Antitrust Issues Raised by the Emerging Global Internet Economy

By David S. Evans[*]

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[Editor's Note: This week, we are pleased to present Part I of Professor Evan's Essay on antitrust issues in the global internet economy.  Part II of this Essay will appear next week.]

Introduction

Web-based businesses are increasingly the subject of antitrust concerns. Plaintiffs in the United States have sued eBay for tying its online payments service to its transaction service.[1]  Multiple jurisdictions in the European Community have claimed that Apple has violated the competition laws by limiting the ability of its music player to play music from competing music stores and limiting the ability of competing music players to play music purchased from its music stores.[2]  During 2007, although the U.S. Federal Trade Commission decided not to block Google’s acquisition of DoubleClick after a lengthy investigation, it expressed its intent to “closely watch these markets” involved in online advertising.[3]

Of course, competition policymakers have not just discovered the web.  In 1998, shortly after the start of the commercial internet three years earlier, the U.S. Department of Justice and various states filed an antitrust case against Microsoft for engaging in various practices related to web browsers.[4]  The European Commission started an investigation of Microsoft’s practices related to media players that stream music over the internet in 2001.[5]  However, the Microsoft cases mainly involved the use of the company’s market power in personal computers to influence competition in web-based markets that threatened it.  The matters involving Apple, Google, and eBay concern market power in web-based products and services themselves.

The internet economy is likely to raise antitrust concerns—and possible demands for regulation—for years to come. Global gargantuan firms have emerged, which will likely attract scrutiny by competition authorities and by policymakers concerned with competition issues.  The companies mentioned above, for example, have shares in putative antitrust markets that rival those held by Microsoft.[6]  Apple has more than a 70 percent share of paid music downloads in the European Union,[7] Google has more than an 80 percent share of search queries in Europe,[8] and eBay has more than a 90 percent share of auction site page views in France, Germany, Italy, Spain, and the UK.[9]

Competition authorities and private parties can challenge the practices of these leading firms under the antitrust laws of most jurisdictions.  Such challenges are especially likely under European Community law and decisional practice which impose special obligations and significant scrutiny on firms that have market shares as low as 40 percent.[10]  Moreover, many web-based firms have complex business models and arrangements. Separating the merely complicated from the nefarious will take courts and competition authorities time to sort out.  This Essay describes the economics and technology behind the web-based economy and how these features will influence internet competition policy in the years to come.

Section I provides a birds-eye view of the web-based economy.  Although this sector is evolving quickly, its contours are beginning to take shape and we can be reasonably confident that several globally dominant firms will play significant roles.  Section II describes the economics of the web-based economy. The key businesses are what economists call “multi-sided platforms” that serve several distinct but interdependent customer groups. Google for example serves people who are searching the web, advertisers who want to reach these users, and application developers who are using Google’s software to develop complementary products.  The leading multi-sided platforms for the web are often built on “software platform” technologies that make portions of their code available to software developers who write applications that benefit users of the software platform.  Section III considers the competition that arises in the web-based economy.  The appearance of dominant firms in key sectors will ensure ongoing scrutiny, and the nature of the economics and technology of these businesses will result in ongoing disputes over their practices.

The web economy poses two major challenges to competition authorities.  The law and economics for analyzing the multi-sided platforms that dominate the internet sector is not well developed. At the same time the web-economy is evolving very rapidly and in ways that are sure to result in antitrust complaints and investigations.  Competition authorities and courts will need to exercise great care in balancing the protection of consumers from anticompetitive behavior against causing harm from interfering in complex businesses that are both rapidly moving and not fully understood.

I.  An Overview of the Web-Based Economy

The internet refers to computer networks that are linked through wired and wireless connections and that interoperate through standard communication protocols.  This global communication system provides access to various software-based services.  The most important set of services on the internet is the world-wide web, which consists of digital media linked through hyperlinks and uniform resource locators (“URLs”).[11]  For simplicity, this Essay refers to the internet as the physical communication system and to the web as all products and services that rely on this communication system.

