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Regulatory Comments Introduction The cloud-computing industry has undergone a transformation in recent years, driven by innovation, competition, and unprecedented demand for information-technology (IT) services. These comments assess . . .
The cloud-computing industry has undergone a transformation in recent years, driven by innovation, competition, and unprecedented demand for information-technology (IT) services. These comments assess the state of competition in this burgeoning field, and we thank the Federal Trade Commission (FTC) for the opportunity to respond to this request for information (RFI).
Competition among industry players within cloud computing is intense. It is crucial, however, to remember that, as ubiquitous as cloud-service providers might be, they must compete not just with each other but also with the internal IT capabilities of large enterprises. In other words, while the cloud-computing sector has been growing in importance within the IT ecosystem, it remains just one aspect of that ecosystem. Traditional, on-premises IT infrastructure continues to hold sway within many businesses, with internal IT teams designing solutions uniquely tailored to the specific needs of their organizations.
In this context, cloud providers present an attractive proposition. They offer companies the opportunity to take advantage of gains from specialization to outsource some or all of their IT services to expert entities. This decision between outsourcing and maintaining in-house operations is a typical business consideration, and its outcome will vary depending on a particular company’s individual capabilities. Nonetheless, it is clear that the advent of cloud computing has significantly expanded the range of available IT options.
While both the fast-moving nature of the cloud-computing industry and its intense competition have catalyzed numerous benefits, there are also some reasons for concern. For example, the shortage of computer chips has affected many segments of IT, including cloud computing. Despite this slowdown in the immediate term, the market’s general trends are mostly optimistic. These include an explosion in the variety of available software services and breakthroughs in hardware, both accompanying a dramatic fall in prices.
Given this energetic landscape, it is crucial that regulatory bodies like the FTC exercise caution in any potential interventions. After all, this vibrant and rapidly evolving industry stands as testament to the power of competitive forces to drive progress and deliver value.
The digital landscape is undergoing a profound transformation, as businesses around the globe increasingly transition from on-premises IT solutions to cloud services. This shift represents a significant evolution in the way that organizations manage their data, execute their operations, and leverage technology to gain competitive advantage. The market’s competitive dynamics are frequently misunderstood, however, which often leads to misconceptions about the role and impact of cloud computing in the broader IT ecosystem.
Traditionally, cloud computing has been divided into three “layers”:
One misconception about cloud computing is that it is a novel technology dominated by the “big three” companies of Amazon, Google, and Microsoft. In fact, cloud computing is merely one component of IT services, which used to be provided exclusively on-premises. Investments in cloud computing still represent a relatively small portion of global IT spending, with one report putting the total at 7%,[1] while another suggests it may be as much as 12%.[2] Whatever the precise figure, there clearly remains a sizeable opportunity for the sector to grow.
It’s also important to remember that before the advent of cloud computing, the IT landscape was dominated by a different set of players, some of which—including IBM, Hewlett-Packard, and Oracle—remain prominent today. It is therefore critical to acknowledge that cloud services have not replaced these entities, but have instead expanded the market and introduced new competitors and service offerings.
If we narrow our focus from all cloud-computing services to one of its three layers, such as IaaS, we can see that it is teeming with competition. Numerous competitors—including Amazon, Google, Alibaba, Microsoft, IBM, OVHcloud, Digital Ocean, Oracle, Deutsche Telekom, Huawei, and others—all vie for consumers. According to industry reports, in 2021 alone, these competitors showcased remarkable growth, with Microsoft growing 51%, Alibaba 42%, Google 64%, and Huawei 56%.[3]
Amid this robust competition, the dominance of established players like Amazon’s AWS has been declining. According to Gartner data for IaaS, AWS’s market share dipped from 45% in 2019[4] to 39% in 2021,[5] signaling a continuing evolution in the industry’s competitive dynamics. If we expand the market and look at IaaS, PaaS, and hosted private-cloud services (which is a subset of IaaS), Amazon’s market share has been steady, while Microsoft and Google have made huge gains in the past few years (see Figure 1 below).[6] This is exactly the sort of dynamics we would expect from a vibrant industry: some firms succeeding in one part but not in another, and market shares shifting around.
It is important to note that these “shares” are for the broad, colloquial sense of “a market,” and not for a relevant market in the antitrust sense. But even assuming, for the sake of argument, that it was a relevant market, concentration would not appear to be a concern. According to Synergy Group’s Q1 2023 numbers for IaaS, Amazon had a 32% market share, with Microsoft at 23%, Google at 10%, Alibaba at 4%, and IBM at 3%.[7] If we consider all other firms in the market to be a single entity, the highest possible Herfindahl-Hirschman Index (HHI) for this market (a proxy for all cloud computing) would be 2462.
Even though that is a large overestimate of the true market concentration, it still produces an HHI that is in the “moderately concentrated” range, according to the 2010 Merger Guidelines.[8] If the remaining 28% of the market were divided up among 28 firms, the HHI would drop to 1706. And neither of these figures account for the vast swath of IT spending that occurs outside the cloud, which suggests that competition in the market is far more vigorous than the HHI would imply.
By contrast, it is difficult even to conceive of the SaaS layer of cloud computing as a “market” in any meaningful sense. SaaS comprises an extremely varied set of productivity and collaboration tools, such as Microsoft Office 365, Google Workspace (formerly G Suite), and Slack; content management systems (CMS) like WordPress, Wix, and Squarespace; video-conferencing and communication platforms, such as Zoom, Microsoft Teams, and Slack; and cloud-gaming platforms like Microsoft xCloud and PlayStation Now. Like IaaS, SaaS has experienced dramatic expansion, with more than 30,000 providers in operation. Major players include most of the already mentioned companies, as well as industry giants like Cisco, Dell, Salesforce, Databricks, Heroku, Snowflake, Adobe, and Atlassian, among others.
To answer RFI Question #1 regarding the extent to which cloud providers specialize within a layer or operate at multiple layers, all of the major players in IaaS and PaaS (Amazon, Microsoft, Google, etc.) also offer SaaS, but not the other way around. SaaS is a much larger layer, in terms of both the number of companies and amount of revenue. It is the largest cloud-computing segment and has experienced exponential growth, with cloud-software sales escalating from $31 billion in 2015 to an impressive $103 billion in 2020 (see Figure 2 below).
Other research finds similar numbers regarding the dominance of SaaS within cloud computing. Grand View Research finds: “The SaaS segment dominated the industry in 2022 and accounted for the highest share of more than 53.95% of the overall revenue.”[9] Other research finds similar divisions among the layers. [10]
RFI Question #3 asks: “What are the competitive dynamics within and across the different layers of cloud computing?” These will vary by layer. In particular, any analysis of competition within SaaS would have to examine a particular subset of the layer. The subset of personal-storage services, for example, sees competition among Dropbox, Apple’s iCloud, Microsoft’s OneDrive, Google Drive, and many others. For video conferencing, we have competition among Zoom, Microsoft’s Teams, Google Meet, Apple’s FaceTime, Cisco’s Webex, and more.
Question #3 continues: “How does service quality vary between providers operating at one layer vs. providers operating at multiple layers?” While we cannot say much about the competitive dynamics within SaaS overall, as it is not a single, coherent market, we can work through the implications between SaaS and the other layers. Some of the major players in SaaS also provide IaaS and PaaS. They are not the norm, however. For example, Zoom (like most SaaS companies) does not provide the other layers, so it may not exert direct influence in those layers. SaaS is simply much broader. To the extent there is a competitive connection between SaaS and the other layers, it is indirect and manifests through demand for other services. In the other direction, falling prices for IaaS and PaaS increases competition among SaaS providers.
Beyond the newsworthy stories of big companies switching cloud providers, we see aggregate-level outcomes that indicate competition. Prices are dropping (with a recent exception that we discuss below) and quantity is increasing, both at rapid rates. We have already documented the rapid rise in revenue generated by these markets. Industry forecasts continue to predict significant growth in the coming years. Gartner, for example, forecasts 23% growth for 2023 alone.[11] These revenue-growth trends are particularly remarkable in the face of rapidly falling prices.
RFI Question #7 asks: “What are the trends in pricing practices used by cloud providers?” According to Amazon’s blog, the company reduced prices 107 times between AWS’s launch in 2006 and 2021.[12] For one comparison, in November 2010, the cost of Amazon’s “Simple Storage Service” (S3) was cut to $0.140 per-GB per-month.[13] In May 2023, the monthly cost was $0.023 per-GB, a drop of more than 80% in roughly 12 1/2 years.[14] Over the same period, the consumer price index rose nearly 40%.[15] Google Cloud’s standard storage prices are similarly at $0.020-$0.023 per-GB per-month.[16]
Byrne, Corrado, & Sichel conduct the most systematic study of AWS prices, but only for the period 2009-2016.[17] Looking at storage (S3), database management (RDS), and computing services (EC2), they found:
prices for S3 storage fall at an average annual rate of more than 17 percent over the full sample. Over sub-periods, the pattern is that same as that for EC2 prices. Prices fell at an annual average rate of about 12 percent from the beginning of 2009 to the end of 2013. Then, in early 2014, just as Microsoft had entered the market to sufficient degree that they were posting their cloud prices on the Internet, AWS began cutting prices more rapidly. That started with the big price drop in early 2014, and over the period from the start of 2014 to the end of 2016, S3 prices fell at an average annual rate of about 25 percent.[18]
The timing and magnitude of price drops was similar for Amazon’s RDS, a data-management system that involves both storage and computing abilities. Overall, “quality-adjusted prices for RDS instances fall at an average annual rate of more than 11 percent over the full sample.”[19]
RFI Question #4 asks: “What practices do cloud providers use to enhance or secure their position in any layer of cloud computing?” Lowering prices, especially for storage, is a major way that cloud providers compete. Examining the timing of the most extreme drops in AWS’s prices, it is clear that competition from Microsoft pushed down prices at AWS.
The story is more complicated when it comes to on-demand compute instances. Each cloud-computing provider offers many different tiers of instances, depending on the customer’s needs for memory, network performance, operating systems, and other criteria. Moreover, those tiers and offerings have changed over time, so any price comparison needs to be quality-adjusted.
Again, the systematic analysis by Byrne, Corrado, & Sichel for 2009-2016 shows a longer-term decline in prices.[20] They find:
quality-adjusted prices for EC2 instances fall at an average annual rate of about 7 percent over the full sample. Interestingly, prices fell at an annual average rate of about 5 percent from the beginning of 2009 to the end of 2013. Then, in early 2014, just as Microsoft had entered the market to sufficient degree that they were posting their cloud prices on the Internet (and shortly before Google started doing the same), AWS began cutting prices more rapidly. That started with the big price drop in early 2014, and over the period from the start of 2014 to the end of 2016, EC2 prices fell at an average annual rate of 10.5 percent.
