Trump just noticed Europe’s $5BN antitrust fine for Google

In other news bears shit in the woods. In today’s second-day President Trump news: ‘The Donald’ has seized, belatedly, on the European Commission’s announcement yesterday that Google is guilty of three types of illegal antitrust behavior — with its Android OS, since 2011 — and that it is fining the company $5 billion; a record-breaking penalty which the Commission’s antitrust chief, Margrethe Vestager, said reflects the length and gravity of the company’s competition infringements.

Trump is not! at all! convinced! though!

“I told you so!” he has tweeted triumphantly just now. “The European Union just slapped a Five Billion Dollar fine on one of our great companies, Google . They truly have taken advantage of the U.S., but not for long!”

Also not so very long ago, Trump was the one grumbling about U.S. tech giants. Though Amazon is his most frequent target in tech, while Google has been spared the usual tweet lashings. Albeit, on the average day he may not necessarily be able to tell one tech giant from another.

Vestager can though, and she cited Amazon as one of the companies that had suffered as a direct result of contractual conditions Google imposed on device makers using its Android OS — squeezing the ecommerce giant’s potential to build a competing Android ecosystem, with its Fire OS.

Presumably, for Trump, Amazon is not ‘one of our great companies’ though.

At least it’s only Google that gets his full Twitter attention — and a special Trumpian MAGA badge of honor call-out as “one of our great companies” — in the tweet.

Presumably, he hasn’t had this pointed out to him yet though. So, uh, awkward.

Safe to say, Trump is seizing on Google’s antitrust penalty as a stick to beat the EU, set against a backdrop of Trump already having slapped a series of tariffs on EU goods, and Trump recently threatening the EU with tariffs on cars — in what is fast looking like a full blown trade war.

Even so, Trump’s tweet probably wasn’t the kind of support Google was hoping to solicit via its own Twitter missive yesterday…

#AndroidWorksButTradeWarsDon’t doesn’t make for the most elegant hashtag.

But here’s the thing: Vestager has already responded to Trump’s attack on the Android decision — even though it’s taking place a day late. Because the EU’s “tax lady”, as Trump has been known to vaguely refer to her, is both lit and onit.

During yesterday’s press conference she was specifically asked to anticipate Trump’s tantrum response on hearing the EU antitrust decision against Google, and whether she wasn’t afraid it might affect next week’s meeting between the US president and the European Commission’s president, Jean-Claude Juncker.

“As I know my US colleagues want fair competition just as well as we do,” she responded. “There is a respect that we do our job. We have this very simple mission to make sure that companies play by the rulebook for the market to serve consumers. And this is also my impression that this is what they want in the US.”

Pressed again on political context, given the worsening trade relationship between the US and the EU, Vestager was asked how she would explain that her finding against Google is not part of an overarching anti-US narrative — and how would she answer Trump’s contention that the EU’s “tax lady… really hates the US”.

“Well I’ve done my own fact checking on the first part of that sentence. I do work with tax and I am a woman. So this is 100% correct,” she replied. “It is not correct for the latter part of the sentence though. Because I very much like the US. And I think that would also be what you think because I am from Denmark and that tends to be what we do. We like the U.S. The culture, the people, our friends, traveling. But the fact is that this [finding against Google] has nothing to do with how I feel. Nothing whatsoever. Just as well as enforcing competition law — well, we do it in the world but we don’t do it in a political context. Because then there would never, ever be a right timing.

“The mission is very simple. We have to protect consumers and competition to make sure that consumers get the best of fair competition — choice, innovation, best possible prices. This is what we do. It has been done before, we will continue to do it — no matter the political context.”

Maybe Trump will be able to learn the name of the EU’s “tax lady” if Vestager ends up EU president next year.

Or, well, maybe not. We can only hope so.

Google gets slapped with $5BN EU fine for Android antitrust abuse

Google has been fined a record breaking €4.34 billion (~$5BN) by European antitrust regulators for abusing the dominance of its Android mobile operating system.

Competition commissioner Margrethe Vestager has tweeted to confirm the penalty ahead of a press conference about to take place. Stay tuned for more details as we get them.

In a longer statement about the decision, Vestager said:

Today, mobile internet makes up more than half of global internet traffic. It has changed the lives of millions of Europeans. Our case is about three types of restrictions that Google has imposed on Android device manufacturers and network operators to ensure that traffic on Android devices goes to the Google search engine. In this way, Google has used Android as a vehicle to cement the dominance of its search engine. These practices have denied rivals the chance to innovate and compete on the merits. They have denied European consumers the benefits of effective competition in the important mobile sphere. This is illegal under EU antitrust rules.