The key innovations behind the internet started occurring in the early 1960s, and the key innovations behind the web came in 1989.[12]  The commercial web began roughly in 1995 with the introduction of browsers that made web navigation easy for regular computer users; this therefore encouraged the formation of businesses geared to a mass audience.  There was much prognostication in the late 1990s on how the web would evolve, and enormous optimism that it would lead to quick fortunes as network effects—more users make a site more valuable which leads to more users—propelled early entrants to monopolies.[13]  Those hopes were seemingly dashed in 2001, when the market caps of most web-based firms plummeted and vast numbers of these firms vanished.[14]  It became apparent that many of these firms had not developed business models that allowed them to make money from the visitors who came to their sites. In the aftermath of the burst bubble, though, a robust web-based economy has emerged that is creating completely new services, from social networking to behaviorally targeted advertising, and also disrupting many traditional businesses from media to telephony.[15]  As we will see below, advertising revenue for delivering traffic has become the major driver for a significant portion of the web economy.

A large portion of the population in industrialized countries touches the web-based economy daily.  In 2007 55 percent of the population in the European Union[16] and 71 percent of the population in the United States had access to the internet.[17]  United States and 69 percent worldwide used webmail;[18] 39 percent of all internet visitors in the US and 47 percent worldwide used instant messaging.[19] According to a year 2007 survey of Americans who frequently used the internet, 84 percent used a search engine.[20]  The same survey found that the average respondent spent 33 hours per week on web products and services in 2007 compared with 16 hours viewing television.[21]

Web-based products and services are consumed primarily through the personal computer, which is the primary internet-connected device in most countries.[22]  However, it is widely expected that most mobile phones around the world will soon be connected to the internet.[23]  This increased portability will increase the amount of time people can access the web because people usually have their mobile phones with them all the time.  It will also increase the use of web-based products and services in lesser developed countries because mobile phones are less expensive than personal computers and more widely held.[24]

One must be modest in speculating on the future evolution of the web.  The internet and the web are very new technologies by historical standards.  One could not have reliably forecasted the development of electricity at a similar vantage point during its development.  The recent dot.com bust teaches how wrong smart and financially motivated people can be about the business prospects of a new technology. Nevertheless, five features of the web-based economy appear to have emerged that are critical for understanding how this industry will evolve, the competitive strategies used in this sector and their implications ultimately for antitrust policy.

Many web businesses follow the traditional advertising-supported media model.  Content is used to attract traffic. Access to that traffic is sold to advertisers.  The content is usually made available for free so that advertising is the primary source of revenue and profits.  Many of the leading web properties follow this approach.  Table 1 lists the top ten sites in the United States based on the number of pages of those sites that are viewed by visitors.  All but three of these sites are primarily supported by advertising; Amazon and eBay are funded through transaction mechanisms while Wikipedia is funded by voluntary donations.

Table 1: Top 10 Properties (U.S.) January 2008.

Rank	Property	Unique Visitors (in thousands)
	Total Internet Audience[25]	184,239
1	Yahoo! Sites	138,059
2	Google Sites	134,886
3	Microsoft Sites	119,297
4	AOL LLC	109,442
5	Fox Interactive Media	83,752
6	eBay	78,789
7	Amazon Sites	59,003
8	Wikipedia Sites	55,589
9	Time Warner - Excluding AOL	52,645
10	Ask Network	52,102

Source: Press Release, comScore, comScore Media Metrix Releases Top 50 Web Rankings for January (Feb. 18, 2008) at Table 3, available at http://www.comscore.com/press/release.asp?press=2067.

Google and Ask primarily sell advertising on their search results pages.  AOL, Fox, Microsoft, Time Warner, and Yahoo primarily sell advertising on their various web properties.  The emergence of the advertising-supported media model for websites is one of the most significant changes since the dot.com bust and is the revenue source behind what is sometimes called Web 2.0.

Transaction platforms play a key role.  The web has resulted in the development of a number of transaction platforms which reduce the costs of connecting buyers and sellers and consummating trades between them.  These platforms earn most of their revenues and profits from transaction fees.[26] For example, although eBay began by helping consumers sell second-hand goods to other consumers who wanted to buy those goods, it has evolved into a broad platform for connecting consumers and businesses.  Other e-commerce sites, such as Amazon have started moving from directly selling merchandise on their own behalf to providing a platform for connecting businesses and consumers.

Social networking is a critical innovation.  Social networking has emerged as a new form of communication and interaction among individuals. MySpace, for example, has attracted 69 million users worldwide who post information about themselves on the site and use it to stay in contact with friends and to make new acquaintances.  A related phenomenon is that a great deal of the “content” on the web is generated by users.  Although sites such as YouTube, as well as MySpace and Facebook, rely on advertising to make money as traditional media firms do, they expend few resources on actually creating or purchasing any content themselves—they focus mainly on inducing others to provide this content.