More recently, some industry reports suggest that computing prices might not have fallen. For example, Liftr Insights estimates there was a 2.5% increase in 2022 for cloud-instance prices—though their methodology is unclear, especially around adjusting for quality improvements and the introduction of new products over time. In any case, this number should be taken with a pinch of salt. The study shows significant variation by provider.[21] For example, there was a 23.0% increase in 2022 for average prices of on-demand compute instances at AWS, while Azure saw a 9.1% decline.[22] These price variations suggest there may be significant price dispersion in the market, or that there were important and asymmetrical product quality variations during the observed time period. In either case, the diverging price paths suggest the report may be missing important parameters or competition or simply that its price measures are not accurate.
Even on its own terms, the Liftr report does not paint an unambiguously negative picture of cloud competition over recent years. First, AWS still has lower prices than competitors. As Liftr Insights writes in their news release, “despite all these increases and decreases in prices, Azure prices have been higher (on average) than AWS prices for three years.”[23] This suggests that AWS may have dropped prices at an unsustainable pace, as competitors did not go that low, and later decided to reverse course.
A more important factor to keep in mind is that the recent period of flat or rising prices is not unique to cloud computing. A January 2022 report that calculated the cost of computations by looking at the price of computing hardware found:
The price of computations in gigaFLOPS has not decreased since 2017. Similarly, cloud GPU prices have remained constant for Amazon Web Services since at least 2017 and Google Cloud since at least 2019. Although more advanced chips have been introduced in that time—with the primary example being Nvidia’s A100 GPU, released in 2020—they only offer five percent more FLOPS per dollar than the V100 that was released in 2017.[24]
For all of its success, the cloud-computing industry is not immune from the widespread demand for chips, combined with more recent supply shortages. The supply of the chips needed to run computations has barely kept up with demand, which has caused prices to remain flat.
While falling prices are evidence of strong competitive pressures within an industry, one may be concerned about barriers to switching service providers that, as RFI Question #10 suggests, may serve as a form of customer lock-in.
The major SaaS companies can still exert competitive pressure on the other layers through entry and exit. For example, Dropbox decided in 2017 to leave AWS and build its own infrastructure,[25] illustrating two things that matter for thinking about customer lock-in. First, it shows that exit is an option for customers. As explained above, cloud companies always compete with on-premises servers. Second, there is real harm to Amazon’s bottom line when it does not satisfy customers. Dropbox is a company with $2 billion in annual revenue.[26] While we do not know the nature of the Dropbox-Amazon negotiations, it seems implausible that Dropbox’s IT managers simply went on the AWS website to buy storage. Companies of Dropbox’s size will negotiate on price and quality/reliability terms. In this case, Dropbox decided its own servers would be superior.
On the flip side, cloud providers also attract large customers by convincing them that increased reliability and decreased costs justify a switch from on-premises servers to the cloud. Netflix migrated some services to AWS after originally having only its own servers. It partnered with Amazon despite Amazon Prime Video being a competitor to Netflix in the streaming-video space.[27] Importantly, Netflix was able to partially exit and to mix and match its own Open Connect with AWS to ensure that its streaming “never goes down,” as The Verge put it.
This sort of user entry and exit is to be expected from a healthy market. The turnover in these contracts also speaks to the influence that the IaaS and PaaS layers can have on SaaS.[28] IaaS can greatly improve SaaS systems’ offerings, but they always have to compete with the option of on-premises servers.
Do these examples illustrate that switching among different cloud providers is as easy as flipping a light switch? No, but moving data is neither immediate nor free. There are serious time costs and financial costs for cloud companies, and we should ultimately expect consumer prices to reflect those underlying costs. Back in 2015, moving 100 terabytes of data from an on-premises server to an AWS server could take 100 days. Amazon subsequently introduced a service called “Snowball” that involved physically shipping servers on trucks. With this service, that same transfer could take only two days.[29]
For many SaaS-storage options, such as Dropbox and Google Drive, the cost of moving data is not explicitly charged, as personal files are usually too small to bother charging for transfers, provided that the data is not moving across the country to a different data center. But for storage offered as part of IaaS, such as Google Virtual Private Cloud and Amazon S3, customers face explicit fees associated with moving data around.
Any transfer of data involves the data leaving one location (“egress traffic”) and entering another location (“ingress traffic”). Amazon,[30] Google,[31] and Microsoft[32] do not charge any fees for ingress traffic, even though incoming traffic is costly. Cloud providers instead recoup the costs of moving data through egress fees, including fees for moving within one provider or to somewhere else on the internet.
The pricing for egress fees varies depending on the type of transfer. For example, Google Cloud charges $0.01 per GiB[33] for an “Egress from a Google Cloud region in the US or Canada to another Google Cloud region in the US or Canada,” but $0.08 for an “Egress to a Google Cloud region on another continent (excludes Oceania).”[34] Amazon offers 100GB of transfer out to the internet each month, but thereafter charges $0.09 per GB for the first 10 TB per month.[35]
Beyond explicit egress charges for switching providers, policymakers may be concerned about other compatibility costs that could generate consumer lock-in. This is not a major issue for pure data storage or computing power. The major cloud providers allow users to run programs on open-source Linux instances. As one moves further from the commodity-like products of storage and computing, however, the switching costs become more real, depending on which precise service customers are using.
For example, for video editing, whether one is using editing software on one’s local machine or through cloud services, all the major editing software will input and output standardized files. If you are in the middle of an edit, however, that file format is often unique. Is that a switching cost? Probably not in any sense that is relevant to the FTC, but it is on par with the switching costs experienced once you enter a grocery store. The competitive pressures are to attract customers to enter the store, or to start using the software.
For less trivial examples, one could worry about the costs to a large company of switching from one cloud SQL-database (part of the PaaS layer) provider to another—e.g., from Amazon RDS to Microsoft Azure. SQL itself isn’t “open source” in the way that a software application or operating system might be. There are, however, numerous database systems that utilize SQL, and many of these are open source. Examples include MySQL, PostgreSQL, and SQLite; all are open-source relational database-management systems that use SQL as their standard language. Conversely, there are also proprietary, closed-source database systems that use SQL, such as Microsoft SQL Server and Oracle Database. No matter the system, again, changing providers is not as easy as flipping a light switch or dragging and dropping files on Google Drive.
But we must always ask, compared to what? Changes to major IT operations have always been costly. Transferring large amounts of data is costly, as noted above. That’s why companies have dedicated, full-time IT staff to handle such issues. Putting something on the cloud does not magically make it free to do whatever one wants, but cloud computing does open up the number of choices for any product that is available to customers.
While the above discussion frames such questions as an either/or decision, many users “multi-home” or use multiple providers. According to one survey, 70% of companies that use cloud providers use multiple providers.[36] This flexibility in selection allows customers to cherry-pick services from various providers and assign different providers for distinct workloads. Such an approach inherently amplifies the level of competition within the cloud industry. Again, it is worth contrasting this with on-premises IT services. The apparent ease of multi-homing suggests that other compatibility issues are not a major hindrance to competitive pressures and that there is still robust competition for consumers.
RFI Question #4 asks: “What are the effects of those practices on competition, including on cloud providers who do not operate at multiple layers?”
The biggest impact of competition on prices within the cloud-computing sector may not be observed directly by consumers; rather, it manifests in generating the infrastructure and platforms that allow other businesses to compete. This includes not only the various types of SaaS that people usually associate with cloud computing, such as Zoom and Dropbox, but also general online products and services that have become feasible due to the lower cost of cloud computing.
Every industry has been affected by cloud computing, as many large-scale enterprises are adopting cloud-based technologies to effectively manage and reduce their expenses.[37] As noted above, for the 2009-2016 period, Byrne, Corrado, & Sichel find that prices fell annually by 7% for computing power, 12% for database services, and 17% for storage.[38]
These cost reductions enhance competition in many sectors, not just “tech” sectors. For example, according to Grand View Research, the banking, financial services, and insurance (BFSI) sector has the largest share of cloud computing by end-use (see Figure 3 below).[39] As of 2017, a large BFSI company like JP Morgan Chase required 40,000 IT employees and an annual budget of more than $9 billion.[40] As companies moved more of those IT services to the cloud, they have saved money and opened new possibilities.
Cloud computing has also enabled such advances as mobile banking, digital wallets, and payment services. Services like Apple Pay, Google Pay, and PayPal allow users to make secure transactions with their smartphones, eliminating the need for physical credit cards or cash. By leveraging cloud computing, mobile-payment services can benefit from increased scalability, flexibility, security, and accessibility, ensuring the smooth and secure operation of payment transactions while providing a seamless user experience. These options and the competitive pressures they unleash are now feasible, given the drastic drop in cloud prices.
And banking is just one industry. Every industry has experienced the effects of cloud computing increasing competition in those downstream industries. For a recent example, American Airlines in May 2022 transitioned its customer-facing applications from an internal server to IBM Cloud. Again, for decades, companies have had to manage their own IT processes. The move by American was intended to enhance the airline’s digital self-service tools and offer customers improved access. By leveraging the open and flexible IBM cloud platform, American was able to modernize its technology stack, embrace DevOps principles, and achieve greater agility in its operations.[41]
This ease is especially important for startups. According to one IT-industry advocacy group, “cloud hosting and computing services, like AWS, Azure, Google Cloud, or others”[42] is one of the three most popular categories of services used by startups, alongside code repositories (like Github) and communication and collaboration tools (like Zoom or Slack). By their numbers, 69% of startups are using “cloud computing and database services,” because these “have lowered barriers for startups by enabling them to innovate without needing to worry about building the hardware physical infrastructure themselves.”[43] Whether the number is 60% or 80%, the important thing to recognize is that cloud providers now provide options to startups in the most remote parts of the country on par with those in Silicon Valley.
One aspect of the market’s evolution that may get lost in the discussions about price and exit is the increased security benefits that cloud computing can provide for downstream firms—especially for smaller startups without the means for a dedicated IT team. Oracle conducted a survey of “341 CEOs and CIOs, at firms between 500 to 10,000 employees, making between 100M to 999M dollars in revenue annually in a variety of industries, and located across the United States.”[44] They found that that 66% of the C-suite officials selected “security” as one of the “biggest benefits of cloud computing for your organization today,” while only 41% chose “cost reduction.”[45] Any policy proposals that seek changes in the cloud-computing market must take the potential impacts to security seriously.
Among the downfield services that have received considerable attention are artificial intelligence (AI) and machine learning (ML). Training large AI and language models requires an expensive, upfront training period. The costs are often not released to the public, but we can make rough calculations.
