, a senior Apple employee wrote to a counterpart at Google: "Our vision is to work as if we are one company."

Apple, the most valuable company in the world, derives up to one-fifth of its $260 billion of worldwide income due to its partnership with Google, which commands more than 90% of global online searches, according to the government's submission to the court.

"This isn't classic collusion, where two rivals agree to raise prices and each benefits," said John Newman, a former Justice Department antitrust lawyer who is now a law professor at the University of Miami. "It looks more like one monopolist agreeing with another company to split the monopoly rent."

Analyst Munster had a more generous take: that the deal shows Google playing hardball, not throwing its weight around in an abusive way.

"It reveals the degree that Google is willing to pay for placement and distribution," Munster said. "Google is aggressive in defending this market share."

Justice Department lawyers see the Google-Apple union as something else: a striking example of how Google has allegedly rigged the online search business against any other company looking to enter by becoming so predetermined by design that it's impossible to compete.

Just ask DuckDuckGo, a privacy-forward competitor to Google.

"We actually see a very simple and effective solution, which is really making search competition one click away via a search preference menu," said Gabriel Weinberg, DuckDuckGo's CEO and founder. "When you open a new device, the browser, you're given the option to choose your preferred provider."

Weinberg says that because of Google's stranglehold, only about 2% of searches happen on DuckDuckGo. That number could jump to 20% if people had the option of setting DuckDuckGo as the default on phones, he said.

In Europe, when people buy a smartphone with Google's Android software, they are given such an option, a result of Europe's own antitrust probe of U.S. tech giants.

The alternative search engine choices are handed to the three highest bidders, a process that has been criticized by DuckDuckGo, which argues a menu of search engines should not be a "pay to play" arrangement. Instead, DuckDuckGo says consumers should be able to choose whatever Google rival they want, without the company having to pony up big money for the privilege of being an option.

Newman, the former Justice Department lawyer, agrees. He says there should not be barriers to competition in the search business even if people by and large prefer Google.

"If the Yankees keep winning the World Series in a world where baseball's fair, that's no reason not to make baseball fair," Newman said.

Justice Department lawyers have interviewed DuckDuckGo's Weinberg about his view that Google is stifling competition through its smartphone default status, and Justice officials may push a federal judge to order that consumers have more options, if the court eventually rules against Google. Of course, the case is likely to take several years to resolve.

"Search rivals should feel emboldened and view the Justice Department's lawsuit as an opportunity," Munster said. "But they first need to hit a certain threshold in quality."

That mirrors Google's response to the lawsuit. Google says it's successful because its search engine is just better than the rest. And it is not stiff-arming rivals because people can switch their default browsers if they wanted to, Google Senior Vice President of Global Affairs Kent Walker wrote in a blog post.

"Our agreements with Apple and other device makers and carriers are no different from the agreements that many other companies have traditionally used to distribute software," Walker wrote. "Other search engines, including Microsoft's Bing, compete with us for these agreements. And our agreements have passed repeated antitrust reviews."

On the "Code Red" scenario of being dropped as the de facto search engine on Apple devices? Google says it hadn't heard of the phrase before reading it in the Justice Department's lawsuit.

NPR's Shannon Bond contributed to this report.

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We're going to zoom in now on a detail in the lawsuit the Justice Department filed against Google this week. It alleges that Google paid Apple as much as $12 billion to be the default search engine for iPhones. Prosecutors say this proves that Google abused monopoly power to try to keep rivals down. We should mention Apple and Google are both financial supporters of NPR.

NPR's Bobby Allyn covers tech and joins us now. Bobby, thanks so much for being with us.

BOBBY ALLYN, BYLINE: You got it, Scott.

SIMON: And why does the government contend that this payment is evidence Google abused power?

ALLYN: So the heart of the government's case against Google is that it's grown so large it functions like a monopoly, like an oil baron or like a steel magnet. But instead of being an industrialist, it has huge power over the Internet, which, on its face, is not illegal. But when a company gains this much power and throws its weight around to make sure nobody else can compete, that's when there are real legal questions. And the Justice Department says that's how Google behaves. One really vivid example of this, at least allegedly, is this $12 billion payment. Google paid that to Apple to make sure Google would be the predetermined search engine on every single Apple device.

SIMON: Practical effect, as you note, is every time somebody buys an iPhone or an iPad and they search for something on the Internet, it's a Google search. Some people might consider that good. Why is it a problem?

ALLYN: In short, because if you're a search competitor, say Bing or DuckDuckGo or you pick one, you don't get any attention. I mean, how often, Scott, are you Googling things on your phone, right? (Laughter) I mean...

SIMON: That's how we say it.

ALLYN: Right. Exactly. So their dominance is baked into the verb. So - and the Justice Department points this out. And inside Google, becoming the default search engine was a huge priority. The Justice Department says Google insiders called the prospect of not getting the deal code red. Google CEO Sundar Pichai met one-on-one with Apple's Tim Cook to hammer out the terms of the deal behind closed doors. And according to the court papers, an unidentified senior employee from Google wrote to an Apple counterpart, quote, "our vision is to work as if we are one company." And so I called up former Justice Department antitrust lawyer John Newman and asked, is this collusion?

JOHN NEWMAN: I would say it's somewhere in the middle. It's not classic collusion.

ALLYN: So it's not like two oil companies conspiring to raise the price of oil, for instance.

NEWMAN: It looks more like one monopolist agreeing with another company to split the monopoly rent.

SIMON: So we have Google and Apple, who are technically competitors, working together to make each other stronger. What do the companies say about it?

ALLYN: The companies say there's nothing strange or illegal about it, that companies make deals all the time to get the best distribution for their products. And Apple just decided that Google simply was the best partner to work with. And Google says, look; people like Google, right? Its dominance and strength is the result of just how great it is. And former Justice Department lawyer Newman says, yeah, You can be the best, but that is not an argument to not give others a fair shot.

NEWMAN: If it is true that Google will win out on a competitive playing field - and it may be, even in a competitive market, a lot of people would like to use Google. But even if that's true, that's not a reason to leave the competitive playing field uneven.

SIMON: Bobby, where's the case go from here?

ALLYN: Yeah. So, Scott, it's going to drag on for many years. The big question on everyone's mind is, will Google be broken up? Plenty of calls on Capitol Hill for that to happen, but it's just too early to say whether a judge is going to buy the Justice Department's case, and if a judge does, what exactly will be done about it.

But I've talked to many antitrust experts. And they all tell me if the DOJ does persuade a judge, one outcome could be that, you know, when you buy an iPhone, you'll be given an option of what should be your default search engine. It might not automatically go to Google. This is what happens when you buy a smartphone in Europe, for instance. But in Europe, most people still choose Google.

SIMON: Well, we'll certainly be following this case - sounds like for years. Thanks very much for your reporting, Bobby.

ALLYN: You've got it. Thanks, Scott.

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