Ben Thompson’s Stratechery, Part 2
By: Tim Wu
Tags: Google, Stratechery

Ben Thompson’s Stratechery, Part 2

In which the Kool-Aid gets stirred

Credit Ben Thompson, usage via 17 USC 107

I was impressed by, and enjoyed, the first two-thirds of Ben Thompson’s response to my critique of his work related to tech platforms and the Google antitrust case. (The last third is more regrettable, but I’ll address that, too.) I’ve enjoyed most of the exchange, and it has helped me clarify my thoughts. In particular, I’ve come to feel that Google’s spending $30 billion on traffic acquisition feels too much like the kind of thing Net Neutrality was trying to prevent back in the 2000s. But more on that later.

Overall I’d say Thompson’s response hasn’t done much to counter my core critique. He is too quick to jump from model to reality, too quick to assume that one important source of advantage represents something close to the full picture. As I said, his work is insightful for understanding tech business models, but when it comes to antitrust, it is on much shakier ground. And the hardest part for him to defend is the assertion that various costs, including switching costs, are zero or near zero. For doing so assumes away the costs that could be critical in determining strategic advantage, winners and losers, and at some point, liability in a lawsuit.

Let’s focus on the Google case, which, ironically, we agree on — it is nonetheless a good proxy to examine our differences. In case you’ve been living under a rock, the Justice Department sued Google, alleging that it is maintaining its monopoly using means that violate the Sherman Act. Thompson says that as “[Wu] does not believe that Google is unique as far as scalability is concerned, he appears to assume that the company must be doing something nefarious to command such market share.”

I’d turn this around and say that I don’t actually assume that the company must be doing something nefarious, but — but more importantly — I don’t not assume it, either. And that may make for the key difference between us.

Google is unquestionably one of the most impressive companies of the last 30 years, the cream of Silicon Valley’s late-1990s crop. Indeed, for much of my early career, I was accused of being too big a booster of Google.

But despite its origins as an impressive company with an undeniably great product, life is long, products are dynamic, and 15 years into Google’s dominance, we face an open question. That is whether:

A: Google search gained an advantage due to superior technology, user experience, aggregation theory, having the smartest coders, or whatever, and has continued to hold its advantage due to that reason; or

B: Google gained market leadership that way, but has subsequently come to rely in significant part on methods that include paying for traffic through defaults, acquisitions, subtle increases in switching costs, and other techniques having little to do with pure quality.

Both A and B are plausible — so which is true? The answer is: It is an empirical question. That is a question of fact, not of theory. And that is why I think Thompson’s aggregation theory, even if it does a good job explaining the initial advantage, isn’t helpful for telling us whether we now live in World A or World B. In fact, aggregation theory is positively unhelpful to law enforcement, to the extent it is read to insist that we must be living in World A because of zero switching costs. That comes close to assuming away the question, or stated another way, elevating theory over facts.

What we really need to settle the A/B question is not theory, but evidence. Which leads us back to a key evidentiary question: Just why is Google willing to pay Apple and other distributors so much for “default” placement of its product (and relatedly, why they haven’t settled the case, and stopped paying)? According to its 2019 10K, Google paid out over $30 billion to acquire traffic, much of which seems to have been paying for such defaults in various forms.

So what was Google paying for?

The funny thing is, if you have what people want, you don’t usually pay for distribution: people pay you. The NFL doesn’t pay NBC to carry Sunday Night Football, and George Clooney does not pay to appear in movies. Knowing nothing else, you might then expect Apple to be paying Google if it has such an intrinsically superior product. That would follow if aggregation theory is 100% right about the quality of the user experience creating a true winner-take-all situation.

Here are three possible explanations: A, B, and C. Explanation A, the most benign, is that Google has an inherently superior product but still thinks it’s worth paying tens of billions for a default placement because being the default is worth it for reaching more customers and increasing its revenue. In other words, unlike George Clooney, Google can make money by paying to be in movies.

Explanation B is that Google maybe makes more money, but is also afraid of a competitor arising on the iPhone or elsewhere — especially a Microsoft or Apple competitor. It is therefore willing to spend billions to avoid that competition and the corresponding loss of revenue. That’s anticompetitive.

Explanation C is partial, but posits that the core deal, the Apple deal, was actually driven in large part by Apple’s market power, and that Apple and Google have colluded to divide up the search market. The deal is this: Google gets freedom from an Apple competitor, but Apple gets billions in return. In this story, they are splitting the monopoly proceeds.