A cutting-edge GPU such as the popular Nvidia A100, released in 2020, costs about $10,000.[46] Meta’s largest language model used 2,048 Nvidia A100s. If Meta bought GPUs specifically for training this model, the cost would be more than $20 million and the training would take about 21 days. If it instead used dedicated prices from AWS, the cost would be over $2.4 million.[47] Cloud computing allows for the cost of GPUs to be split across many users. Training large models are a perfect use case for renting processing power, since it is a large training cost that companies do not need every day.
While $2 million to $20 million is a large investment, it is not beyond the capabilities of many large tech companies. For a comparison, Meta has spent more than $30 billion on the Metaverse.[48] And the returns to innovation in this space are large. OpenAI’s ChatGPT reached 100 million active users just two months after its release, making it the fast-growing user base ever.[49] And that came from a relatively unknown company.
Much of the attention around AI involves the big companies (OpenAI, Google, Meta, Microsoft). But the cloud increases the availability of AI models for smaller companies, thereby increasing competition in the AI space, just as it previously did in teleconferencing, mobile payments, and IT services. For example, Amazon’s Bedrock is a marketplace for “generative AI applications with foundation models (FMs)” that “makes FMs from leading AI startups and Amazon available via an API, so you can choose from a wide range of FMs to find the model that is best suited for your use case.”[50]
Similarly, Microsoft’s Azure provides tools for customers to use AI models for their unique situations by, for example, offering models to help with quality control in manufacturing.[51] Azure also offers large-scale language models—including ChatGPT, as well as others—for use on the pay-as-you-go model, similar to other cloud services.[52]
Cloud computing may allow AI to flourish, but AI also affects the cloud-computing markets. One concern in AI is the limit of suitable AI chips. For years, there have been news stories about chip shortages and their impact on car production, computer availability, and more. That supply constraint could have a major impact on cloud computing. As noted above, computing prices are rising both on the cloud and off.
In response to rising prices, as well the development of AI and ML, demand has grown for new types of chips within cloud computing. Many are transitioning from traditional CPU chips to specialized chips, such as graphics processing units (GPUs), which were traditionally used for graphics cards but are increasingly used for AI and ML. For example, Google’s AI Infrastructure is built around Google’s Tensor Processing Units (TPUs) and cloud GPUs.[53] Amazon introduced a new type of chip, known as Trainium, which was specifically engineered to train machine-learning algorithms and to compete with similar products from Nvidia.
To respond to RFI Question #4, new hardware—such as Google’s TPUs or Amazon’s Trainium—is one way that cloud providers could enhance or secure their position across multiple layers. By offering a better product, they secure their position both in IaaS, as well as in any SaaS that runs on that hardware.
The landscape of the cloud-computing industry is marked by intense competition and rapid innovation, influenced by the increasing demand for IT services. It’s important to acknowledge the dual nature of this competition: cloud providers must not only contend with one other, but also with the established internal IT capabilities of large firms.
Cloud computing is a new entrant to the IT sector. Traditional, on-premises IT infrastructure remains a significant player in this arena, with cloud computing forming one crucial component of the broader IT ecosystem. Firms’ ability to choose, combine, or even switch among services from multiple cloud providers further underscores the industry’s competitive dynamics. As we move forward, the promise of enhanced service offerings, technological innovation, and reduced costs for consumers appear set to continue, fueled by these competitive pressures. We could always imagine some perfect policy remedy that would allow these trends of falling prices, increasing quantity, and increased innovation to be even more extreme. But given what we have seen, it appears the future of cloud computing is bright, and we can eagerly anticipate exciting developments on the horizon.
[1] Bill Whyman, Secrets From Cloud Computing’s First Stage: An Action Agenda for Government and Industry, Information Technology and Innovation Foundation (Jun. 1, 2021), https://itif.org/publications/2021/06/01/secrets-cloud-computings-first-stage-action-agenda-government-and-industry.
[2] Glenn Solomon, The Cloud Is Still a Multibillion-Dollar Opportunity. Here’s Why, Forbes (Jan. 4, 2023)m https://www.forbes.com/sites/glennsolomon/2023/01/04/the-cloud-is-still-a-multibillion-dollar-opportunity-heres-why.
[3] Press Release, Gartner Says Worldwide IaaS Public Cloud Services Market Grew 41.4% in 2021, Gartner (Jun. 2, 2022), https://www.gartner.com/en/newsroom/press-releases/2022-06-02-gartner-says-worldwide-iaas-public-cloud-services-market-grew-41-percent-in-2021.
[4] Id.
[5] Id.
[6] Cloud Spending Growth Rate Slows But Q4 Still Up By $10 Billion from 2021; Microsoft Gains Market Share, Synergy Research Group (Feb. 6, 2023), https://www.srgresearch.com/articles/cloud-spending-growth-rate-slows-but-q4-still-up-by-10-billion-from-2021-microsoft-gains-market-share.
[7] Felix Richter, Big Three Dominate the Global Cloud Market, Statista (Apr. 28, 2023), https://www.statista.com/chart/18819/worldwide-market-share-of-leading-cloud-infrastructure-service-providers.
[8] U.S. Department of Justice & FTC, Horizontal Merger Guidelines § 5.3 (2010).
[9] Cloud Computing Market Size, Share & Trends Analysis Report By Service (SaaS, IaaS), By End-use (BFSI, Manufacturing), By Deployment (Private, Public), By Enterprise Size (Large, SMEs), And Segment Forecasts, 2023 – 2030, Grand View Research, https://www.grandviewresearch.com/industry-analysis/cloud-computing-industry (last visited Jun. 18, 2023).
[10] Minjau Song, Trend and Developments in Cloud Computing and On-Premise IT Solutions, Alliance for Digital Innovation (Dec. 2021), available at https://alliance4digitalinnovation.org/wp-content/uploads/2021/12/Brattle-Cloud-Computing-Whitepaper_Dec-2021-2.pdf, at 17.
[11] Press Release, Gartner Forecasts Worldwide Public Cloud End-User Spending to Reach Nearly $600 Billion in 2023, Gartner (Apr. 19, 2023), https://www.gartner.com/en/newsroom/press-releases/2023-04-19-gartner-forecasts-worldwide-public-cloud-end-user-spending-to-reach-nearly-600-billion-in-2023.
[12] Bowen Wang, Amazon EC2 – 15 Years of Optimizing and Saving Your IT Costs, Amazon (Aug. 17, 2021), https://aws.amazon.com/blogs/aws-cost-management/amazon-ec2-15th-years-of-optimizing-and-saving-your-it-costs.
[13] Alexia Tsotsis, Amazon Slashes AWS S3 Prices Up to 19%, TechCrunch (Nov. 1, 2010), https://techcrunch.com/2010/11/01/aws-s3-2.
[14] Amazon S3 pricing, Amazon, https://aws.amazon.com/s3/pricing (last visited Jun. 15, 2023).
[15] Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, FRED, https://fred.stlouisfed.org/series/CPIAUCSL (last accessed Jun. 15, 2023).
[16] Cloud Storage price, Google, https://cloud.google.com/storage/pricing (last visited Jun. 15, 2023).
[17] David Byrne et al., The Rise of Cloud Computing: Minding Your P’s Q’s and K’s, National Bureau of Economic Research (Working Paper 25188 2018).
[18] Id. at 22.
[19] Id. at 22.
[20] Id at 20.
[21] Press Release, Liftr Insights Data Highlights Increases in AWS Prices While Microsoft Azure Prices Have Been Decreasing, Liftr Insights (Feb. 7, 2023), https://liftrinsights.com/news-releases/aws-and-azure-cloud-pricing-moving-in-different-directions-as-shown-by-liftr-insights-data.
[22] Id.
[23] Id.
[24] Andrew Lohn & Micah Musser, AI and Compute: How Much Longer Can Computing Power Drive Artificial Intelligence Progress, Center for Security and Emerging Technology (Jan. 2022), https://cset.georgetown.edu/publication/ai-and-compute.
[25] Ron Miller, Why Dropbox Decided to Drop AWS and Build Its Own Infrastructure and Network, TechCrunch (Sep. 15, 2017), https://techcrunch.com/2017/09/15/why-dropbox-decided-to-drop-aws-and-build-its-own-infrastructure-and-network.
[26] Press Release, Dropbox Announces Fourth Quarter and Fiscall 2022 Results, Dropbox (Feb. 16, 2023), https://dropbox.gcs-web.com/news-releases/news-release-details/dropbox-announces-fourth-quarter-and-fiscal-2022-results.
[27] See, e.g., Shirsha Datta, What Led Netflix to Shut Their Own Data Centers and Migrate to AWS?, Medium (Sep. 22, 2020), https://shirshadatta2000.medium.com/what-led-netflix-to-shut-their-own-data-centers-and-migrate-to-aws-bb38b9e4b965; Vaishnavi Katgaonkar, How Does Netflix Work?, Medium (Sep. 9, 2020), https://medium.com/@katgaonkarvaishnavi10/how-does-netflix-work-425e0fd06055; Netflix on AWS, Amazon, https://aws.amazon.com/solutions/case-studies/innovators/netflix (last visited Jun. 15, 2023).
[28] Catie Keck, A Look Under the Hood of the Most Successful Streaming Service on the Planet, The Verge (Nov. 17, 2021), https://www.theverge.com/22787426/netflix-cdn-open-connect.
[29] Yevgeniy Sverdlik, AWS Finds Way to Move a Lot of Data to Cloud Faster – by Putting It on a Shipping Truck, DataCenter Knowledge (Oct. 7, 2015), https://www.datacenterknowledge.com/archives/2015/10/07/aws-speeds-up-data-migration-to-cloud-using-shipping-trucks.
[30] Amazon, supra note 14.
[31] Bandwidth Pricing, Azure, https://azure.microsoft.com/en-us/pricing/details/bandwidth (last visited Jun. 15, 2023).
[32] All Network Pricing, Google Cloud, https://cloud.google.com/vpc/network-pricing (last visited June 15, 2023).
[33] 1 gibibyte (GiB) equals 1.074 gigabytes (GB).
[34] Google Cloud, supra note 32.
[35] Amazon, supra note 14.
[36] 2023 State of the Cloud Report, Flexera, https://info.flexera.com/CM-REPORT-State-of-the-Cloud#view-report (last visited Jun. 15, 2023).
[37] Grand View Research, supra 9.
[38] Byrne et al., supra 17.
[39] Grand View Research, supra 9.
[40] Kim S. Nash, J.P. Morgan Chase Names New CIO as Dana Deasy Exits, Wall Street Journal (Sep. 7, 2017), https://www.wsj.com/articles/j-p-morgan-chase-names-new-cio-as-dana-deasy-exits-1504822667.
[41] Id.
