Over the summer, a quarter century after ‘”don’t be evil”, a judge has found that Google has abused its monopoly in search. But nobody knows what happens next, and whether this ruling will change anything. Or what LLMs might/might not do.
Google search seems to be disintegrating
22 October 2024 (Chania, Crete) — Earlier today my Chief Technology Officer posted his requiem for the man who killed Google Search. In the piece, Eric lays out pretty well:
• why Google search has been disintegrating
• how/why Google’s gratuitous monopoly over search (and likely ads) is coming to an end
• why a company bereft of vision, incapable of making money without monopolies, is flailing wildly
• why Google says “screw search” and sees AI as fundamental to its future growth and relevance
It is a good read. Please take the time. I just want to make a few additional comments.
Oh, search is a funny old thing. A search engine is a vast mechanical Turk – a reinforcement learning engine that uses human activity to understand the web. Google’s PageRank used signal from links created by people, but once people started using Google at scale, that usage itself created far more signal: which results you clicked on, how you changed your searches to get better results, and what else you searched for before and after.
That then applies on the advertising side as well: the more search ads Google serves, the more it knows about which ads are effective and the higher its revenue-per-query.
So, search is a virtuous circle. Everyone was using Google because it has the best results, and it had the best results because everyone used it, and hence it has the money to invest in getting even better results.
That is compounded by the scale of the infrastructure needed to index and analyze the entire web (Apple estimated $6bn a year for it to match Google on top of its existing search and indexing spending), which largely precludes venture-backed startups from entering the market.
But even if you had that capital, you wouldn’t have Google’s query volume and so you wouldn’t have Google’s quality. In tech this is called a network effect; in competition theory it’s called a natural monopoly.
Hence, Bing. Satya Nadella claimed that Microsoft has invested $100bn in search to date, yet Bing has only 5% of US search traffic, and both its results and its revenue-per-query are worse.
It’s stuck on the wrong side of that virtuous circle.
However, there’s another virtuous circle:
• everyone uses Google because it’s the default
• it’s the default because it’s the best and because Google pays other tech companies billions of dollars a year in revenue shares as “traffic acquisition costs” (TAC) to make it the default
• it’s the best and Google has those billions to pay because everyone uses it. In 2022, Google paid Apple about $20bn (about 17.5% of Apple’s operating income, and a 36% revenue share) and other companies $10bn to make it the default, which was close to 20% of Google’s search advertising revenue.
And THAT was the center of the U.S. competition case that was decided over the summer.
We all knew this in theory (after all, the TAC is right there in the accounts), but the summer’s judgement made it a lot more tangible:50% of search in the USA happens on channels where Google has a contract to make it the default: 28% on Apple devices, 19.4% on Android (the OEMs and telcos decide the default on Android, not Google) and 2.3% on other browsers (i.e. Mozilla). And then another 20% happens in user-downloaded Chrome on PCs
Amusingly, the contract means that Google pays Apple even for searches done in Chrome on Apple devices.
Note to readers: and, yes, I read the entire decision and many of the collateral documents. That case was a master class on search, monopolies, network effects, network control, demolishing smaller players, hyper-growth markets, Generative AI, mass-market utilities, how to burn cash – just about every major issue (and many minor issues) in technology today.
Meanwhile, users do not, by and large, change defaults unless the default is much worse that the alternative. And here, the default is generally better than the alternatives. But that is slowly changing.
So the court had an easy time finding these contracts “freeze the market.’
Web search is a reinforcement learning engine, where Google sees a lot more of the reinforcement than anyone else, and spends tens of billions of dollars to make sure things stay that way. The court found that these defaults deals are illegal, and it also found that Google squeezes up prices for search ads using its dominance in search advertising, in addition to its superior targeting.
All of this is pretty clear and easy to understand, but what comes next is not clear at all.
It’s obvious (to me) that the court will order Google to stop its TAC payments and abandon the contracts (or at a minimum radically reduce their scope), which means it saves $30bn in cash each year and Apple loses $20bn.
But then what else? I have seen a list:
• The court might order ‘choice screens’ in user-downloaded Chrome (20% of queries), but it has no power to order a choice screen in Safari, since Apple isn’t a party, and it’s not clear whether it can do that on Android, given that Samsung and Motorola, and the telcos, aren’t parties either.
• Meanwhile, it’s also unclear whether choice screens actually work, especially where (as the judgment laid out) Google has a much better brand than Bing, let alone any of the other alternatives. A lot of people given a choice screen would just choose Google anyway, as indeed appears to have happened in the EU, which already mandated this on Android.