In particular, the EC has decided that Google:

  • has required manufacturers to pre-install the Google Search app and browser app (Chrome), as a condition for licensing Google’s app store (the Play Store);
  • made payments to certain large manufacturers and mobile network operators on condition that they exclusively pre-installed the Google Search app on their devices; and
  • has prevented manufacturers wishing to pre-install Google apps from selling even a single smart mobile device running on alternative versions of Android that were not approved by Google (so-called “Android forks”).

The decision also concludes that Google is dominant in the markets for general internet search services; licensable smart mobile operating systems; and app stores for the Android mobile operating system.

During the press conference Vestager said the Commission had determined that Google had breached its competition rules with Android since 2011. (Although its press release also notes that during 2013, after being called out by the Commission, Google gradually stopped making illegal payments to device manufacturers to exclusively pre-install Google Search. “The illegal practice effectively ceased as of 2014,” it adds.)

“The decision today concludes that the restrictions Google imposed on manufacturers and network operators using Android have breached [EU] rules since 2011,” said Vestager. “First that’s because Google’s practices have denied rival search engines the possibility to compete on their merits. They made sure that Google search engine is pre-installed on practically all Android devices, which is an advantage that cannot be matched.

“And by making payments to major manufacturers and network operators on condition that no other search app or search engine was pre-installed — well, then rivals were excluded from this opportunity.”

“Google’s practices also harmed competition and further innovation in the wider mobile space, beyond just Internet search — and that’s because they prevented other mobile browsers from competing effectively with the pre-installed Google Chrome browser.

“Finally they obstructed the development of Android forks. This could have provided a platform for rival search engines as well as other app developers to thrive.”

She raised the example of Amazon’s Android fork, Fire OS, as a rival Android platform that has suffered from Google’s contractual arrangements with device manufacturers.

“In 2012 and 2013 Amazon tried to license to device manufacturers its Android fork, called Fire OS. It wanted to co-operate with manufacturers to increase its chances of commercial success. And manufacturers were interested but due to Google’s restrictions, manufacturers could not launch Fire OS on even a single device,” she said.

“They would have lost the right to sell any Android phone with key Google apps. Nowadays, very few devices run with Fire OS. Namely only those manufactured by Amazon themselves. And this is not a proportionate outcome. Google is entitled to set technical requirements to ensure that functionality and apps within its own Android ecosystem runs smoothly. But these technical requirements cannot serve as a smokescreen to prevent the development of competing Android ecosystems.

“Google cannot have its cake and eat it.”

Vestager also made a point of characterizing Google’s actions as monopolistic towards data, saying that by blocking rival apps and services it “also denied rivals access to valuable data from increased user traffic which in turn could have allowed rivals to improve their products”.

What about breaking Google up?

During the press conference she was asked several times about whether breaking up Google might not be a more effective remedy than the cease & desist decision the Commission has reached today — which hands responsibility for Google to come up with a compliance remedy for its illegal behavior with Android (albeit, subject to ongoing monitoring by the Commission).

She replied that she wasn’t sure that breaking up Google would make for an effective competition remedy, arguing there are “no silver bullets” to ensuring competitive markets.

“Here we have a decision that is very clear, which will allow mobile device producers to have a choice — that will us, as consumers, to have a choice as well. That’s what competition is about. And I think that is much more important than a discussion of whether or not breaking up a company would do that,” she said, when asked whether she would exclude the possibility of breaking up Google — so she was sidestepping a direct answer to that.

“I think what will serve competition is for more players to have a real go, to be able to reach consumers so that we can use our choice to find what suits us the best,” she added. “Test out new search engines, new browsers, have maybe a phone that works in a slightly different way [via an Android fork]… maybe the totality of the phone, in the way it was presented, that would work to allow others to compete on the merits, to show consumers what can we do, what have we invented, this is where we put our efforts, this is the that innovation we want to present for you. This I think would enable competition.”

She also emphasized the importance of passing proposed EU legislation related to transparency and fairness for businesses that are reliant on online platforms.

“I think there is a very important discussion which is to discuss how to pass the legislation that my colleagues have tabled — legislation that will ensure that you have transparency and fairness in the business to platform relationship,” she said.

“So that if you’re a business and you find that ‘oh, my traffic has stopped’, that you know why it happened, when it happened and what to do to get your traffic back…. Because this will change the marketplace, and it will change the way we are protected as consumers but also as businesses.”

Google has tweeted an initial reaction to the decision, claiming Android has created “a vibrant ecosystem, rapid innovation and lower prices”.

A company spokesperson confirmed to us that it will appeal the Commission’s decision.

In a lengthy blog post response, CEO Sundar Pichai expands on the company’s argument that the Android ecosystem has “created more choice, not less” — writing for example:

Today, because of Android, there are more than 24,000 devices, at every price point, from more than 1,300 different brands,including DutchFinnishFrenchGermanHungarianItalianLatvianPolishRomanianSpanish and Swedish
phone makers.