[42] Tools To Compete: Lower Costs, More Resources, and the Symbiosis of the Tech Ecosystem, CCIA Research Center and Engine (Jan. 25, 2023), https://research.ccianet.org/reports/tools-to-compete, at 6.
[43] Id. at 16.
[44] Security in the Age of AI, Oracle, available at https://www.oracle.com/a/ocom/docs/data-security-report.pdf, at 3 (last visited June 15, 2023),
[45] Id. at 6.
[46] Jonathan Vanian, ChatGPT And Generative AI Are Booming, but the Costs Can Be Extraordinary, CNBC (Mar. 13, 2023), https://www.cnbc.com/2023/03/13/chatgpt-and-generative-ai-are-booming-but-at-a-very-expensive-price.html.
[47] Id.
[48] Jyoti Mann, Meta Has Spent $36 Billion Building the Metaverse but Still Has Little to Show for It, While Tech Sensations Such as the iPhone, Xbox, and Amazon Echo Cost Way Less, Business Insider (Oct. 29, 2022), https://www.businessinsider.com/meta-lost-30-billion-on-metaverse-rivals-spent-far-less-2022-10.
[49] Krystal Hu, ChatGPT Sets Record for Fastest-Growing User Base – Analyst Note, Reuters (Feb. 2, 2023), https://www.reuters.com/technology/chatgpt-sets-record-fastest-growing-user-base-analyst-note-2023-02-01.
[50] Amazon Bedrock, Amazon, https://aws.amazon.com/bedrock (last visited Jun. 15, 2023).
[51] Azure AI, Microsoft, https://azure.microsoft.com/en-us/solutions/ai/#overview (last visited Jun. 15, 2023).
[52] Price Details, Microsoft, https://azure.microsoft.com/en-us/pricing/details/cognitive-services/openai-service/#pricing (last visited Jun. 15, 2023).
[53] AI Infrastructure, Google Cloud, https://cloud.google.com/ai-infrastructure (last visited Jun. 15, 2023)
Amicus Brief INTEREST OF THE AMICUS CURIAE The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center aimed at building . . .
The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center aimed at building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies to inform policy debates and has longstanding expertise evaluating antitrust law and policy.
ICLE has an interest in ensuring that antitrust law promotes the public interest by remaining grounded in sensible rules informed by sound economic analysis. That includes ensuring consistency between antitrust law and other laws that proscribe unfair methods of competition, such as California’s Unfair Competition Law.[1]
The panel’s holdings that (1) Apple’s conduct with respect to its close control over the App Store and restrictions on in-app payments (“IAP”) do not give rise to an antitrust violation, but that (2) its anti-steering provisions nevertheless violate California’s Unfair Competition Law (“UCL”), are incongruent. The anti-steering provisions violate the UCL only if they constitute an “incipient violation of an antitrust law, or . . . [cause harm] comparable to or the same as a violation of the law.” Cel-Tech Commc’ns, Inc. v. L.A. Cellular Tel. Co., 20 Cal. 4th 163, 186-87 (1999). But provisions limiting app developers’ ability to steer consumers to alternative payment options exist merely to further the goals of the lawful IAP restrictions, and thus the anti-steering provisions cannot constitute incipient antitrust violations or cause harm comparable to such violations.
Having affirmed the District Court’s finding that Apple’s IAP policies are procompetitive, the panel should have ruled that Apple’s anti-steering provisions—which constitute a less restrictive means of pursuing the same procompetitive objective—are not unfair under the UCL. The panel’s decision, if it stands, risks chilling procompetitive conduct by deterring investment in efficiency-enhancing business practices, such as Apple’s “walled-garden” iOS. See Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004) (“[F]alse condemnations ‘are especially costly, because they chill the very conduct the antitrust laws are designed to protect.’”) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986)). More egregiously, it risks creating a fundamental contradiction by enjoining conduct under the UCL that is benign—and even beneficial—under antitrust law.
Antitrust and other laws aimed at proscribing unfair methods of competition (“UMC”) share the same overarching rationale, and thus “we can classify unfair competition and antitrust as blood brothers or, at least, as brothers-in-law.” Rudolf Callmann, Unfair Competition and Antitrust: Coexistence Within Complementary Goals, 13 Antitrust Bull. 1335, 1335 (1968). Both types of laws were enacted to protect consumers by protecting “competition, not competitors.” Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962) (emphasis in original); accord Cel-Tech, 20 Cal. 4th at 186-87 (citing this language and defining “unfair” in the UCL to include incipient antitrust violations and other conduct that “significantly threatens or harms competition”) (emphasis added).
Thus, while harm to a competitor may provide an evidentiary basis for demonstrating harm to competition under both antitrust and UMC laws, it is not sufficient for a viable claim under either. Indeed, just as conduct that constitutes vigorous competition in one context can cause anticompetitive harm in another, so too may conduct that harms a competitor promote competition overall. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458-59 (1993) (“The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself . . . . It is sometimes difficult to distinguish robust competition from conduct with long-term anticompetitive effects . . . .”); New York v. Microsoft Corp., 224 F. Supp. 2d 76 (D.D.C. 2002) (“conduct that is in some respect adverse to competitors is almost implicit in the concept of competition”). In order to avoid condemning beneficial conduct, only a few forms of conduct are per se antitrust violations, and the vast majority are assessed based on their economic effects.
UMC law is nominally more focused on the nature of the conduct at issue—whether it is “unfair.” As in antitrust, a few forms of conduct are facially problematic under UMC law. Most notably, conduct that violates some other law or policy may also violate UMC law.[2] But where the basis for an unfairness claim under UMC law is inchoate harm to competition, decades of scholarship and judicial decisions have made clear that the conduct should be assessed using the same principles and effects-based logic of antitrust. “[A] rigid separation of the antitrust laws and the law of unfair competition is neither legally realistic nor economically desirable.” Callmann, supra, at 1345.
The same is true under the UCL: “[T]he determination of whether a particular business practice is unfair necessarily involves an examination of its impact on its alleged victim, balanced against the reasons, justifications and motives of the alleged wrongdoer. In brief, the court must weigh the utility of the defendant’s conduct against the gravity of the harm to the alleged victim.” Motors, Inc. v. Times Mirror Co., 102 Cal. App. 3d 735, 740 (Cal. Ct. App. 1980).
The logic is simple. Because consumers benefit from vigorous competition, antitrust law does not punish companies for competing on the merits, even if rivals are harmed or eliminated as a result. See Spectrum Sports, 506 U.S. at 458; Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 758, 767 (1984); NYNEX v. Discon, 525 U.S. 128, 135-36, 139 (1998). Using UMC laws to ban conduct merely because it harms competitors would risk undermining the very rationale of competition and, by extension, the UMC laws that seek to protect it. See Cel-Tech, 20 Cal. 4th at 185 (an improper definition of unfair “may even lead to the enjoining of procompetitive conduct and thereby undermine consumer protection, the primary purpose of the antitrust laws”) (emphasis in original). Under UMC law as under antitrust law, “[c]ourts must be careful not to . . . prevent rigorous, but fair, competitive strategies that all companies are free to meet or counter with their own strategies. Companies that cannot compete with others that are more capable or efficient may lawfully fail.” Id.
As the California Supreme Court has held, in order to establish the meaning of “unfair” under the UCL, “we may turn for guidance to the jurisprudence arising under the ‘parallel’ Section 5 of the Federal Trade Commission Act. ‘In view of the similarity of language and obvious identity of purpose of the two statutes, decisions of the federal court on the subject are more than ordinarily persuasive.’” Cel-Tech, 20 Cal. 4th at 185 (citations omitted).
“As with the Sherman Act, conduct challenged under Section 5 ‘must have an “anticompetitive effect.’” That is, it must harm the competitive process and thereby harm consumers. In contrast, harm to one or more competitors will not suffice.’” Statement of FTC Commissioner Joshua D. Wright on the Proposed Policy Statement Regarding Unfair Methods of Competition under Section 5 of the Federal Trade Commission Act, at 7 (June 19, 2013) (quoting United States v. Microsoft Corp., 253 F.3d 34, 58 (D.C. Cir. 2001) (en banc)).
Indeed, in the more than 100 years of history interpreting the FTC Act, “[a]n understanding emerged that the FTC’s UMC authority reached somewhat beyond the Sherman Act, but was still tethered to the central antitrust concepts of the consumer welfare standard and the ‘rule of reason,’ both of which offer courts a means to evaluate the legality of market behavior in terms of its likely harms and benefits.” Geoffrey A. Manne & Daniel Gilman, FTC UMC Authority: Uncertain Scope, Int’l Ctr. for L. & Econ. (Jan. 19, 2023), https://laweconcenter.org/resources/ftc-umc-authority-uncertain-scope/.
The legislative history of the FTC Act makes clear its alignment with the principle of “harm to competition, not competitors” undergirding antitrust law: “The unfairness must be tinctured with unfairness to the public; not merely with unfairness to the rival or competitor . . . . We are not simply trying to protect one man against another; we are trying to protect the people of the United States, and of course, there must be in the imposture or in the vicious practice or method something that has a tendency to affect the people of the country or be injurious to their welfare.” 51 Cong. Rec. 11,105 (1914) (Remarks of Senator Cummins).
Scholars have developed a robust body of work confirming that the FTC Act was meant to supplement the Sherman Act. See, e.g., Gregory J. Werden, Unfair Methods of Competition under Section 5 of the Federal Trade Commission Act: What Is the Intelligible Principle?, Mercatus Center Working Paper 4, 19-22 (2023). And even former FTC Chairman William Kovacic has written that the FTC “should not . . . rely on the assertion . . . that the Commission could use its UMC authority to reach practices outside both the letter and spirit of the antitrust laws.” William E. Kovacic & Marc Winerman, Competition Policy and the Application of Section 5 of the Federal Trade Commission Act, 76 Antitrust L.J. 929, 945 (2010).
While these statements relate to federal statutes, the more general point on the shared rationale between antitrust and unfair competition laws extends beyond the specific relationship between the Sherman and Clayton Acts on the one hand, and the FTC Act on the other. In fact, the California Court of Appeals has explicitly endorsed this view, finding that, where the same conduct is “alleged to be both an antitrust violation and an ‘unfair’ business act or practice for the same reason—because it unreasonably restrains competition and harms consumers—the determination that the conduct is not an unreasonable restraint of trade necessarily implies that the conduct is not ‘unfair’ toward consumers.” Chavez v. Whirlpool Corp., 93 Cal. App. 4th 363, 375 (Cal. Ct. App. 2001).
