December 22nd, 2019

“Competition is just one click away.”—Eric Schmidt, former CEO of Google

If you work on a competitor to Google’s search, you will eventually hear that “you only need to build a better search engine and you would capture significant market share”. Wouldn’t users immediately switch? The former Google CEO Eric Schmidt famously phrased that Google’s dominance is not a problem since “competition is just one click away”. This is a dangerous statement: it justifies Google’s 93% monopoly . It is also a discouraging statement: it implies competition is just not able to build a good search engine. And it is a very wrong statement: It implies that people choose Google only because of its quality. Yes, the quality of the product is a necessary condition for success. It is however not a sufficient condition. Almost all browsers and almost all phones today come with Google as the default search engine. It is not by chance. Google pays a heavy sum to be pre-installed at these positions. They are standing in front of yearly bribes (yes, you read it right, a bribe), of 27 billion US dollars to make sure they monopolize all search entry points and ask you to look somewhere else.

Building a search engine is without doubt a hard and challenging task . You need data, you need access to crawling, you need good algorithms, you need smart people and you will most certainly need more than tens of millions of dollars. There are many technical challenges, network effects working against you, and data barriers to entry. But it can be done. Microsoft did it. We, Cliqz, did it. Others did it. But still Google has a 93% market share in Europe and even 97% on mobile.

The Internet value chain

Google wants you to look at all the tough technical challenges. They want you and anti-trust authorities to think about and solve problems that will not result in more successful competition. And especially smart and technical people will fall for this trick: If you’re technical, it’s very easy to see the complexity of building a search engine. If you’re smart, it’s easy to understand the importance of data and crawling. And: smart people can and would switch immediately for a better search engine or one that has a more ethical business model. Because for them it’s easy to change the default search engine; even to use multiple ones in parallel for different tasks. Smart people are not affected by the billions Google pays to be pre-installed. If you read this article, you’re most likely not affected. For you “competition is only a click away”. And here is the trap—smart people assume that if they can switch, others can and will too. In practice, however, this is not the case. The bulk of people stick to the default, no matter how good or how bad it is. That’s why so much money is spent on distribution. And that’s why looking at the Internet value chain is so important.

Figure 1: Internet value chain. Example: Europe, mobile, May 2019. Google has protected the value chain either with own products (Chrome, Android) or by paying everyone else (Apple, Samsung, etc.)

Starting from the search engine, Google quickly and decisively entered and protected the Internet value chain—always with the goal to protect the crown jewel and only real money-making machine: Search.

They own, control and set the standards and rules of the game for the vast majority of Internet browsing: Browsers both on desktop as well as on mobile are an important gateway to search, either through the search/Omnibar or a pre-set search as start page. Defaults matter. Google invested heavily into the self-developed Google Chrome browser and the Chromium open source project . Chrome doesn’t make any money. In fact, it creates massive costs. But it also creates one additional line of defense for search. Chrome with more than 60% of the browser market comes with Google search pre-installed. But also, the vast majority of the remaining 40% of browsers are bought by Google. In Europe and the US most browsers have one and only one business model: Selling the search slot to Google. And Google pays well for this: More than 90% of Firefox’s yearly 435 million USD income comes from search partnerships. Firefox comes with Google pre-installed. Opera receives more than 80 million USD per year from search partnerships . Apple receives more than 9 bn (!) USD per year from Google . Ever wondered why on some browsers, like Safari, you can only select a pre-set list of search engines? Ever wondered why it’s not trivial to change the search engine and the browser on your iPhone? Multiple billion USD per year are standing between you and another search engine in your browser.

Google has just raised the bar for every search competitor. Now you not only need to build a great search. No, you must either build and distribute your own browser or where possible (because in the 60% Chrome market share no money will buy you the distribution) buy to become default in the remaining 40% of the browsers. Good luck outbidding Google to become default.

But Google seems to be a bit paranoid. We guess that happens when you try to protect 31 bn USD profit . They went even further down the value chain to not only protect search via the browser, but now to also protect the browser from the operating system and hardware. Google builds its own desktop operating system, Chrome OS. And Google provides Android for free to hardware manufacturers. It consequently quickly gained over 70% market share. Manufacturers however had to agree to pre-install their phones with Google search and the Chrome browser (this is the essence of the Android anti-trust case in Europe). In fact, hardware manufacturers not only got Android for free, they even receive money on top: Samsung reportedly gets more than 3.5 bn USD per year for using Android and pre-installing Google search . And of course, Apple also has a deal. And one more last example—on desktop: If you install an antivirus software (like e.g., but not limited to Avast) on your desktop, chances are it will also install Chrome, just in case, because it’s a great browser. But maybe even more so, because they get paid for it .