The phones made by these companies are all different, but have one thing in common — the ability to run the same applications. This is possible thanks to simple rules that ensure technical compatibility, no matter what the size or shape of the device. No phone maker is even obliged to sign up to these rules — they can use or modify Android in any way they want, just as Amazon has done with its Fire tablets and TV sticks.

He also has a veiled warning about the consequences should Google’s “free distribution” model for Android come unstuck, writing:

The free distribution of the Android platform, and of Google’s suite of applications, is not only efficient for phone makers and operators—it’s of huge benefit for developers and consumers. If phone makers and mobile network operators couldn’t include our apps on their wide range of devices, it would upset the balance of the Android ecosystem. So far, the Android business model has meant that we haven’t had to charge phone makers for our technology, or depend on a tightly controlled distribution model.

The fine is the second major penalty for the ad tech giant for breaching EU competition rules in just over a year — and the highest ever issued by the Commission for abuse of a dominant market position.

In June 2017 Google was hit with a then-record €2.4BN (~$2.7BN) antitrust penalty related to another of its products, search comparison service, Google Shopping. The company has since made changes to how it displays search results for products in Europe.

According to the bloc’s rules, companies can be fined 10 per cent of their global revenue if they are deemed to have breached European competition law.

Google’s parent entity Alphabet reported full year revenue of $110.9 billion in 2017. So the $5BN fine is around half of what the company could have been on the hook for if EU regulators had levied the maximum penalty possible.

“It’s a very serious illegal behavior”

The Commission said the size of the fine takes into account “the duration and gravity of the infringement”.

It also specified it had been calculated on the basis of the value of Google’s revenue from search advertising services on Android devices in the European Economic Area (per its own guidelines on fines).

Pressed during the press conference on how the Commission had determined the size of the penalty, which is double the penalty it issued in the Google Shopping case, Vestager emphasized the time period over which it had been going on, the fact of it having three components, and the effect of it, combined with Google’s rising turnover — adding finally for emphasis: “It’s a very serious infringement. It’s a very serious illegal behavior.”

Google will have three months to pay the fine but has confirmed it will appeal the decision — and legal wrangling could drag the process out for many years.

Vestager confirmed that while antitrust fines must technically be paid to the EU within the three month deadline they are placed in a closed account until the end of any appeals process — meaning the money cannot be used in the meanwhile.

So, in the Android case, the $5BN will likely be locked up until the late 2020s — assuming Google’s appeals aren’t successful. Should Google fail to overturn the Commission’s decision in the courts, Vestager said the money would be returned to EU Member States “using the same key as the contribution to the European budget”.

“You can impose a fine if someone has done someone wrong, you cannot impose a fine because you need the money. That would be wrong,” she added. “This of course means that it will take quite some time… if we win in court — and I can assure you we have done our best to make that possible — then, eventually, the money will come back to Member States to serve European citizens.”

Prior to the Commission’s record pair of fines for Google products, its next highest antitrust penalty is a €1.06BN antitrust fine for chipmaker Intel all the way back in 2009.

Yet only last year Europe’s top court ruled that the case against Intel — which focused on it offering rebates to high-volume buyers — should be sent back to a lower court to be re-examined, nearly a decade after the original antitrust decision. So Google’s lawyers are likely to have a spring in their step going into this next European antitrust battle.

The latest EU fine for Android has been on the cards for more than two years, given the Commission’s preliminary findings and consistently prescriptive remarks from Vestager during the course of what has been a multi-year investigation process.

And, indeed, given multiple EU antitrust investigations into Google businesses and business practices (the EU has also been probing Google’s AdSense advertising service — a separate investigation that Vestager today confirmed remains ongoing).

The Commission’s prior finding that Google is a dominant company in Internet search — a judgement reached at the culmination of its Google Shopping investigation last year — is also important, making the final judgement in the Android case more likely because the status places the onus on Google not to abuse its dominant position in other markets, adjacent or otherwise.

Announcing the Google Shopping penalty last summer, Vestager made a point of emphasizing that dominant companies “need to be more vigilant” — saying they have a “special responsibility” to ensure they are not in breach of antitrust rules, and also specifying this applies “in the market where it’s dominant” and “in any other market”. So that means — as here in the Android case — in mobile services too.

While a one-off financial penalty — even one that runs to so many billions of dollars — cannot cause lasting damage to a company as wealthy as Alphabet, of greater risk to its business are changes the regulators can require to how it operates Android which could have a sustained impact on Google if they end up reshaping the competitive landscape for mobile services.

In search of a remedy

At least that’s the Commission’s intention: To reset what has been judged an unfair competitive advantage for Google via Android, and foster competitive innovation because rival products get a fairer chance to impress consumers. Although it is avoiding prescribing any specific remedies — beyond telling Google to stop it.