True, in Cel-Tech an “unfair” claim was allowed to proceed despite the plaintiff failing to make out an antitrust violation. Cel-Tech, 20 Cal. 4th 163. But Cel-Tech is the rare case where anticompetitive conduct—below cost sales—may be actionable under the UCL but not under antitrust law because of the idiosyncratic structure of the industry and the regulatory context. See id. at 189 (“This case has an unusual circumstance that might bring it within the unfair competition law’s coverage. . . . ‘[F]air and honest competition’ in equipment sales might not be possible when a legally privileged company sells equipment below cost as a strategy to increase profits on service sales that are prohibited to its equipment competitors.”). Ultimately, however, the underlying logic of the UCL and antitrust claims in Cel-Tech was rooted in the same unified goal: protecting competition.
The case at hand, however, is fundamentally different. Here, Epic is essentially asking that Apple be forced to aid its competitors, a position that is contrary to the ethos of both antitrust law and the UCL.
The UCL contains three distinct bases for establishing a violation, two of which are relevant here: “unfair competition shall mean and include any unlawful, unfair or fraudulent business act or practice . . . .” Cal. Bus. & Prof. Code § 17200 (emphasis added).[3] But the panel erred when it declared that requiring a violation of antitrust law would collapse the unlawful and unfair prongs of this disjunctive standard. While there is inevitably overlap between the assessment of antitrust law under the two prongs (because “unfairness” inherently imports antitrust concepts and standards), the “unlawful” prong is not rendered a nullity by the role of antitrust standards in assessing the unfairness prong because that prong relates to laws other than antitrust. Actual violations of antitrust law may also constitute violations of the UCL. See, e.g., In re Keurig Green Mountain Single-Serve Coffee Antitrust Litig., 383 F. Supp. 3d 187, 267 (S.D.N.Y. 2019) (“Because I have concluded that the IPPs have adequately pleaded that Keurig’s conduct was an unfair restraint of trade, I also conclude that they have adequately pleaded that it was unfair under the California Unfair Competition Law.”).
Thus, the court in Cel-Tech first addressed potential non-antitrust sources of harm and then considered the role of antitrust law only in its exegesis of the “unfair” prong of the UCL. That is why the decision considered whether (1) any provision of the California Unfair Practices Act offers a basis for liability or provides a “safe harbor” from liability, or (2) stated policies of the California Public Utilities Commission could be undermined by the conduct in question. Cel-Tech, 20 Cal. 4th at 182-91.
The California Supreme Court then separately considered whether antitrust law might serve as a basis for liability, and did so under the “unfair” prong of the UCL. There, it established that “the word ‘unfair’ in [the UCL] . . . means conduct that threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” Cel-Tech, 20 Cal. 4th at 187. It is impossible to read this as holding that a violation of the “unfair” prong of the UCL can arise from conduct other than conduct that would violate the antitrust laws.
Most relevant here, the court strongly cautioned against imposing liability for conduct that would not otherwise be an antitrust violation because “[c]ourts must not prohibit ‘vigorous competition’ nor ‘render illegal any decision by a firm to cut prices in order to increase market share.” Id. at 189 (quoting Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 116 (1986)). Doing so would lead to a harmful and improper incongruity between the UCL and the antitrust laws.
By the same token, in Chavez a California Court of Appeals held:
If the same conduct is alleged to be both an antitrust violation and an “unfair” business act or practice for the same reason—because it unreasonably restrains competition and harms consumer—the determination that the conduct is not an unreasonable restraint of trade necessarily implies that the conduct is not “unfair” toward consumers. To permit a separate inquiry into essentially the same question under the unfair competition law would only invite conflict and uncertainty and could lead to the enjoining of procompetitive conduct.
113 Cal. Rptr. 2d at 184. The panel asserts that this admonition is limited only to “categorical antitrust rule[s].” Epic Games, Inc. v. Apple, Inc., 67 F.4th 946, 1001 (9th Cir. 2023). But California’s Second District Court of Appeals clarified that:
[w]e do not hold that in all circumstances an “unfair” business act or practice must violate an antitrust law to be actionable under the unfair competition law. Instead we hold that conduct alleged to be “unfair” because it unreasonably restrains competition and harms consumers, such as the resale price maintenance agreement alleged here, is not “unfair” if the conduct is deemed reasonable and condoned under the antitrust laws.
Chavez, 113 Cal. Rptr. 2d at 184.
The litigation at hand is a case-study on why conduct that is procompetitive should not be enjoined under the UCL.
Apple’s Guidelines included two types of anti-steering provisions that were aimed at preventing third-party apps from directing customers to purchasing mechanisms other than Apple’s IAP: (1) a prohibition on links or buttons within third-party apps; and (2) a prohibition on targeted communications outside of the apps.
Apple has deleted (2) as part of the Cameron v. Apple Inc. settlement, meaning that developers are now free to communicate outside of the apps about external purchasing options (or anything else). See Order: Granting Mot. for Final Approval of Class Action Settlement; Granting in Part and Denying in Part Mot. for Attorney’s Fees, Costs, and Service Award; and Judgment at 12, No. 19-cv-03074 (N.D. Cal. June 10, 2022). What remains is the prohibition on links and buttons within apps. The question is therefore whether such a prohibition is unfair within the meaning of the UCL.
The panel claims that the California Supreme Court has identified two tests to assess liability under the UCL’s “unfair” prong: “First, to support ‘any finding of unfairness to competitors,’ a court uses the ‘tethering’ test . . . . Second, to support a finding of unfairness to consumers, a court uses the balancing test . . . .” Epic Games, 67 F.4th at 1000 (citations omitted).
But it is incorrect that the California Supreme Court has identified these two tests; rather, the California Supreme Court identified only the tethering test and left unsettled whether there should be a separate test for claims brought by consumers. Cel-Tech, 20 Cal. 4th at 187 n.12 (“This case involves an action by a competitor alleging anticompetitive practices. Our discussion and this test are limited to that context. Nothing we say relates to actions by consumers . . . .”).
Despite the confusion generated by the Cel-Tech court’s failure to provide a test for consumer-initiated claims under the UCL, ultimately it should not matter whether the case is resolved under the tethering test or the balancing test. As discussed above, the aim of both the antitrust laws and UMC laws is to promote consumer welfare by protecting competition—regardless of whether the underlying conduct is in the first instance “unfair” to consumers or competitors. See Cel-Tech, 20 Cal. 4th at 186 (noting the aim of the test it enumerates to identify unfairness to competitors is “to promote consumer protection”); see also id. at 206 (Kennard, J. concurring and dissenting) (“The purpose of competition is to drive prices down. Although the unfair competition law protects competitors, even under the majority’s definition it does not protect competitors at the expense of competition.”).
Thus, while the evidentiary basis for claims brought by different parties may be distinct, the ultimate test of harm is not: finding injury to consumers. But even on this point, the supposed differences between the two tests are largely formalistic. The so-called “balancing test,” which the panel asserts should apply to unfairness claims brought by consumers, is effectively the same as the burden-shifting, rule-of-reason assessment under antitrust law—which is similarly reflected in the “tethering test” applied to claims brought by competitors.
The anti-steering provisions therefore cannot be considered substantially injurious to consumers because it has already been established that consumers on the whole benefit from Apple requiring the use of its IAP.
Unfairness to competitors is explicitly resolved through the “tethering test,” which asks whether the defendant’s conduct “threatens an incipient violation of an antitrust law, or violates the policy or spirit of one of those laws because its effects are comparable to or the same as a violation of the law, or otherwise significantly threatens or harms competition.” Cel-Tech, 20 Cal. 4th at 186-87.
Any of these three bases for liability implicates harm to consumers, which antitrust law generally defines in terms of reduced output or increased prices for consumers. The first basis for finding unfairness—an incipient violation of an antitrust law—concerns conduct that has not yet harmed consumers but is almost certain to do so in the future.
The second basis—the “policy or spirit” of antitrust law provision—is violated when conduct results in “effects [that] are comparable to or the same as a violation of” antitrust law. Id. at 187. Under this provision, whether anyone labels the challenged conduct an antitrust violation is irrelevant; instead, what matters is whether the conduct results in the same anticompetitive effects as an antitrust violation, and courts should pursue this inquiry as they would any other inquiry into the competitive effects of challenged conduct.
The third basis—conduct that “otherwise significantly threatens or harms competition”—is a catch-all meant to capture conduct that is permitted under the antitrust laws but nevertheless results in harm to competition. The most obvious such circumstance is the very one assessed in Cel-Tech where the defendant was given a privileged legal status in the market at issue, and the threat was to a specifically defined form of competition under other laws or regulatory policies.
Accordingly, to resolve the question of whether Apple’s anti-steering provision is unfair, an inquiry must be made into whether the conduct has anticompetitive effects—i.e., whether it harms consumers by reducing output without concomitant procompetitive benefits—or whether it would, if left unchecked, likely develop into such an infringement.
In rejecting Epic’s claims under federal antitrust law, the district court and the panel have effectively foreclosed an unfairness claim under the UCL.
The panel found that Apple’s walled-garden iOS, which prohibits third-party IAPs and app stores, did not violate federal antitrust laws because of its pro-competitive benefits: i.e., increased user privacy and security that could not be achieved through less restrictive means and that ultimately increased inter-brand competition between Apple’s iOS and its closest competitor, Android. In parallel, however, the panel concluded that Apple’s anti-steering provisions, which prohibit apps from informing users about payment possibilities other than IAP, were unfair under the UCL.
In other words, Apple remains free to prohibit third-party IAPs based on the findings of procompetitive benefits, yet, at the same time, Apple is enjoined from prohibiting links or buttons to third-party payment mechanisms—a less-restrictive means of furthering the same objective. The two holdings cannot be reconciled.
The prohibition of links and buttons within the app is an enforcement mechanism for the prohibition of third-party IAPs. If Apple is allowed to require its own IAP on security and privacy grounds, then surely prohibiting apps from encouraging users to bypass Apple’s IAP—by directing consumers to alternative payment methods which may be less secure or private—supports those same procompetitive benefits that the courts recognized. Other courts have correctly concluded that the same conduct cannot be both procompetitive and unfair. See Hicks v. PGA Tour, Inc., 897 F.3d 1109, 1124 (9th Cir. 2018); City of San Jose v. Off. of the Comm’r of Baseball, 776 F.3d 686, 691-92 (9th Cir. 2015).
While the anti-steering provision and the requirement that Apple’s IAP be used are not technically identical, they are both instrumental to achieving the same objective. Thus, even if the Ninth Circuit’s conclusions under federal antitrust law on the IAP were not sufficient to automatically preclude a UMC claim related to the anti-steering provisions, an independent analysis under the UCL should—if done properly—reach the same conclusion: Apple’s anti-steering provisions, like its IAP exclusivity requirement, are procompetitive, do not harm competition, and therefore cannot be considered unfair.