Demand and supply-side scale economies tend to lead to certain segments of the web being dominated, on a national and often global basis, by a few large firms.[27]  On the demand side, some web-based platforms create more value for each customer as they obtain more customers.  A transaction platform such as eBay, for example, is more valuable to buyers because it has more sellers and more valuable to sellers because it has more buyers.  Moreover, buyers and sellers appreciate being able to reach others across borders.

On the supply side, some web-based platforms—Google, for example—also incur significant fixed costs in developing and maintaining their software platforms and in acquiring computer server and storage capacity for their activities.  The average cost of providing products and services is lower for larger platforms, which can amortize these fixed costs over a larger customer base.  Demand and supply-side scale economies result in larger firms being able to offer greater value to consumers at lower costs, as discussed in more detail below.  These scale economies do not necessarily result in a monopoly but they do tend to limit the number of viable firms in a segment.[28]  In some segments, it is in fact unclear how many viable firms will remain and whether they will evolve towards monopoly.

Web-platforms support many web firms.  These giant global web-based firms provide platforms for other web-based businesses.  They make software services available so other businesses can provide complementary services.  For example, the music service iLike.com and the online Scrabble platform Scrabulous are two of the most popular Facebook applications, raising the value of the Facebook platform as a whole.  Google makes its popular mapping software available to developers who are writing applications based on Google’s maps.  Web-platforms also provide services that these businesses rely on. Many web-based small businesses depend on auction sites such as eBay or e-tailers such as Amazon to make sales.  Most blogs rely on Google to sell ad space on their sites to advertisers who want to reach blog viewers.[29]  These web-platforms are examples of the multi-sided platforms that we describe in more detail below.  The web-based businesses that rely on these platforms provide complementary products and services that make the web platform more valuable and help drive revenue to it.

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*. Executive Director, Jevons Institute for Competition Law and Economics and Visiting Professor, University College London; Lecturer, University of Chicago Law. The author would like to thank Howard Chang and the editors for very helpful comments on an earlier draft, Aditya Bhave, Marina Danilevsky, and Melissa DiBella for excellent research assistance, and Microsoft for financial support. The views are the author’s own and do not necessarily reflect those of anyone else with whom he is affiliated.

1.  See, e.g., Malone v. eBay, Inc., No. 07-01882-JF (N.D. Cal. filed Apr. 4, 2007).

2.  Free-DRM Music By iTunes, But EC Starts Official Investigation, EDRI.org, Apr. 12, 2007, http://www.edri.org/edrigram/number5.7/ituned-free-drm; Increased Competition Pushes iTunes Towards Interoperability, Forbrukerombudet, Feb. 11, 2008, http://www.forbrukerombudet.no/index.gan?id=11038653 (link); Helena Spongenberg, Apple’s iTunes Risks EU Backlash After Norway Ruling, EU Observer, Jan. 25, 2007, http://euobserver.com/871/23334; Apple: European Consumer Organisations Join Forces in Legal Dispute Over iTunes Music Store, Verbraucherzentrale, Jan. 22, 2007, http://www.vzbv.de/go/dokumente/571/8/36/index.html (link); Consumer Council of Norway, Complaint against iTunes Music Store (Jan. 25, 2006), http://forbrukerportalen.no/filearchive/Complaint%20against%20iTunes%20Music%20Store.pdf (link).

3.  Fed. Trade Comm’n, Statement of FTC Concerning Google/DoubleClick, Dec. 20, 2007, available at http://www.ftc.gov/os/caselist/0710170/071220statement.pdf (link).

4.  The D.C. Circuit Court of Appeals upheld in 2001 portions of a lower court ruling in 2000 that found Microsoft guilty of violating Section 2 of the Sherman Act. SeeUnited States v. Microsoft Corp., 253 F.3d 34, 45 (D.C. Cir. 2001) (citing United States v. Microsoft Corp., 87 F.Supp.2d 30 (D.D.C. 2000)).

5.  In 2007 the European Court of First Instance upheld the Commission’s 2004 decision that Microsoft has violated Article 82 EC by tying its media player software to its dominant operating system. See T-201/04, Microsoft Corp. v. Comm’n, 2007 WL 2693858 (Sept. 17, 2007).