For instance Vestager was asked whether the Commission might want Google to send push notifications to existing Android users to highlight alternatives, and thereby offer a remedy to consumers who had already been impacted by the choice constraints it placed on device makers and carriers.

“It is for Google to figure out how to lift this responsibility,” she told reporters. “It’s for them to do this… Google may make that kind of choice [i.e. sending push notifications] — on that we have taken no position.”

However the popularity and profile of Google services suggests that even if Android users are offered a choice as a result of an EU antitrust remedy — such as of which search engine, maps service, mobile browser or even app store to use — most will likely pick the Google-branded offering they’re most familiar with.

That said, the antitrust remedy could have the chance to shift consumers’ habits over time — if, for instance, OEMs start offering Android devices that come preloaded with alternative mobile services, thereby raising the visibility of non-Google apps and services. Which is clearly the Commission’s hope.

Interestingly, Google has been striking deals with Chinese OEMs in recent months — to brings its ARCore technology to markets where its core services are censored and its Play Store is restricted. And its strategy to workaround regional restrictions in China by working more closely with device makers may also be part of a plan to hedge against fresh regulatory restrictions being placed on Android elsewhere. 

Complainants in the EU’s earlier Google Shopping antitrust case continue to express displeasure with the outcome of the remedies Google has come up with on that front. And in a pointed statement responding to news that another EU antitrust penalty was incoming for Android, Shivaun Raff, CEO of Foundem, the lead complainant in Google Shopping case, said: “Fines make headlines. Effective remedies make a difference.”

So the devil will be in the detail of the Android remedies that Google comes up with.

“The decision requires Google to bring its illegal conduct to an end within 90 days in an effective manner,” said Vestager today. “At a minimum, our decision requires Google to stop and not to re-engage in the three types of restrictions that I have described. In other words our decision stops Google from controlling which search and browser apps manufacturers can pre-install on Android devices, or which Android operating system they can adopt. But it is Google’s sole responsibility to make sure that it changes its conduct in a way that brings the infringements to an effective end.”

“We will monitor this very closely,” she added, warning that failure to comply would invite further penalty payments — of up to 5% of the average daily turnover of Alphabet for each day of non-compliance, back dated to when the non-compliance started. “Our decision requires Google to change the way it operates and face the consequences of its action.”

Aptoide, one of the original app store complainants — which filed an antitrust complaint with the European Commission in 2014 complaining that Google’s policies did not allow any alternative app stores which competed with the Play Store to be valid content — welcomed today’s decision, albeit cautiously, as a “positive first step”. So there’s a lot of ‘wait and see’ in the air.

CEO Paulo Trezentos told us: “The EU’s ruling justifying our antitrust arguments is a positive first step forward, for a market more open, more competitive and better tailored for the users. It is these types of decisions that push industries to bigger levels and we hope that this will help everyone evolve.”

On the Google Shopping compliance front, Vestager had some additional words of warning for Google — saying: “We have not yet taken a position on whether Google has complied with the decision. And since we haven’t done so this remains very much an open question.”

She also said the Commission is continuing to investigate other elements of Google’s business practices related to other vertical search services.

“I cannot prejudge the outcome of these ongoing investigations,” she said, also citing the ongoing AdSense probe, and adding that they continue to be “a top priority for us”.

Android as an antitrust ‘Trojan horse’

The European Commission announced its formal in-depth probe of Android in April 2015, saying then that it was investigating complaints Google was “requiring and incentivizing” OEMs to exclusively install its own services on devices on Android devices, and also examining whether Google was hindering the ability of smartphone and tablet makers to use and develop other OS versions of Android (i.e. by forking the open source platform).

Rivals — banding together under the banner ‘FairSearch‘ — complained Google was essentially using the platform as a ‘Trojan horse’ to unfairly dominate the mobile web. The lobby group’s listing on the EU’s transparency register describes its intent as promoting “innovation and choice across the Internet ecosystem by fostering and defending competition in online and mobile search within the European Union”, and names its member organizations as: Buscapé, Cepic, Foundem, Naspers, Nokia, Oracle, TripAdvisor and Yroo.

On average, Android has around a 70-75% smartphone marketshare across Europe. But in some European countries the OS accounts for an even higher proportion of usage. In Spain, for example, Android took an 86.1% marketshare as of March, according to market data collected by Kantar Worldpanel.

In recent years Android has carved an even greater market share in some European countries, while Google’s Internet search product also has around a 90% share of the European market, and competition concerns about its mobile OS have been sounded for years.

Last year Google reached a $7.8M settlement with Russian antitrust authorities over Android — which required the company to no longer demand exclusivity of its applications on Android devices in Russia; could not restrict the pre-installation of any competing search engines and apps, including on the home screen; could no longer require Google Search to be the only general search engine pre-installed.