Furthermore, despite the panel’s assertion that its finding of legality under the Sherman Act did not mean that Apple’s conduct was “categorically” permitted under Cel-Tech, Epic Games, 2023 U.S. App. LEXIS 9775, at *96-97, it is settled case-law that, in the absence of any purpose to create or maintain a monopoly, Apple has a “categorical” right to choose with whom it does business. See, e.g., Trinko, 540 U.S. at 408; Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438, 448 (2009); Chavez, 113 Cal. Rptr. 2d at 182-83. “The antitrust laws [do] not impose a duty on [firms] . . . to assist [competitors] . . . to ‘survive or expand.’” Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 545 (9th Cir. 1983) (citations omitted). Apple is under no obligation to facilitate third-party payment options—much less if this jeopardizes the integrity of its iOS.
For the foregoing reasons, this Court should grant Apple’s rehearing request to clarify that Apple’s conduct violated neither the antitrust laws nor the UCL.
[1] ICLE represents that no party’s counsel authored this brief in whole or in part, no party or party’s counsel contributed money that was intended to fund preparing or submitting the brief, and no person—other than ICLE and its counsel—contributed money that was intended to fund preparing or submitting the brief. ICLE files this brief pursuant with consent of all parties.
[2] This is reflected in the UCL’s language prohibiting “unlawful” conduct. See Cel-Tech, 20 Cal. 4th at 180 (“By proscribing ‘any unlawful’ business practice, ‘[the UCL] “borrows” violations of other laws and treats them as unlawful practices’ that the unfair competition law makes independently actionable.”) (citations omitted).
[3] It is worth noting that the dissenting opinion in Cel-Tech takes issue with the majority’s decision that the “unfair” prong of the UCL means anything other than “deceptive.” Under this reading of the UCL, of course, there would be no basis for the district court or the panel’s finding that Apple’s conduct violated the UCL. See Cel-Tech, 20 Cal. 4th at 192 (Kennard J. dissenting) (“The purpose of the legal prohibitions against unfair business acts and practices, by contrast, is to prevent deceptive conduct that injures a particular competitor.”).
Scholarship Abstract Student loan servicers are the face of the U.S. student loan system, and they are not well-liked. Using the Consumer Financial Protection Bureau’s (the . . .
Student loan servicers are the face of the U.S. student loan system, and they are not well-liked. Using the Consumer Financial Protection Bureau’s (the CFPB) consumer complaint database, we study borrower perceptions of the student loan system. We qualitatively analyzed a sample of complaint narratives drawn from every student loan complaint ever filed with the CFPB. Our analysis of these complaint narratives reveals clear patterns of discontent in four primary areas: 1) a mismatch between ability to repay and repayment options, including problems with forbearance, deferments, the public service loan forgiveness program, income-driven repayment plans, and loan cancellation options; 2) customer service, including sudden and unexplained changes in payment obligations, 3) inappropriate payment processing, such as misapplying payments; and 4) unauthorized loans or outright scams. The first issue was, by far, the most common. Our results high-light areas where better regulation, whether through contract with the government, ex ante supervision by regulators, or ex post lawsuits in court, has the potential to improve the function of the student loan ecosystem.
Popular Media In Robert Bolt’s play “A Man for All Seasons,” the character of Sir Thomas More argues at one point that he would “give the Devil . . .
In Robert Bolt’s play “A Man for All Seasons,” the character of Sir Thomas More argues at one point that he would “give the Devil benefit of law, for my own safety’s sake!” Defending the right to due process for a broadly disliked company is similarly not the most popular position, but nonetheless, even Meta deserves the rule of law.
Read the full piece here.
Popular Media The 16 young Montanans who have sued in state court seeking a judicial declaration that the state of Montana‘s policies violate their right to a . . .
The 16 young Montanans who have sued in state court seeking a judicial declaration that the state of Montana‘s policies violate their right to a clean and healthful environment under Article IX, Section 1, of the Montana Constitution are surely both sincere and well intentioned. Climate change is a serious public concern that should focus the attention of Montana law makers. The plaintiff s allege that the state‘s policies violate their constitutional rights by both contributing to and failing to do enough to combat climate change. They may well be right about the effects of state policies, but it is not within the competence or authority of the judiciary to second guess or override those policies. The trial judge has recognized as much by indicating that the only remedy she will consider is a declaratory judgment. But even a declaration that state policies violate the constitutional right to a clean and healthful environment would require the judge to conclude that there are better policies the executive and legislature should enact.
TOTM With the first day of summer less than a week away and political silly season just around the corner, we don’t have much time for . . .
With the first day of summer less than a week away and political silly season just around the corner, we don’t have much time for hootenannies. Congress needs to channel the wisdom of Jerry Reed, who noted: “We’ve got a long way to go and a short time to get there.”
Popular Media After nearly two years of litigation and intense competition for the world’s top golfers, the PGA Tour and LIV Golf have agreed to create a . . .
After nearly two years of litigation and intense competition for the world’s top golfers, the PGA Tour and LIV Golf have agreed to create a new, as-yet-unnamed, for-profit joint entity. Most headlines about the deal have focused on the ethical and geopolitical problems that accompany the PGA’s joining forces with LIV’s sponsor, the Saudi Arabian Public Investment Fund. Within policy circles, the pseudo-merger has also stirred concerns regarding potential antitrust violations and harm to competition should the major golf leagues join forces as planned. The Justice Department (DOJ) has announced an investigation into the merger.
Amicus Brief INTEREST OF AMICUS CURIAE The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, global research and policy center committed to developing the . . .
The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan, global research and policy center committed to developing the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies, and economic findings, to inform public policy, and has longstanding expertise in antitrust law.
ICLE has an interest in ensuring that antitrust law promotes the public interest and consumer welfare by remaining grounded in sensible rules informed by sound economic analysis. This includes ensuring that courts and agencies correctly apply the standards for class certification in antitrust cases involving two-sided transaction platforms.[1]
Amicus is authorized to file this brief by Fed. R. App. P. 29(a)(2) because all parties have consented to its filing.
Amicus hereby states that no party’s counsel authored this brief in whole or in part; that no party or party’s counsel contributed money that was intended to fund the preparation or submission of the brief; and that no person other than amicus or its counsel contributed money that was intended to fund the preparation or submission of the brief.
The aim of the federal antitrust laws is to protect competition and the innovation and value-creation that it fosters. To that end, a wide range of entities are authorized to prosecute antitrust claims provided they meet the standards that the legislature and courts have articulated to prevent over-enforcement, which itself can mute competitive incentives and dampen innovation. Those standards include the prerequisites of standing and, in the case of class actions, commonality and predominance.
In this case, plaintiffs have asked to pursue antitrust claims against Google, a 26-year-old company—younger than the average PhD student—that has transformed the way consumers interact with the internet, increased efficiency, and created immeasurable value. Plaintiffs assert that “Google illegally monopolized the Android app distribution market”—which the District Court characterized as a two-sided platform—“with anticompetitive practices in the Google Play Store.” 1-ER-3, 10. They have further asked to proceed as a class, representing 21 million consumers who entered into distinct transactions with various developers related to (in aggregate) 300,000 apps. Defs.-Appellants’ Br. (“Br.”) at 20.
The value of a two-sided platform to both consumers and sellers depends on the platform successfully balancing their relative interests, demands, and capacity. That distinctive aspect of two-sided platforms makes questions about standing (such as injury) and the predominance of common issues particularly complex.
On November 28, 2022, the District Court granted class certification, relying on Illinois Brick v. Illinois, 431 US. 720 (1977), and Apple v. Pepper, 139 S. Ct. 1514 (2019), for the proposition that all 21 million consumers were “direct purchasers” and therefore a purported overcharge to the developer must necessarily also injure them. 1-ER-18–19. It further found a “pass-through” formula was sufficient “class-wide proof of antitrust impact and injury.” 1-ER-19. In reaching this conclusion, the District Court failed to engage meaningfully and rigorously with the economic realities of two-sided platforms.
In its landmark Apple v. Pepper decision, the Supreme Court held that consumers could be considered “direct purchasers” of a two-sided platform even though developers set the retail prices for apps. 139 S. Ct. at 1520 (“It is undisputed that the iPhone owners bought the apps directly from Apple. Therefore, under Illinois Brick, the iPhone owners were direct purchasers who may sue Apple for alleged monopolization.”). In other words, such consumers were not so remote from the platform as to be barred from bringing suit for lack of standing. But status as a “direct purchaser” does not categorically mean that plaintiffs have met the requirements of Article III standing. “Direct purchasers” from two-sided platforms must still show that, as compared to a but-for-world platform using a different price structure, they have been adversely affected.
The Supreme Court in Ohio v. American Express emphasized this point. Noting first that “[l]egal presumptions that rest on formalistic distinctions rather than actual market realities,” are “generally disfavored in antitrust law” (Ohio v. Am. Express Co., 138 S. Ct. 2274, 2285 (2018) (quoting Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 466–67 (1992)), it found that “[P]rice increases on one side of the platform . . . do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.”
Id. at 2287. In other words, given the unique dynamics of two-sided platforms, the existence and quanta of injury to consumers cannot be assessed without considering whether a “price” change—including quality parameters such as convenience and security—feeds through the indirect network effects[2] running from one side of the platform to another to alter the relative value of the platform to users and then, assuming that it does, determining which (if any) users are adversely affected.
Plaintiffs skipped over this complexity, instead relying on inapplicable supply-and-demand assumptions and focusing on the pass-through of a single price term. A suit by consumers against a platform based on products priced by developers necessarily invokes a much more complicated interaction:
Apple’s overall pricing structure includes a component whereby Apple allows app developers to set app prices, but it also includes relevant prices and terms set by Apple, including: the price of iOS devices; the commission charged to app developers; the price of its own iOS apps; the (unavoidable) ability for app developers to charge for services outside of the iOS ecosystem (without paying the thirty percent commission); and the structure, price, and availability of app marketing in the App Store.[3]
It is not enough to show that developers are charged higher fees; or even that developers could charge higher prices to app consumers. Instead, Plaintiffs must assess both the price effects and non-price quality dimensions.
As things stand, however, plaintiffs focus solely on the costs of Google’s behavior—i.e., the purportedly higher Play Store fees—ignoring how it contributes to making the Android ecosystem safer and of higher quality (both of which boost participation on both sides of the market). Put differently, plaintiffs’ mistake is to narrowly focus on the effect that Google’s behavior has on Play Store fees, while ignoring how it benefits the broader Android ecosystem and how it may affect individual participants.
In short, plaintiffs have not met their burden of showing that common issues of injury will predominate over individualized inquiries; among other things, they have not offered an analysis rigorous enough to determine whether any members of the putative class were injured, let alone the majority of them. Accordingly, the District Court’s class certification order should be reversed.