I think it is hard to rule out A, B, or C on the evidence we have. Indeed, figuring the best fit is what the law and courts are supposed to do, and some of the best evidence may reside in sworn testimony or an email chain somewhere. And there may be partially overlapping reasons.

But what isn’t particularly helpful to answer this question is Thompson’s aggregation theory because, again, it is an idealized model of how Google works, not the reality, and it assumes too much away. That’s why, as I said, I find Thompson’s work useful for learning and thinking about digital markets, but not so useful for answering core antitrust questions, like this one.

This brings us, finally, to switching costs and the influence of defaults on user behavior. These matter because if there truly were zero switching costs, it suggests that the only reason for Google’s persistence is quality. Thompson, if I have him right, thinks that the switching costs related to Google search are zero or near-zero because his theory presumes that transaction costs are zero, which leads to some of the “competition is a click away” stuff. I’d say, like a broken record, that this is another empirical question, and one unlikely to be settled by either theory or the anecdotes of technically sophisticated users (“Hey! It wasn’t hard for me to switch”). Indeed the latter is maybe the worst form of evidence, akin to saying, “none of my friends voted Republican, so what’s going on here?”

One thing neither Thompson nor I discussed in our first exchange was the effect of defaults on user behavior, but they are very relevant to switching costs and also what is at issue in the actual Google case. Numerous studies suggest that consumer defaults are highly “sticky,” in various contexts — that is, very few people bother to change a default (here’s an example about 401(k) plans). That’s relevant because defaults can heighten the effect of even very small switching costs.

I would agree that what you might call the literal costs of switching are low for a user with even basic technical skills. But that isn’t a full accounting, nor enough to declare zero switching costs. For when you add in the effects of defaults and other factors like access to maps, the coziness of the Google suite, and old-fashioned brand loyalty, I think you end up with a package that tends to discourage switching. And why not? Google wants, like any company, for people to stay with it, even if it doesn’t quite want to try to imprison people in the style of your friendly neighborhood cable company.

Some readers, and Thompson, were confused as to why I brought up Gmail. I think the suite of products that make up the Google ecosystem also have some nonzero effect on switching costs. It is common to try and maintain user loyalty with free goodies and perks, and doing so invokes the norm of reciprocity. That’s the sense that with Gmail and other gifts, you are getting something from Google and are indebted, an aspect of human psychology that user interface designers often rely on. There’s more: The user needs to know that you can actually adjust the default; there’s subtle mental load switching between Gmail to Bing, missing out on Google Maps, and even simple brand loyalty — all of these factors, I think, keep people in the Google family and make switching a cost. Does that mean it should be illegal to ply people with great add-on products? Obviously not, in most cases. But that’s not the question: It is whether something other than search quality helps keep people with Google. And that cannot be answered by pure theory.

All this said, it may still be the fact that it is the quality of Google search, and not the extra goodies nor the money spent on defaults is what keeps people with Google. (And the defaults, by the way, could still be anticompetitive, even if quality plays a role in keeping people with Google as Brett Frischmann points out). But at core we have a contestable empirical question, not one answered by saying things about how transaction costs and marginal costs are zero.

Let me conclude this section with some of my own thoughts on Google and its market position. Writing this entry has made me more critical of Google, for one big reason: that $30 billion spent on traffic acquisition. One of the ideals of the open internet and Net Neutrality, circa 1995 or so, was that the internet ought to be a kind of level playing field — let the best site or app win. In those days, the feeling was that a quasi-academic search out of a garage with a great new algorithm could beat out an established giant (DEC’s Altavista). Nothing is perfect, but I did feel like the 2000s was fairly meritocratic: Google beat Altavista and Yahoo!, Facebook beat Myspace, Prodigy lost out to everyone, mainly because of better code.

In that context, the idea of Yahoo! paying Verizon broadband to guarantee a win over Google (which was actually better) felt ugly to me; the entrenchment of what was, at the time, clearly an inferior product. But here, in the 2020s, the $30 billion a year being paid out by Google feels a lot like Yahoo! paying off Verizon in the ’00s. Spending that kind of money has strongly entrenching potential. It feels like what we were trying to prevent with Net Neutrality and I don’t like it one bit.

As I’ve said repeatedly, I’d like Google to be the company it could be, for it to prove its merits, on the merits, without the side payments/bribes. Maybe that’s too hopeful or naive, but there you have it: I’m an idealist at heart.