6.  These are not necessarily relevant antitrust markets but they are ones that competition authorities could plausibly adopt.

7.  See Anna Jenkinson & Don Jeffrey, Apple, Record Companies Restrict Music Sales, EU Says (Update6), Bloomberg.com, Apr. 3, 2007, http://www.bloomberg.com/apps/news?pid=20601085&sid=aiMdS7KddG14&refer=europe (link).

8.  comScore, MyMetrix qSearch 2.0 Key Measures Report (Dec. 2007). comScore is a “global Internet information provider” that gathers data on internet usage trends. comScore Who We Are, http://www.comscore.com/about/default.asp. comScore’s data analyses are based on its panel of over two million users. Id. In recruiting its panelists, comScore attempts to ensure that “[a]ll demographic segments of the online population are represented in the comScore Global Network, with large samples of participants in each segment.” comScore Methodology, http://www.comscore.com/method/method.asp (link).

9.  comScore, MyMetrix Key Measures Report (Dec. 2007).

10.  See British Airways, PLC v. Comm’n, 2003 E.C.R. II-5917, ¶¶ 211, 223–25 (finding British Airways dominant in the context of Article 82 with a share of 39.7%, notwithstanding evidence that its share had declined from 46% over a seven year period).

The finding in British Airways relied heavily on the fact that the rest of the market was very fragmented. See id. ¶¶ 211–25. This was the first time that a firm with a market share below 40% was found to be dominant. Subsequently, in Wanadoo Interactive, the Commission concluded that Wanadoo did hold a dominant position, though it only had a market share of 39%. Wanadoo Interactive, Commission Decision of July 16, 2003, ¶ 227 (link). The Commission reached this finding both based on the size and strength of Wanadoo’s main competitors, who all had markets shares in between 6.5% and 16%. The Commission reached this finding both based on the size and strength of Wanadoo’s main competitors, who all had markets shares in between 6.5% and 16%. Id. The issue of thresholds for finding dominance was not examined further by the CFI in Case T-339/04 France Télécom SA v. Comm’n, 2007 E.C.R. II-00521 (2007).

11.  Other internet services include online gaming, Voice-over-IP, email, instant messaging, file sharing, and other communication services. Most of these services are bundled into websites.

12.  See David C. Mowery & Timothy Simcoe, Is the Internet a U.S. Invention?—An Economic and Technological History of Computer Networking, 31 Res. Pol’y 1369, 1371–76 (2002).

13.  See, e.g., Carl Shapiro & Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy 13 (1999) (“When the value of a product to one user depends on how many other users there are, economists say that this product exhibits network externalities, or network effects . . . . Technologies subject to strong network effects tend to exhibit long lead times followed by explosive growth. The pattern results from positive feedback: as the installed base of users grows, more and more users find adoption worthwhile.”) (emphasis in original).

14.  See, e.g., Suzanne McGee, New Economy Sours on Venture Capitalists, Wall St. J., Jan. 2, 2001, at R.6; Easy.com easy.gone, Economist, June 16, 2001, at 6–9 (supp.); Living in Freefall, Economist, Nov. 18, 2000, at 117–18.

15.  See Reply All Blog, Is ‘Web 2.0’ Another Bubble?, WSJ.com, Dec. 27, 2006, http://online.wsj.com/article/SB116679843912957776.html (link).

16.  Internet World Stats, Internet Usage in the European Union, http://internetworldstats.com/stats9.htm, (last visited Apr. 19, 2008) (link). Population penetration is defined as the number of Internet users divided by the total population of the region. An Internet user is defined as “anyone currently in the capacity to use the Internet,” namely, that he has access to an Internet connection point and can use the technology. Internet World Stats does not adjust the figures to exclude children, illiterate people, or any other segment of the population.

17.  Internet World Stats, Internet Penetration in North America: Nov. 2007, http://www.internetworldstats.com/stats14.htm#north, (last visited Apr. 19, 2008).

18.  comScore Media Metrix, data for December 2007, available at http://www.marketingcharts.com/interactive/more-what-if-data-issued-on-yahoo-microsoft-combo-3362/ (link) (follow “In the email category, Yahoo mail leads both in the US (82 million visitors) and worldwide (257 million visitors)” hyperlink).

