“Google is clearly buying its way to squelch competitors"
On Day 17, we heard another account of how Google's default agreements prevented Branch Metrics from ever fully launching.
When the founder and former CEO of Branch Metrics Alex Austin took the stand last Wednesday, we heard about Branch’s multi-year struggle to find homes for its app-search software. Austin testified that it felt like an “injustice” that his company was never able to launch an unrestricted version of its technology.
Today we heard another perspective of Branch’s story from former Samsung employee Patrick Chang, who had a special relationship with Branch: he played a leading role in Samsung’s investment in the young software company. As a Director at Samsung Next Ventures — the venture capital investment arm of Samsung Electronics — Chang was the employee who made the initial recommendation for Samsung to provide funding to Branch.
Before I cover Chang’s testimony, here’s an excerpt from my write-up on Austin's testimony that may offer a helpful refresher on what we’ve already heard about Branch:
At the beginning of his testimony, Austin described the initial mission that Branch focused on: building a search engine for apps that would allow users to pull up specific app pages from search queries through “deep linking” technology. For example, if you searched for “Pizza” on a Branch-integrated search bar, you would get results that brought you directly to pizza-related pages on apps you might own like Yelp or UberEats, as well as suggestions for apps that you hadn’t yet downloaded.
Austin thought this technology would create a win-win-win. Phone manufacturers and carriers could add another feature to their phones that would not only enhance the user experience but also create a new source of ad revenue, and app developers would get a new way to grow and distribute their apps outside of crowded app stores.
But Austin and his team soon discovered a familiar barrier: Google’s search engine default agreements. According to Austin, every single potential partner that he pitched Branch to turned it down for the same reason. Their contract with Google wouldn’t allow it.
Branch pivoted by developing an “offline” device search. This was apparently the only way that phone manufacturers like Samsung could implement Branch without violating their revenue share agreements (RSAs) with Google, which he understood to require that Google be the only “web-connected” search function pre-loaded onto a device.
Chang’s testimony was more emotionally muted than Austin’s, but as a whole, it largely corroborated the story Austin told about the obstacles Branch faced in working around Samsung’s relationship with Google.
In his responses to the DOJ’s questioning, Chang at times seemed reticent about saying anything that would be damaging to Google. But the exhibits that DOJ introduced of Chang’s internal messages with Samsung colleagues highlighted Chang’s attempts to advocate for a “carve-out” in Samsung’s default search engine agreement with Google that would allow Samsung phones to integrate a more powerful version of Branch’s software.1
In July 2020 — during the same period that Samsung executives were negotiating a new default agreement with Google — Chang wrote in one chat message: “The current agreement is looking like google will own all search on device….This will completely kill all potential for any branch search and other future services….[A]ll this will be killed if this google agreement happens.”
As the negotiations continued, Chang wrote a few weeks later: “This is probably Google being aware of Branch as you mentioned on their call and attempting to kill all of Branch’s attempts.”
Chang’s boss David Eun responded: “[G]oogle is clearly buying its way to squelch competitors….Outside of a potential antitrust action, I don't see Samsung refusing these terms.”
The DOJ filed its complaint against Google in this case on October 20, 2020. A couple days later, another Samsung employee suggested to Chang that the lawsuit might cause Google to loosen its interpretations of its contracts with Samsung.
Chang responded: “Actually the COMPLETE opposite. Google just did a f*ck you to Samsung. After the doj filings, they submitted a new redline that went backwards in all negotiations with Samsung and was even more aggressive in being restrictive….They basically don’t feel the doj has a real case.”
As Google’s cross examination of Chang made clear, there were differing opinions about Branch amongst his colleagues at Samsung and partnering phone carriers. Some felt that Branch would cannibalize search revenues generated from Google and others cited concerns about low user engagement with the restricted version of Branch that was integrated into Samsung phones. But Chang’s messages indicated that he believed Branch offered a complimentary product that didn’t compete with Google search and offered a path to higher overall revenue.
Chang’s vision of integrating a more powerful version of Branch into Samsung phones ultimately never came to fruition and he left Samsung Next in 2021 to start his own venture fund.
The Cellophane Fallacy
This afternoon we also heard the start of expert witness testimony from MIT economist Michael Whinston. Whinston’s testimony is being broken up into two separate weeks of the trial, but today he testified to his opinion that the three markets alleged by the DOJ — the markets for general search services, general search text advertising, and search advertising — are all relevant antitrust markets.
The DOJ’s direct examination walked Whinston through the slide deck he prepared as Whinston described the various methodologies he relied on to reach his conclusion about the relevant antitrust markets. This included reviewing previous testimony in this trial as well as internal Google documents.
What seemed to be of greatest interest to Judge Mehta based on his questions was Whinston’s discussion of the “cellophane fallacy”, which refers to the flawed reasoning the Supreme Court relied on in the 1956 Du Pont & Co. monopoly case.
Whinston didn’t describe the cellophane fallacy in the exact same terms, but Wikipedia provides a helpful distillation of the concept:
In research on the du Pont company arising from his PhD dissertation, Willard F. Mueller and co-author George W. Stocking, Sr. pointed out the error of mistaking a monopolist's inability to exercise market power by raising price above the current price for an inability to have already exercised market power by raising price significantly above the competitive price. Courts that use a monopolized product's elevated market price will typically misconstrue a completed anti-competitive act as a lack of market power. Had the Supreme Court considered the substitutability of other wrappings at cellophane's competitive price, the sales of other wrappings would have been much lower; du Pont might very well have been found guilty of monopolizing the market for flexible wrappings.
Whinston explained the cellophane fallacy to make the point that the fact that there may be some substitution away from Google’s products is not inconsistent with it being a monopolist.
Tomorrow, Whinston is expected to continue testifying about his additional conclusion that Google possesses substantial market power protected by barriers to entry in each of the three relevant markets. Google will not cross-examine Whinston until after he completes the second portion of his direct examination testimony later in the trial.
Fridays are only a half-day for the trial so I might not write an article tomorrow, but I’ll post some updates on the Big Tech on Trial X/Twitter account. The trial is scheduled to be off on Monday before resuming on Tuesday.
As Google lawyer John Schmidtlein warned Judge Mehta yesterday, Chang’s testimony was a “hearsay palooza.” The parties agreed with Judge Mehta that instead of repeatedly objecting to exhibits throughout Chang’s testimony, they would each just lodge a standing hearsay objection to the exhibits they didn’t like. All of the exhibits used for Chang were conditionally admitted with the understanding that the parties may argue about the admissibility of the exhibits later on in the parties’ post-trial briefing.
“Google is clearly buying its way to squelch competitors….Outside of a potential antitrust action, I don't see Samsung refusing these terms.” Ha!
As I understand it after Google holds its own, closed, internal ad auction they bring their “winning bid” to Samsung etc. which accepts the fantastic amount of money offered. In exchange Samsung etc. apparently agree not to hold an auction that would allow potential competitors to bid. At least this seems like what is happening. An ingenious set-up on the part of Google. Your clear writing on the ins and outs of this case is exceptional.