• Meanwhile, the DoJ’s head of competition, Jonathan Kanter, was clear in an interview after the court decision that he wants any remedies to change the situation, not just remove the illegal conduct.
So if this ends up with Google just not having to pay Apple but still being the default, have you accomplished anything? I saw this blurb from a DOJ spokeman:
“We want to make sure that remedies in any case, whether it’s this one or any other, are meaningful and meet the markets where they are today, not where they were 15 years ago”.
Oh, and there are press reports that the DoJ is considering asking for Android and Chrome to be spun out. Spinning out Android seems irrelevant except as a purely punitive step: if it was independent, that wouldn’t change how Samsung sets defaults. If Chrome was independent, it could choose a different default too. But would it?
But we won’t know until early 2025 when the court’s “remedies” are announced, and then the fall of 2025 after all the *public comment* and horse trading.
And really … what will Apple, Samsung and Motorola, and a hypothetically independent Chrome Inc, choose as the default if Google can’t pay to be the default?
Bing, of course, is still free to pay to be the default, and now it doesn’t have Google bidding against it. Apple calculated that Bing would have to pay a revenue share of well over 100% to match Google’s offer (since, as above, Bing’s revenue-per-query is lower). But now there is no Google offer. And yet, here’s the judge in his decision quoting Eddie Cue, who runs this at Apple:
There was no price that Microsoft could ever offer to make the switch, because of Bing’s inferior quality and the associated business risk of making a change. I don’t believe there’s a price in the world that Microsoft could offer us. They offered to give us Bing for free. They could give us the whole company.
Some of this may be posturing, and some may just reflect the fact that Google could afford to outbid Bing massively. It also reflects the risk that Bing’s payments might never catch up to Google’s, while a lot of users might switch their defaults back to Google anyway, but now with their Google searches no longer generating payments to Apple.
But then Eddie Cue also says this:
We’re not going to take something that isn’t as good and provide that to our customers. Our customers are too important to us. One of the reasons Apple’s been so successful is the fact that we treat the customer as the most important thing in the world. Much more important than the revenue.
Again, is this posturing? Maybe, and I’m sure some Android OEMs would take the money, but how much would you have to pay Apple to make the second-best search engine the default? (Of course, it did make the second-best maps the default, but there it had no choice.)
I really don’t think we can answer this now: it depends what exactly the final ruling looks like, after all the appeals (what if it only caps the TAC, say?), how Microsoft reacts, whether Microsoft increases investment in Bing search quality to take advantage, what offers it choses to make, and of course what Apple really wants here. The same apples to Samsung and Motorola. Any remedies proposed by the court will be the kick-off for a multi-sided piece of game theory and corporate strategy shuffling between the court (and maybe the DoJ), Apple, the Android OEMs and telcos, Microsoft, and Google, in which the court can’t actually tell anyone other than Google what to do.
However, this also gets to an interesting question: if Apple would choose Google anyway (and that’s a big “if”), what was Google buying for that $20bn? Yes, to keep Google the default, but “default” isn’t binary.
And try this on for size:
When you type a query into Safari, Apple evaluates it and presents choices. In these examples, Apple is already unbundling some of that ‘default’ query traffic from Google. How much more aggressively would it think about these suggestions if it wasn’t getting a $20bn revenue share for search it chooses to send to Google? Booking.com pays $1bn a quarter for traffic, most of it to Google – what would it pay Apple to be on this screen? Amazon? Eddie Cue said Apple isn’t considering putting ads here, but taking TAC isn’t an ad. How much will Apple experiment and optimise? In different ways, this applies to Android as well – lots of startups would try to sell things like this to Samsung if Google wasn’t paying Samsung to say no.
Meanwhile, so far I’ve only been discussing Bing as the alternative, but for Apple, uniquely I think, there is also the option to create its own. The capital costs of building and running a search engine are too large for a startup, and for Samsung or Motorola (Lenovo) they’re too far out of scope: perhaps more importantly, as above, if a large sample of search queries is needed, neither of them have enough. One could consider Amazon and Meta here, but only Apple has both the money and the distribution: it can launch as the default on devices driving 30% of US search, giving it several times more query volume than Bing has ever seen.
This prompts an amusing dilemma for the DoJ: it is also suing Apple for abusing what it claims is a monopoly of ‘performance smartphones’ (a more challenging market definition than ‘general search engines’, incidentally). Now it wants more competition in search engines, but the most obvious way that such competition could emerge is for Apple to make its own new search engine the default on this ‘monopoly’ platform. (Microsoft of course already makes Bing the default search engine in the default browser on the dominant PC platform, but no-one seems to care.)