Google also agreed with Russian antitrust authorities that it would no longer enforce its prior agreements where handset makers had agreed to any of these terms. Additionally, as part of the settlement, Google was required to allow third parties to include their own search engines into a choice window, and to allowing users to pick their preferred default search engine from a choice window displayed in Google’s Chrome browser. The company was also required to develop a new Chrome widget for Android devices already being used in Russia, to replace the standard Google search widget on the home screen so they would be offered a choice when it launched.

A year after Vestager’s public announcement of the EU’s antitrust probe of Android, she issued a formal Statement of Objections, saying the Commission believed Google has “implemented a strategy on mobile devices to preserve and strengthen its dominance in general Internet search”; and flagging as problematic the difficulty for Android users whose devices come pre-loaded with the Google Play store to use other app stores (which cannot be downloaded from Google Play).

She also raised concerns over Google providing financial incentives to manufacturers and mobile carriers on condition that Google search be pre-installed as the exclusive search provider. “In our opinion, as we see it right now, it is preventing competition from happening because of the strength of the financial incentive,” Vestager said in April 2016.

Google was given several months to respond officially to the antitrust charges against Android — which it finally did in November 2016, having been granted an extension to the Commission’s original deadline.

Thriving competition?

In its rebuttal then, Google argued that, contrary to antitrust complaints, Android had created a thriving and competitive mobile app ecosystem. It further claimed the EU was ignoring relevant competition in the form of Apple’s rival iOS platform — although iOS does not hold a dominant marketshare in Europe, nor Apple have a status as a dominant company in any EU markets.

Google also argued that its “voluntary compatibility agreements” for Android OEMs are a necessary mechanism for avoiding platform fragmentation — which it said would make life harder for app developers — as well as saying its requirement for Android OEMs to use Google search by default is effectively its payment for providing the suite for free to device makers (given there is no formal licensing fee for Android).

It also couched “free distribution is an efficient solution for everyone” — arguing it lowers prices for phone makers and consumers, while “still letting us sustain our substantial investment in Android and Play”.

In addition, Google sought to characterize open source platforms as “fragile” — arguing the Commission’s approach risked upsetting the “balance of needs” between users and developers, and suggesting their action could signal they favor “closed over open platforms”.

During today’s press conference, Vestager was asked whether she has concerns that the costs of handsets might rise should Google respond to the antitrust remedy by deciding to charge a licensing fee for OEMs to use Android, instead of distributing it for free.

She pointed to the revenue Google generates via the Play Store. “The revenue made from that is quite substantial so I think there is still a possibility for Google to recoup the investment made in developing the Android operating system,” she suggested.

“I think a number of different choices can be made by Google and it is for Google to make these choices,” she added. “What we see in general is that competition makes prices come down, gives you better choices. So you can have a theory that prices will come up, it is as likely that prices will come down because of more competition. The thing is now it’s open — there can be competition as to how this should work. And that’s the very point of the decision.”

Court approves merger of AT&T and Time Warner

United States District Court Judge Richard J. Leon has ruled in favor of AT&T in the government’s antitrust suit to block AT&T’s proposed merger with Time Warner .

That decision matches word on the street over the past few weeks, and delivers a stern rebuke to the Trump Administration, which had opposed the deal from its earliest days. The decision was made following the close of markets in New York, and after hours trading was muted to the decision.

In light of today’s decision, Comcast, which has been eyeing its own content creator takeover of 21st Century Fox, will likely move forward with a bid as early as tomorrow.

In October 2016, AT&T announced its plan to acquire Time Warner for $85.4 billion, and a total of $108 billion with debt. The DOJ moved to block the merger in March, arguing that the merger would reduce competition and hurt consumer choice.

The nuances of this case are important, as the implications of this decision reach far beyond the individual businesses of AT&T and Time Warner to the vast media landscape as a whole.

First off, it’s worth noting that the overall goal of antitrust regulations is to protect the consumer from unfair business practices that may arise from a consolidation of power within a single company. But size isn’t necessarily what’s most important in these types of cases. In fact, sometimes a merger can help competition and consumer choice, as is more often the case with vertical mergers.

A vertical merger is when two companies who provide different or complimentary offerings join forces, giving consumers access to a more comprehensive set of services, at a lower price, while still generating profits. That’s not to say that vertical mergers get through regulatory approval free and clear — the FTC has fought 22 vertical mergers since 2000 — but they receive less scrutiny than horizontal mergers.

AT&T-Time Warner is considered a vertical merger, as AT&T is a content distributor and Time Warner is a content creator. But the overall landscape complicates the decision a great deal.

There are only a handful of companies in this space, and they are some of the most powerful companies in the world. AT&T itself is the largest telecom provider in the world, and via DirecTV, it is also the largest multichannel video programming distributor in the U.S. Time Warner, meanwhile, owns channels like TBS and TNT, HBO, Warner Bros, not to mention the assets to live sports and news orgs such as NBA, MLB, NCAA March Madness, and PGA.