Google has just raised the bar even further. You want to bring your search to millions of users? Now you not only need to build a great search. You must build or buy (search distribution in) a browser and then buy to get this browser installed. Good luck outbidding Google to make your browser default (which by the way is impossible on iOS).

Still with us or bored by all the billions flying left and right? Because Google is really not finished yet setting up even more moats for their business. If you dare to try to outbid them, because you might have a better search engine in one country or region, or maybe you are simply willing to buy or invest long-term into the market. Tough luck, hold your fire, keep the money in your investors’ pockets. Most of the contracts Google does are worldwide. Want to bring a great search to Germany? Most browsers and mobile manufacturers will not even talk to you, because they have a worldwide deal. Willing to pay double what Google pays in one country? No one can take your deal, because they would lose the rest of the world.

You get the point: It is no longer about search. Once you have done the hard technical task of building a search engine, you need to make it great in a region big enough to be interesting to partners, ideally world-wide. Then you will probably need to develop a browser, and ultimately even an operating system. Competition takes place outside of what users see. Competition takes place outside of the technical challenge. Competition takes place only on who can pay most. Google’s main defense line for the search monopoly is not quality of the products, it is paying enough to be default everywhere.

Not convinced yet? There are two real world examples proving it: Where is the only place where Google does not totally dominate? It’s China and Russia. The problem is not technology. China and Russia are authoritarian enough to not allow Google to buy out all competition via distribution. And if Google cannot displace competitors by throwing money, by being default, they do not become the monopolist. (And please note: We use this as an example to demonstrate the effect, to show that under other conditions Google’s monopoly is not a natural one, to show how much distribution power makes a difference. We do not advocate for the Internet protection model of China or Russia, as it introduces side effects we do not agree with).

Why would Google with 93% market share pay billions to be preinstalled? It can’t be to grow. It can only be to foreclose the market.

As we have seen, Google’s strategy is paranoid and simple: Each step of the value chain is used to protect the next step either via own products or tons of money, ultimately to protect the search ad business. By this coupling of different services, potential competition in the search engine sector is successfully stopped from competing on a level playing field. A new competitor would immediately also have to offer all upstream products in order to be able to negotiate a distribution possibility with manufacturers and usually this would have to be done on a global scale immediately. A pretty high bar, if you ask us.

But isn’t this a bit unfair—isn’t Google simply paying partners to continue to grow its business? Hell no! Paying to acquire more users is very normal and totally legitimate. But which users is Google trying to acquire? They have 93% market share. The remaining 7%? Those might add 10 bn USD in additional yearly revenue. But this 10 bn USD additional revenue costs Google 27 bn USD per year. Makes no sense, right? Of course not. The real intention of this money is to foreclose the market, to increase the entry cost of any competitor. To avoid competition in the first place. Because they know well, that having the best search engine is not enough, they need to set up a barrier to entry, a tall one.

Search is a hard problem; it requires time and dedication to build a good product. It requires data. It requires smart people. But the real problem for competition is not technical, is not the quality of the search, this is a distraction. Although, one must admit that Google is still the best, the real problem is the money Google has to protect the market and to make any investment case impossible. Not technically, but financially. So, do not fall for potential solutions that solve the tech (e.g. like open crawl or access to indices for everyone). That is a first hurdle to overcome to any search engine, true, a pretty tall one. Not many have solved it. But it’s a joke compared to the hurdle of distribution. The tech made Google famous. But their business aggressiveness, their way of setting up moats, how they protect the distribution, is the real deal. Money defends their monopoly.

There is a simple remedy for this, if regulators really want to break the monopoly and really want competition in the search market. Google should be forbidden from paying for pre-installation or default installation at all steps of the value chain. They already have 93% of the market, they can really not grow that much anymore. Any payment they do is by nature a foreclosure. Forbid these payments and we would finally see competition on the merits of the product.

Because competition is not one click away. It’s one click and 27 billion US dollars per year away.







Footnotes and references

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