19.  Id. (follow “A Microsoft/Yahoo combined instant messenger audience of 298 million would reach nearly 77% of the instant messenger audience worldwide.” hyperlink) (link).

20.  IDC, U.S. Online Consumer Behavior Survey Results 2007, Part I: Wireline Internet Usage 1 (2007) (on file with author).

21.  Id. at 52.

22.  The major exceptions are Korea and Japan, where many consumers use their mobile phones to connect to the internet and where sophisticated web-based mobile phone services have been introduced. See Michael Fitzpatrick, Why Mobile Japan Leads the World: A Combination of an Urban Lifestyle and Infrastructure Advantages Mean that the Fixed Internet is Being Left Behind by the Mobile, The Guardian, Sept. 27, 2007, at Tech. News &Features 3, available at http://www.guardian.co.uk/technology/2007/sep/27/guardianweeklytechnologysection.mobilephones (link).

23.  See, e.g., Press Release, Ipsos, Mobile Phones Could Soon Rival the PC As World’s Dominant Internet Platform (Apr. 18, 2006), available at http://www.ipsos-na.com/news/act_hit_cntr.cfm?id=3049&Region=us&PDF_name=mr060418-1b.pdf (link); Press Release, comScore, Mobile Phone Web Users Nearly Equal PC Based Internet Users in Japan (Sept. 20, 2007), available at http://www.comscore.com/press/release.asp?press=1742 (link); see also Darren Waters, Why the Future is in Your Hands, BBC News, Feb. 18, 2008, http://news.bbc.co.uk/2/hi/technology/7250465.stm (link).

24.  See id. Also, cell phone unit shipments were nearly 1.2 billion units in 2007 while the number of PCs shipped globally was just over 270 million. See Ann Steffora Mutschler, SIA: 2007 global chip sales up modestly by 3% to $256B, EDN.com, Feb. 1, 2008, http://www.edn.com/article/CA6527975.html?industryid=47037; Press Release, Gartner, Gartner Says Worldwide PC Market Grew 13 Percent in 2007 (Jan. 16, 2008), available at http://www.gartner.com/it/page.jsp?id=584210 (link).

25. Properties include all of the sites owned by an entity, including search engines, international sites and sites acquired. For example, ‘Google Sites’ include google.com and other international homepages, search pages for specific categories such as news and images, applications such as Gmail, Google Maps and Google Earth, and sites owned by Google such as Picasa and YouTube.

26.  These transaction platforms usually have integrated payment platforms. eBay has PayPal, Alibaba has AliPay, and Google’s commerce site has Google CheckOut. In 2007, 25 percent of eBay’s net transaction revenue came from the use of its payment platform, PayPal, rather than its auction platforms and communications segment (for example, Skype).

27.  A demand-side scale economy results when a product or service becomes more valuable as more people use it. Demand-side scale economies result from direct and indirect network effects. In the case of direct network effects, “the benefit to a network user depends directly on how many other users are hooked up to the network.” In indirect network effects, “the benefit to a user arises indirectly because the number of users of the network affects the price and availability of complementary products.” See Dennis W. Carlton and Jeffrey M. Perloff, Modern Industrial Organization 392–393 (4th ed., 2005). Supply-side scale economies result when the long-run average total cost of providing a good or service fall as the quantity of output increases. Id. at 36–40.

The mere fact that a firm has a large share of a segment does not necessarily imply that it has scale economies or network effects and in fact some of the shares discussed below are likely the result of the fact that these firms were just better than their rivals. However, for the reasons discussed below it is apparent that indirect network effects, and to a lesser extent cost-based scale economies, are important for these businesses.

28. As firms become larger indirect network effects and scale economies from further expansion may diminish and congestion and managerial economies may counter the other benefits from size. Furthermore, multiple firms may coexist in a segment despite indirect network effects and scale economies if they can differentiate their products and services from each other.

29.  See, e.g., Posting of David S. Evans to Catalyst Code, http://www.thecatalystcode.com/theconversation/blog/2007/08/06/economics-of-the-blogosphere/ (Aug. 6, 2007) (link).

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Copyright 2008 Northwestern University      

Cite as: 102 Nw. U. L. Rev. Colloquy 285 (2008).

Persistent URL: http://www.law.northwestern.edu/lawreview/Colloquy/2008/13

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