The DoJ has argued that this type of consolidation would give the merged AT&T Time Warner the ability to raise prices, thwarting the competition’s ability to compete by forcing them to raise prices to maintain carriage rights. The government has also argued that the newly rolled back Net Neutrality rules would no longer protect AT&T from, say, throttling Netflix if it didn’t purchase and distribute Time Warner content.

On the other side, AT&T and Time Warner (big as they may be) face steep competition from the FAANG companies (Facebook, Apple, Amazon, Netflix and Google), all of whom have made video a top priority. In fact, CNNMoney reported that AT&T-Time Warner’s counsel Daniel Petrocelli made the argument that traditional media orgs have already been left behind in the digital revolution.

From the report:

Petrocelli told Judge Leon that their estimates show FAANG is worth $3 trillion collectively, while an AT&T-Time Warner entity post-merger would be worth $300 billion. ‘We’re chasing their tail lights,’ Petrocelli said.

It’s also worth noting that President Trump has been publicly opposed to the deal since he was on the campaign trail. Remember, Time Warner owns CNN, which is the object of some of Trump’s most focused hatred. At a campaign rally in 2016, Trump said his administration would not approve the deal, raising concerns over political interference. The government has argued that Trump did not communicate with antitrust officials over the deal and that their choice to fight the merger was not influenced by the White House.

Trump should invest in Amazon, not destroy it

For those who live under a rock (which, these days, I would recommend), President Donald Trump has become increasingly belligerent towards Amazon and its founder, Jeff Bezos.

In addition to a sequence of tweets against the ecommerce and cloud giant , Gabriel Sherman reported in Vanity Fair yesterday that “Now, according to four sources close to the White House, Trump is discussing ways to escalate his Twitter attacks on Amazon to further damage the company. ‘He’s off the hook on this. It’s war,’ one source told me. ‘He gets obsessed with something, and now he’s obsessed with Bezos,’ said another source. ‘Trump is like, how can I fuck with him?’”

‘How can I fuck with them?’ could also describe America’s backwards approach to its flagging prowess in critical technology fields, policies that stand in stark contrast to the massive and focused investment of strategic adversaries like China.

Through its Made in China 2025 plan, China is putting in place a series of initiatives to dominate the future of technologies like 5G wireless networking, artificial intelligence, cloud computing, biotechnology, and semiconductors. It is working to raise about $36 billion for a new semiconductor fund, potentially spend $411 billion on 5G infrastructure, and create a massive domestic market for overseas stocks through Chinese Depositary Receipts.

China selects, grows, and champions a set of winners in each industry in order to concentrate resources and increase the probability of success globally for its chosen companies. As Antonio Graceffo described in Foreign Policy Journal, “National champions are companies which help further the government’s strategic aims and in return, the government supports these companies by providing easier access to financing, giving preference in government contract bidding, and sometimes oligarchy or monopoly status in protected industries, giving these companies a number of advantages over their competitors.”

One has to look no further than Huawei to see the benefits of these policies. Huawei was an unknown player when it started roughly three decades ago, but through an aggressive expansion plan and a wellspring of government support, it has emerged to be the single largest manufacturer of telecommunications networking equipment in the world, surpassing Ericsson back in 2012. The company had revenues of $92 billion last year, and it is taking an early lead in the 5G wireless standards race, which could give it a powerful position to shape the future of connectivity in the years to come.

Meanwhile, the leadership of the United States is increasingly targeting the tech sector — one of the few areas of true vibrancy in the American economy — and trying to undermine it at every turn. The Trump administration has announced tariffs on high-tech goods that will end up harming U.S. technology exports, rolled back net neutrality legislation, and now is talking out loud about breaking up Amazon through antitrust laws.

On the latter, it’s not just Trump calling for war against America’s tech leaders: there is a growing movement against companies like Google and Apple which has led to increasing calls for antitrust action from both right-wing and left-wing policy analysts.

There are good reasons to be concerned about market dominance — it limits consumer choice and often rises prices. However, there are obvious limitations on how many competitors can enter markets like wireless infrastructure and cloud computing. The upfront costs are exorbitant — just launching a single data center today can easily cost hundreds of millions of dollars or more, and conducting original R&D in a competitive industry like artificial intelligence is equally expensive when a machine learning expert can go for tens of millions of dollars.

We are never going to have five Googles, nor five Dropboxes or five Amazons — the economics in these markets just don’t work that way. Their scale is what allows them to offer such comprehensive services at such low cost to consumers. Knocking out Apple is really opening the American market to the next four smartphone manufacturers, which would be Asian manufacturers like Samsung, Huawei, Lenovo, and Xiaomi. That sounds like a pyrrhic victory to me.