Would Apple do this, though? That’s another piece of corporate strategy game theory. It would no longer be giving up $20bn a year from Google (though it would be giving up whatever Microsoft was offering), but it would still need to spend billions of dollars a year on infrastructure and hire thousands more engineers, and find a way to make money from this. Would it reproduce search advertising, finding a way to reconcile that with its privacy branding (note that Google retains 18 months of search history by default)? Something else? And at the end, why? Why, other than the fact that Google’s search business is very profitable? No, that’s not a sufficient answer. Companies do not launch expensive and risky new projects only because a DCF shows a positive NPV, and Apple certainly doesn’t.
This reminds me a little of the ideas that floated around a few years ago that Apple would do some huge acquisition. Netflix! HBO! A record label! Peloton (no longer huge)! A bank! A telco! Yes, Apple has lots of money, and it could buy lots of things, some of which might even be accretive, but that capital has opportunity cost, Apple is a very narrowly-focused company, and adding thousands of new engineers and ad salespeople working on a new and basically unrelated product has an opportunity cost as well. As Tim Cook has put it a few times, the question is whether Apple could combine technology and experience to solve an important problem in a new way. I don’t think he would want to spend tens of billion dollars just to end up with an Apple version of Bing. That doesn’t solve a problem for anyone other than the DoJ.
Another possible (bizarre) approach was explored in that now famous UK Competition and Markets Authority (CMA) study, the CMA the principal competition regulator in the United Kingdom. The CMA study was “kind of” published during the Google trial to “help” the judge.
The study (the section to which I refer starts on page 18) proposes we go “to the root of the natural monopoly – the query data” and requires Google to provide this to its competitors on some sort of wholesale, anonymized basis. If the barriers to entry are the defaults (now blocked), the user data, and the capital costs, what if everyone could have the same data as Google?
The EU’s Digital Markets Act, equally, has a clause (#61) saying that gatekeepers (ie. Google) are required to give third parties “ranking, query, click and view data” – but giving no indication of what precisely that means or how it should be done.
Note to readers: this is a systemic problem with the DMA, which in trying to be broad and principles-based is often merely vague. And why it’s a defense lawyer’s dream.
BUT …providing this user data is a lot easier to say than to do, in a way that actually works. Would this data really be private? If it’s anonymous, how do you provide the history? Would it be useful without knowing all the other signal used? Should Google provide all of that too? Does this enable competition, or just create a class of thin Google wrappers with no real innovation of their own? Would a U.S. court want to mandate something that would require such detailed and highly technical ongoing scrutiny and management?
And yet … old history. We could have said all of this in 2020, when this case was filed. But the emergence of LLMs in the last two years has changed how people think about search itself, and blew everybody away.
LLMs might produce better results, or different results, or different interfaces, and at any rate they represent a discontinuity, a market entry point, and a new opportunity and new way to persuade users to switch. That was (briefly) the idea behind Bing integrating LLM results at the beginning of 2023, and it’s behind the excitement in some quarters around Perplexity, while ChatGPT now has a private search trial.
So … are LLMs an end-run around Google’s reinforcement learning engine? A better way to understand pages? Does search still need that reinforcement learning?
I am pretty skeptical about all this stuff. As I have written, I think that at a minimum, “hallucination” rates mean that LLM web search will need a huge amount of pre-processing and post-processing that’s actually best done by an incumbent (i.e. Google) – but nobody really knows how yet.
And all of these ideas certainly could change the balance of the question “should we set the default as Google or Bing? or Apple or … [fill in box]”
Yes, you see it. A complete lack of clarity might be the best conclusion from everything I’ve just written. It’s really easy for the DoJ to explain TAC and to ask the court to block it – but much harder to say what would change. Meanwhile, the court may need to consider the parallel judgement that Google has been overpricing search ads, nor the separate case around Google’s ad tech, which just started.
Yes, that one descriptive word we reach for these days in technology, politics, or just about anything. Clusterfuck.
But if you’ve been in this whirlpool of tech for as long as I have (40 years?), you get a rather deterministic lesson that we might draw upon. And that is as follows …
From all the previous waves of tech monopolies you see that once a company has won, and network effects have become self-perpetuating and insurmountable, then you don’t beat that by making the same thing but slightly better, and getting a judge to give you an entry point. You win by making the old thing irrelevant. That’s exactly what LLMs want to do. Google didn’t build a better PC operating system or a Win32 office suite, and Facebook didn’t do better search, and Apple didn’t do a better Blackberry.
OpenAI got 100m users in two months without going to a judge.
LLMs have a loooooooooong way to go on so many issues/problems. But it is rather interesting that the last few billions of LLM investment dollars have gone to how to improve LLM search.
Yep. 🍿 time