A plaintiff must establish standing to bring a lawsuit in federal court. Spokeo, Inc. v. Robins, 578 U.S. 330 (2016). The minimum of Article III standing requires that the plaintiff has “(1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.” Id. The standing requirement applies just as equally to a “direct purchaser” plaintiff as it does to any other plaintiff. Where the “direct purchaser” is engaging with a two-sided platform—which is how the District Court treated plaintiffs and the purported Android App Distribution market in this matter[4]—questions about injury and the traceability of such can be particularly complex.
Here, however, the District Court failed to rigorously engage with that complexity, suggesting instead that because it had classified consumers as “direct purchasers”, they per force suffered an injury from the service fees that Google charged to developers:
Google’s monopolistic practices inflated the “headline rate” that was used as the basis for all developers’ negotiations with Google, which affected all of the prices set by the developers and paid by consumers to Google.
1-ER-23. Reasoning that “[t]he overcharge has not been passed on by anyone to anyone” and “consumer plaintiffs paid the alleged overcharge directly to Google,” the District Court concluded that “there is no barrier to certification on this score.” 1-ER-18–19.
But, as discussed further in Section II below, just because a consumer is a “direct purchaser” on one side of a two-sided platform does not mean that the consumer paid any share of a purported overcharge. Rather, the relevant question is whether the retail prices that plaintiffs paid for the apps and associated services—prices that are set by the developers—were higher than they would have been in the but-for world, accounting for quality parameters such as safety and convenience. The Supreme Court’s decision in Apple v. Pepper is instructive on this point. There, the Supreme Court found that the absence of an intermediary between Apple’s app store and its consumers was sufficient to find the latter to be “direct purchasers” in the “retail market for the sale of apps.” 139 S. Ct. at 1521. In other words, under the framework articulated by the Supreme Court in Illinois Brick Co. v. Illinois, 431 US. 720 (1977), such consumers were not so remote from the purported antitrust violation as to be barred from suit. In reaching this decision, the Court rejected the notion that the directness of the purchasing relationship should be defined by who sets the price, i.e., consumers can be the “direct purchasers” of a firm that does not set the retail price of a good or service. Id. at 1522.
However, the Court was also crystal clear that the directness of the payment relationship did not mean that the consumer had in fact paid an overcharge, explicitly distinguishing between app store commissions (or fees) and the app prices paid by consumers:
To be sure, if the monopolistic retailer’s conduct has not caused the consumer to pay a higher-than-competitive price, then the plaintiff’s damages will be zero. Here, for example, if the competitive commission rate were 10 percent rather than 30 percent but Apple could prove that app developers in a 10 percent commission system would always set a higher price such that consumers would pay the same retail price regardless of whether Apple’s commission was 10 percent or 30 percent, then the consumers’ damages would presumably be zero.
139 S. Ct. at 1523.[5] That is, the Court declined to assume that higher fees charged to app developers necessarily were passed on to consumers through the retail price set by the developer. The Court in Apple v. Pepper understood that the effects of a hypothetical anticompetitive fee increase may be shared between developers and consumers, with each group needing to show how it was affected to prove their claims. In the case of consumers, this means showing that the increased fees charged to developers resulted in a worse outcome for consumers.
Apple v. Pepper thus invites a “pass on” inquiry (though fee incidence may actually be the more appropriate terminology), including whether a fee increase has negatively affected a plaintiff, which in turn depends on whether developers have passed on the increased fees to users and whether consumer benefits derived from platform fees (e.g., increased security) outweigh those costs. Indeed, that is the direct and anticipated consequence of the Court’s decision in Apple v. Pepper. In its ruling, the Court intentionally opened the door to such allocation questions:
It is true that Apple’s alleged anticompetitive conduct may leave Apple subject to multiple suits by different plaintiffs. . . .The consumers seek damages based on the difference between the price they paid and the competitive price. The app developers would seek lost profits that they could have earned in a competitive retail market.
139 S. Ct. at 1525. See also id. at 1526 (Gorsuch, J. dissenting) (“Illinois Brick held that these convoluted ‘pass on’ theories of damages violate traditional principles of proximate causation and that the right plaintiff to bring suit is the one on whom the overcharge immediately and surely fell. Yet today the Court lets a pass-on case proceed.”).
In short, Apple v. Pepper does not create a presumption that potentially anticompetitive fee increases always injure direct purchasers in the platform context. Consequently, it was incumbent on the District Court to analyze rigorously whether plaintiffs could demonstrate that purported supracompetitive fees charged to developers caused changes to the value of the platform that injured consumers and that common questions regarding such injury predominate over individualized inquiries. See Bowerman v. Field Asset Services, Inc., 60 F.4th 459, 469 (9th Cir. 2023) (explaining that “class certification is inappropriate ‘when individualized questions . . . will overwhelm common ones,” and decertifying class based on predominance of individual questions over common ones.). As discussed below, the District Court erred by failing to grapple with the economic reality of two-sided platforms.
It is well recognized that “antitrust law should look at the ‘the economic reality of the relevant transactions’ rather than ‘formal conceptions of contract law.’” ((Apple, Inc. v. Pepper, 139 S. Ct. at 1529–30 (Gorsuch, J. dissenting) (cleaned up)). [6] Here, that means that plaintiffs cannot demonstrate injury without accounting for the dynamics of a two-sided platform, i.e., how altering the fees charged to developers may trigger feedback effects between the two sides of the platform to change the balance of features and ultimately affect consumers:
[T]here is no meaningful economic relationship between benefits and costs on each side of the market considered alone . . ., any analysis of social welfare must account for the pricing level, the pricing structure, and the feasible alternatives for getting all sides on board.[7]
Plaintiffs’ narrow focus on pass-through of a single price term (or as the District Court termed it, “share of the overcharge,” 1-ER-19) fell short of this analysis, particularly under the standard required by Rule 23.
A two-sided platform is a business model that creates value by reducing the transaction costs of direct interactions between two or more types of users in ways that mere resellers cannot replicate.[8] A critical feature of multi-sided platforms is that the demand of platform participants is interdependent—the extent of participation by one set of users on a platform depends on the participation of one or more other sets of users.[9] A multi-sided platform uses both pricing and design choices to achieve critical mass. Without critical mass on all sides, the positive feedback effect, which enables the platform’s unique matching abilities, cannot be achieved. Further, interdependent demand on platforms often leads to situations where efficient pricing may involve below marginal cost pricing on one side and above marginal cost pricing on another.[10] As a result, inferences drawn from the traditional indicia of competition—price and output effects—may be inapposite, particularly when they are assessed on only one side of a multi-sided market or without consideration of the effects on the design of the platform itself.
It is a well-accepted proposition in the literature that vertical restraints on multi-sided platforms can be procompetitive, anticompetitive, or competitively neutral depending on a host of complicated interactions among the various groups of platform users and between users and the platform itself. Procompetitive vertical restraints on multi-sided platforms may fall into one or more of at least three broad categories: (1) achieving economies of scale that provide benefits to consumers overall; (2) helping platforms deal with coordination and expectation problems to the benefit of platform users; and (3) providing benefits to one side of the platform that increase consumer welfare overall.[11] These procompetitive effects are a function of the particular structure of such two-sided markets and necessitate adjustments to antitrust doctrine to ensure that presumptions and evidentiary burdens properly reflect the more complicated economic relationships among the parties involved.
Plaintiffs and their experts failed to fully account for these dynamics in their analysis. For example, Dr. Singer mistakenly surmises that lower fees would result in more consumer demand because:
A foundational principle in economics is that “demand curves” are downward sloping—meaning that, all else equal, consumers will demand more of a product or service the lower its price. How much more will be demanded depends on the consumer elasticity of the demand response to lower prices for Apps and In-App Content.
Dkt. 252-3 at 125.[12] Similarly, he concludes that the supply of apps and in-app content would increase if Google’s service fees were reduced and the developers received more revenue: “Absent the Challenged Conduct, developers would realize larger proceeds, which would bring forward more App and In-App Content development, commensurate with a shifting out of the supply curve.” Id. And he makes these claims while explicitly excluding considerations of quality effects. Dkt. 252-3 at 74 n. 368 (“Although my primary impact focuses on price effects (over the take rate) it is possible that competition would occur on non-price quality dimensions as well.”). Moreover, when he does acknowledge that competition can occur on the quality dimension, he neglects entirely the possibility of quality (design) changes in the platform itself. Id. at 108.
This approach is wrong for two important reasons. The first is that lower service fees to the developer do not necessarily translate into lower retail prices to the consumer, as the real-world evidence demonstrated. Br. at 39–41. More fundamentally, the intuition that lower prices result in higher demand does not always hold in two-sided markets. For example, if the fee structure encourages participation from developers on the other side of the market, then that may lead to higher user demand. Likewise, if higher developer fees or a particular fee structure facilitate platform design choices that improve quality for users (and/or developers), that, too, may stimulate user demand. In short, the simple reallocation of costs and benefits across the sides of a two-sided market can be output increasing, output reducing, or output neutral. Looking solely at price effects simply cannot distinguish between these scenarios.
This is why the Supreme Court in Ohio v. American Express emphasized that the legal analysis of injury in a two-sided market requires consideration of both sides of the platform: “Price increases on one side of the platform likewise do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.” 138 S. Ct. at 2286 (internal citation omitted). “Competition,” it declared, “cannot be accurately assessed by looking at only one side of the platform in isolation.” Id. at 2287.
The notion that prices charged on one side have an ambiguous effect on demand on the other is one of the central findings of the economic literature regarding two-sided markets, because the “quality” of the final product is intrinsically connected to the other side of the market. In their highly influential work, Jean-Charles Rochet and Nobel prize winner Jean Tirole observed that:
We define a two-sided market as one in which the volume of transactions between end-users depends on the structure and not only on the overall level of the fees charged by the platform.[13]
They also highlight that the basic, “canonical” model they develop is an important starting place to understand the relationships between sides of a two-sided market, but it is not a description of reality, and a proper analysis must go beyond narrow price considerations.[14] As a result, “policy interventions to alter the price structure (as opposed to the price level)” are not likely to be “solidly grounded.”[15] Indeed, as Andre Hagiu has shown:
[I]n all of these articles, the volume of transactions . . . is not directly affected by platforms’ prices: Rochet and Tirole and Armstrong essentially assume that each member of one side interacts with an exogenously given proportion of members on the other side. . . . In my model the variable fees charged by the platform (royalties) play a central role, because they affect the prices and volumes of trade between sellers and buyers and therefore social welfare. On the other hand, the allocation of the royalties among the two sides is largely inconsequential in my model.[16]
The “canonical” assumption of a fixed quantity and ratio of users is inapt where, as here, users decide whether to join the platform at different times and consume its services in varying amounts. Any assessment of the effects of a revised price structure would require a complete analysis across relevant metrics of the optimal balancing of demand on both sides of the market under the new structure.[17]
But here, Plaintiffs and the District Court discounted non-fee metrics: Google says that class members may be worse off in plaintiffs’ but-for world because Google may have to change its current practices to stay competitive by cutting back on services it currently offers for free. In Google’s view, ‘in a world without existing Android security standards, security-conscious consumers would be worse off because they would face costs to keep their data and devices secure.’ Concerns like these are far too speculative and conditional to be a serious barrier to certification.