The U.S. believes in the power of free markets to cull losers and ensure winners a fair return, and the government avoids picking “winners” as a matter of course in its industrial policy. That worked great when the American economy was dominant, but it is no longer tenable in a world where strategic adversaries are putting their full weight behind a handful of companies.

So instead of getting on The Twitter and blasting Amazon, maybe this administration should start to consider that Amazon’s size and dominance in ecommerce and cloud services is actually an incredible blessing of American capitalism. Maybe it should start to think about how the government could assist Amazon in capturing more overseas markets, ensuring that the wealth generated by the company continues to return to its home country.

The threats faced by American tech companies parallel similar fears of the 1980s, when Japan’s resurgence on the world stage captivated the attention of U.S. politicians. China though is nearly eleven times the population of Japan, and has already overtaken the U.S. economy by some measures. This time really is very different, and the free market needs defenders. Ironically, that means backing American tech giants globally against their competitors.

The nuanced challenges of antitrust and AT&T-Time Warner

It’s been almost 18 months since the boards of AT&T and Time Warner unanimously voted to sign an agreement to merge their two companies and create a content and distribution powerhouse. That deal, pegged at $108 billion including debt from Time Warner, would be among the largest corporate mergers in American history. The U.S. Department of Justice sued to block the deal this past November, and now after long last, the antitrust trial that will determine the deal’s fate is about to start tomorrow with opening statements, following a snow delay today in Washington, DC.

This case is sprawling — the Justice Department intends to present 519 exhibits already — and much of the case will hinge on technical legal minutia. However, at its heart is a critical question of whether a combination of AT&T and Time Warner would help or hurt competition and thus ultimately consumer welfare.

This is a very important case to understand, because the court will have to reach a nuanced understanding of antitrust law in the complex and deeply interconnected world of video services. The decision rendered here could drastically affect consumer choice, as well as the business practices of companies across the tech industry.

A framework to understand antitrust

Before getting into the specifics of AT&T-Time Warner though, we need to understand how antitrust works — which is quite a bit more nuanced than the media generally describes.

The essential goal of antitrust regulations is to protect consumers from predatory business practices driven by companies that hold outsized market power. While companies can grow market power over time (think a fast-growing startup eating more and more market share), the reality is that the U.S. government by and large avoids using antitrust to target a company in the normal operation of its business (Microsoft back in the 1990s being a notable exception).

Instead, the Federal Trade Commission and the Department of Justice directs its attention to mergers and acquisitions as key decision points where it can review a transaction and determine whether the combined company helps or hurts competition. Companies conducting transactions must submit documentation to antitrust bodies as part of what is known as the HSR process.

Mergers are generally divided into two categories. The first is a horizontal merger, which is when two direct competitors join forces and merge — think Uber and Lyft hypothetically. The other form is a vertical merger, which is when two companies with related businesses come together in order to offer a more comprehensive and synergistic set of services in their product market.

In reviewing these transactions, the FTC’s goal is to increase competition and improve consumer welfare in all industries. Horizontal mergers are generally placed under strong scrutiny, since by definition, removing a competitor from a marketplace reduces competition (although there are exceptions).

Here is where the nuance starts to become more pronounced. The FTC generally views vertical mergers more positively, since combining related companies can reduce costs, which ultimately improves consumer welfare.

In a speech earlier this year, Bruce Hoffman, the acting director of the Bureau of Competition at the FTC, explained vertical merger theory and why the FTC generally looks more favorably on the practice:

As compared to arm’s-length contracting, a vertically integrated firm can more readily realize efficiencies in the form of lower costs or improved quality, conditions that greatly benefit customers of the firm. In addition, vertical mergers can eliminate the problem of “double markup,” which occurs when two firms, each with market power over a complementary product, set prices independently. Due to the problem of double markup, separate price setting leads to higher prices and lower levels of output. A vertical merger of these two firms allows for joint price setting over the two products, which leads to higher profits but also increased output. These built-in effects, while not necessarily large or dispositive in all cases, render the starting point for our analysis of vertical mergers more challenging than horizontal mergers.

The FTC may look more favorably upon vertical mergers, but that doesn’t mean it always supports them. Hoffman noted in his speech that the FTC has fought 22 vertical mergers since 2000. He indicates three typical concerns: that the merged companies can block new competitors, that they can foreclose competitors from customers or key inputs, and that they may have confidential information that allows them to compete with competitors unfairly. Each of these may be a reason to either block a transaction, or to demand changes or ongoing monitoring of a merger.

So to review, the FTC doesn’t care about size per se — it isn’t against consolidation, and in fact, may favor consolidation in cases where the newly merged company can be a more effective competitor in the marketplace and therefore increase consumer welfare.

Antitrust and AT&T-Time Warner

With that framework in mind, AT&T-Time Warner becomes much more complicated. The video production and distribution industry is oligopolistic — there are a handful of major studios, channels, distributors and platforms in the industry that drive most of the value here. Balancing those competing interests against each other is the best route toward maximizing competition and therefore consumer welfare.

The players in this space are some of the largest companies in the world. Through DirecTV, AT&T is the largest multichannel video programming distributor (MVPD) in the U.S. with 25 million subscribers, and, of course, it is the largest telecom company in the world. Time Warner is one of the most powerful content producers in the U.S., owning channels like TBS and TNT, premium subscription services like HBO, as well as Warner Bros, which is one of the largest and most profitable movie studios.

The two companies may be powerful, and combining them will only heighten those powers. However, they are facing incredible headwinds from the technology industry, namely the so-called FAANG group of internet giants: Facebook, Apple, Amazon, Netflix and Google (and by extension, YouTube). Every single one of these companies has made video a top priority, and their war chests and valuations are similarly powerful.

As the counsel for AT&T-Time Warner pointed out in trial, according to CNNMoney, “Petrocelli told Judge Leon that their estimates show FAANG is worth $3 trillion collectively, while an AT&T-Time Warner entity post-merger would be worth $300 billion. ‘We’re chasing their tail lights,’ Petrocelli said.”

Given that industry context, the critical question then is whether combining AT&T and Time Warner would help consumer choice in the video industry by allowing the two companies to more effectively compete as equals with the internet giants, or whether it would use its assets to leverage additional fees from competitors, and ultimately suck its competitors dry by forcing more customers on to its platforms, thereby limiting consumer choice.

The Department of Justice is clearly arguing the latter. There are a couple of considerations. In the government’s favor, Time Warner owns the assets to several critical live sports and news organizations, including the NBA, MLB, NCAA men’s basketball tournament (i.e. March Madness) and the PGA, along with CNN and associated networks. This live programming is increasingly valuable for distributors, because viewers watch ads and also perceive the content to have scarcity.

Therefore, such programming is considered “must have” for distributors, so Time Warner is able to charge a premium for access. If AT&T and Time Warner merged, the fear is that they would raise prices on this sort of critical content, forcing its competitors to increase prices to retain carriage rights. AT&T could keep the prices of its own distribution level (they own the content after all), which would make its services more attractive to consumers. Ultimately, that limits consumer choice.

Another factor in favor of the government, particularly since December when the FCC repealed net neutrality, is that AT&T, as a major mobile telecom provider, will have significant power to control the quality of service that customers of the internet giants will experience. AT&T could throttle Netflix, for instance, unless Netflix buys Turner-produced content. A merger gives the company more market power, and that would likely cause price increases in the industry.

The government doesn’t have a simple case to make, though. A factor in favor of AT&T-Time Warner is that its content costs are increasingly being dwarfed by the internet giants. Time Warner’s HBO segment spent $2.2 billion in 2017 according to the company’s 10-K form, compared to more than $6 billion dollars by Netflix in the same time period. Turner, the segment that includes TBS and TNT, spent $4.46 billion.

In other words, Netflix is spending almost as much money as Time Warner as a whole does, and also owns its customers through its streaming subscription model. Add in large original content budgets from Google, Apple and Amazon, and suddenly Time Warner looks like a (relatively) small fish in a very large pond.

Another point in favor of the merger is that the government allowed Comcast’s acquisition of NBC to go through, albeit with restrictions on the deal and active monitoring. As Hoffman of the FTC said in January though, “…we prefer structural remedies — they eliminate both the incentive and the ability to engage in harmful conduct, which eliminates the need for ongoing intervention.” Structural remedies here means divestitures or an outright block, as opposed to active monitoring requiring the DOJ to continually work with a company to ensure compliance.

These are just some of the points that both sides are going to argue over the next six to eight weeks in district court. The court will have to decide how consumers are going to fare in a merger scenario and whether they are better off with or without it.

In my view, the merger is unlikely to be favorable to consumers, given the history of similar mergers in the past, AT&T’s business actions in recent years and the generally positive business models of Netflix and other online streaming services with their convenience and efficiency for consumers.

The caveat is that the internet giants are just that — giants, and their continued growth means that fewer and fewer companies can compete with them in these markets. Allowing AT&T-Time Warner to go through may limit competition today, but that may already happen in the future if Time Warner falls behind its content competitors.

Unfortunately, markets are dynamic, while the conclusion of tomorrow’s case is a static decision in a point of time. While the future may be hard to predict, it seems unlikely that FAANG’s aspirations are going to diminish, and their consolidation may limit what little competition exists in this space. On balance, the court should probably say no, but that decision may well have been different a year or two from now.

As Judge Leon, who is overseeing the case, said this week quoted by CNNMoney, “I always tell people at parties, I don’t have a crystal ball. In this case I have to get a crystal ball! Maybe at one of those second-hand stores somewhere!” Let’s hope that crystal ball is very good indeed.