But here, Plaintiffs and the District Court discounted non-fee metrics:
Google says that class members may be worse off in plaintiffs’ but-for world because Google may have to change its current practices to stay competitive by cutting back on services it currently offers for free. In Google’s view, ‘in a world without existing Android security standards, security-conscious consumers would be worse off because they would face costs to keep their data and devices secure.’ Concerns like these are far too speculative and conditional to be a serious barrier to certification.
1-ER-25 (internal citations omitted). This conclusion ignores the fact that, in two-sided platforms, what might superficially appear to be a fee increase on one side may in fact be a crucial component of the underlying ecosystem:
Where a single, two-sided product is at issue, the price may be spread across users on both sides of the market. Moreover, non-price product characteristics will necessarily differ between different sets of users. . . Given the differential incidence of price and quality across a platform, it is impossible to capture the competitive dynamics and to measure the competitive effects by viewing only the partial price on one side.[18]
It is thus impossible to assess whether a particular participant on the platform has been injured without considering how the change affects the platform as a whole and, to the extent that there is an anticompetitive effect, which side (or sides) and which participants within that side (or sides) are worse off.
In sum, the District Court was wrong to conclude plaintiffs could assert injury based on a purported overcharge in service fees to one side of the platform without fully analyzing the price and non-price feedback between the two sides of the platform.
Plaintiffs, and ultimately the District Court, further err by assuming that the complicated effects of a change to the platform is directionally the same for all consumers.
The first problem is (as discussed above) that antitrust injury cannot be inferred from consideration of only a partial price change, particularly in the context of a platform relationship. Because users are heterogenous across many dimensions, the assumption of anticompetitive effect (let alone commonality across users) from a price change for a subset of consumers is particularly hard to maintain.
This is not just a consequence of the two-sided nature of the market at issue. Consider, for example, the basic principle that harm to a particular competitor—even the loss of a particular competitor—is not the same thing as harm to competition. See Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962). One necessary implication of this principle is that it is not enough to show harm to “inframarginal” consumers or to a particularly sensitive subset of consumers, because, for some of these consumers—say, those with strong brand loyalty to a particular firm—the loss of their preferred competitor would also harm them, even if competition itself were not affected. Holding otherwise would undermine this fundamental limitation on the scope of antitrust injury. Because this distinction between harm to some consumers and anticompetitive harm is so crucial to ferreting out conduct that creates or maintains monopoly power, antitrust law requires a demonstration that the conduct at issue has an actual anticompetitive effect—not merely that it results in some harm—before a case may be brought.
This is a fundamental tenet of antitrust law and economics, but it is particularly magnified in the platform setting. There, because operators are optimizing the platform for the benefit of multiple groups of users on multiple sides of a multi-sided market, superficial harm to one group may well be part of an overall optimization strategy, and injury cannot be assumed on the basis of harm to a subset of users. Most obviously, apps and app prices are embedded in a broader ecosystem and are instrumental to its value—as Plaintiffs’ expert even understands (without acknowledging its significance):
The functionality and user enjoyment derived from a mobile device is highly dependent upon the range and quality of apps available on it. In addition to producing a mobile operating system, Google has created a distribution channel for delivery of Android-compatible apps developed by third parties, and developed its own universe of Apps, for Google Android. Google itself has developed some of the most popular Android- and iOS-compatible apps, including Google Search, Google Maps, Chrome, YouTube, and Gmail.
Dkt. 252-3, at 10.
Indeed, restrictions in one dimension may not even constitute “harm” to that subset of consumers where it is accompanied by corresponding benefits, for instance where the restrictions serve to protect consumers’ privacy and data or to assure adequate monetization and distribution. Platform users can benefit from features that contribute to the overall success of the ecosystem.[19] In other words, higher prices may reflect higher quality—stemming directly from the very conduct that Plaintiffs claim is the source of injury.
Second, even if one ignores the concept of virtuous feedback loops, Plaintiffs’ claim that all class members are negatively affected still falls flat. Consumers are not similarly situated, and it is inappropriate to assume a simple pro rata effect from a change in app store prices. Game apps account for an enormous percentage of app store purchases, and “spending on the consumer side is also primarily concentrated on a narrow subset of consumers: namely, exorbitantly high spending gamers. . . . 81.4% of all Apple accounts spent nothing and account for zero percent of the App Store billings for the quarter. . . , [and] 6% of App Store gaming customers in 2017 accounted for 88% of all App Store game billings. . . .” Epic Games, Inc. v. Apple Inc., 559 F. Supp. 3d 898, 953–54 (N.D. Cal. 2021).[20] Without analyzing whether and how the reduction in fees charged to developers affects other costs associated with the platform—either direct costs or indirect costs through reduced quality—it cannot be assumed that even those consumers who make purchases in the Play Store are worse off. Moreover, because user groups vary along other dimensions that are likely to correlate with price—most notably in terms of their sensitivity to privacy and security risks and their tolerance of user-interface impediments like ads or “choice screens”—the effects of price reductions or increases accompanied by other qualitative changes are not captured by price, vary considerably across users, and are not likely to correlate with pro rata app usage. Any inquiry into injury will turn on these individualized questions.
For the reasons stated above, the District Court’s class certification order should be reversed.
[1] In a two-sided market a firm sells two different products or services to two different groups of consumers. See Filistrucchi et al., Market Definition in Two-Sided Markets: Theory and Practice, 10 J. Competition L. & Econ. 293 (2014) (“In particular, competition authorities have failed to recognize the crucial difference between two-sided transaction and non-transaction markets….”).
[2] Bruno Jullien, Alessandro Pavan, & Mark Rysman, Two-sided Markets, Pricing, and Network Effects, 4 Handbook of Industrial Organization 488 (2021) (“[I]ndirect network effects . . . emerge when the adoption and use of a product leads to increased provision of complementary products and services, with the value of adopting the original product increasing with the provision of such complementary goods . . . Indirect network effects thus lead to a feedback loop as more participants on each side of the platform find it more valuable to adopt and use the platform when they expect the other side to attract more users.”)
[3] Geoffrey A. Manne and Kristian Stout, The Evolution of Antitrust Doctrine After Ohio v. Amex and the Apple v. Pepper Decision That Should Have Been, 98 Neb. L. Rev. 425, 458 (2019).
[4] We understand that there are summary judgment motions pending regarding whether plaintiffs have properly defined a market involving the sale of in-app purchases (IAPs) and subscriptions to consumers because: (1) “Plaintiffs’ experts have conceded that their alleged Android app distribution market does not involve IAPs or subscriptions at all”; and (2) “according to plaintiffs’ experts,” the other putative relevant market involves Google selling in-app billing services to developers. No. 3:21-md-02981-JD, Dkt. 480, at 18. We do not take any position on these issues.
[5] To draw an analogy with physical retail, the harm to consumers that buy from a retail cartel is the difference between the competitive and cartel price of the goods they purchase, not the increase to those retailers’ margins under monopoly. This distinction has important ramifications for two-sided markets and the case at hand.
[6] Manne & Stout, supra note 3, at 458 (referencing both Ohio v. Amex and Apple v. Pepper and emphasizing “the need for the plaintiffs . . . to allege injury and present their prima facie case consistently with the economic realities of the two-sided market at issue”).
[7] David S. Evans, The Antitrust Economics of Multi-Sided Platform Markets, 20 Yale J. Reg. 325, 355–56 (2003).
[8] For a more thorough discussion of the nature of two-sided platforms, see generally David S. Evans & Richard Schmalensee, The Antitrust Analysis of Multisided Platform Businesses, Oxford Handbook On International Antitrust Economics (Roger Blair & Daniel Sokol eds., 2013).
[9] See, e.g., David S. Evans, Economics of Vertical Restraints for Multi-Sided Platforms (Univ. of Chi. Inst. for Law & Econ. Olin Res. Paper No. 626, Jan. 2, 2013), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2195778 [https://perma.unl.edu/T5CP-QECW], at 4.
[10] See Evans & Schmalensee, supra note 8, at 6.
[11] See Evans, supra note 9, at 8–10.
[12] Unless otherwise noted, references to “Dkt” refer to No. 3:21-md-02981-JD.
[13] Jean-Charles Rochet & Jean Tirole, Two-sided Markets: A Progress Report, 37 The RAND J. of Econ. 646 (2010).
[14] Id. at 663.
[15] Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. of the Eur. Econ. Ass’n 1009 (2003).
[16] Andre Hagiu, Pricing and Commitment by Two-Sided Platforms, 37 RAND J. of Econ. 720, 722 (2006)
[17] See, e.g., Benjamin Klein, et al., Competition in Two-Sided Markets: The Antitrust Economics of Payment Card Interchange Fees, 73 Antitrust L.J. 571, 598 (2006) (“The economic theory of two-sided markets indicates that relative prices on the two sides of the market are independent of the degree of competition faced by a supplier in such a market. While total prices will be influenced by competition, relative prices are determined by optimal balancing of demand on the two sides of the market.”).
[18] Geoffrey A. Manne, In Defence of the Supreme Court’s “Single Market” Definition in Ohio v. American Express, 7 J. Antitrust Enf. 104, 109 (2019).
[19] See Dirk Auer, Appropriability and the European Commission’s Android Investigation, 23 Colum. J. Eur. L. 647 (2017).
[20] As the court in Epic v. Apple notes, the Google Play Store appears to have similar characteristics. Epic Games, Inc. v. Apple Inc., 559 F. Supp. 3d at 954 n. 243.
Popular Media Bad competition cases are a dime a dozen these days. The UK Competition and Markets Authority’s (CMA) recent unfortunate decisions to block both Microsoft’s acquisition of . . .
Bad competition cases are a dime a dozen these days. The UK Competition and Markets Authority’s (CMA) recent unfortunate decisions to block both Microsoft’s acquisition of Activision Blizzard and Meta’s takeover of Giphy spring to mind as examples of a competition enforcer prioritising populist “big is bad” concerns.
And yet, in the race to bring the most reckless competition case, the European Commission takes the crown, most recently accusing Google of abusing its dominant position in the online-advertising market. According to the competition watchdog, the issue is that Google favours its own ad exchange (i.e. a platform that matches advertisers with publisher websites) over rivals, thereby harming competition and consumers.
