March 14, 2012

FTC Subpoenas Apple In Google Antitrust Probe

According to a published report, the U.S. Federal Trade Commission has subpoenaed Apple Inc. in part of its ongoing antitrust investigation of tech-prodigy Google Inc. Inside sources told Bloomberg that federal regulators are looking for details on the deal by which the Silicon Valley giant adapted its search engine services for use on iPhones and iPads.

This is comes as the latest development in the federal antitrust probe launched last summer. Insiders say the FTC inquiry is looking to address two principle questions regarding Google´s business practices; namely, whether the company has been using inflated advertising rates to price gouge its competitors, and whether it is manipulating its engine´s search results to favor its own products and services.

Federal investigators are demanding that Apple disclose the details of the agreements that made both Google´s search engine and Google Maps default services in its popular iPhones and iPads.

The anonymous sources also told Bloomberg that the FTC has sent subpoenas to a handful of the other cell phone manufacturers as well, though they declined to provide the names of these companies.

The Rise of the Smartphone

As smartphones gradually displace PCs as the devices most used for Internet searches, both competitors and regulators are concerned about Google´s redoubtable dominance amongst hand-held devices.

With analysts predicting that smartphones´ share in total Internet searches will jump from 15 to as high as 30 percent by the end of the year, Google´s roughly 75-percent market share in the mobile-search market has rivals like Microsoft crying ℠foul play´.

That´s because as the number of mobile searches continues to rise, so does the amount of cash that advertisers are pumping into that mobile search engines.

According to a report issued last week by the Macquarie Capital, in 2011 Google grossed over $1.3 billion in search-related revenue from Apple´s iPhone and iPads. But according to the terms of the deal, Google had to fork $1 billion of that back over to Apple, leaving it with just $335 million of the total.

Still, the pact with Apple combined with the meteoric rise of Google´s own Android mobile operating system has left competing search engines like Microsoft´s Bing Mobile, Yahoo! Mobile and Taptu scavenging for crumbs from Google´s table.

One major marketing research group Efficient Frontier (EFF) says that Google is gobbling up an ever larger piece of the ad-revenue pie. From the company´s large portfolio of clients, they say that over 95 percent of total mobile-search advertisement spending goes to Google.

The Importance of Being the Default

For Google´s languishing competitors, the question of which search engine is already installed in smartphones when they come from the factory has become crucial, says antitrust attorney Allen Grunes.

“As mobile search gets more widespread, the default setting becomes more significant,” Grunes told Bloomberg.

But given the freedom and simplicity with which users can switch their smartphone´s search engine, the growing hullabaloo surrounding a device´s default settings becomes more or less moot, right?

Not so, says market analyst Ben Schachter of New York´s Macquarie Capita .

Default settings are immensely important in despite the ease of search-engine flip-flopping. This is because of the simple yet significant fact that most people don´t bother to change their smartphone´s default search engine.

“Most people don´t even know what default search means —  they just know there´s a box they can use to look for information,” Schacter told Bloomberg´s Sara Forden.

Whether people don´t know or just don´t care that they can easily change their phone´s search engine is largely irrelevant. What matters is that they generally don´t.

Thus, a quick look at the numbers reveals at least one reason behind Google´s dominance of the market.

Since its release in 2008, Google´s mobile operating system Android — which, of course, comes equipped with Google´s search engine — has slowly laid siege to the smartphone market, finally grabbing a majority 50.9 percent of the total market share in the last quarter of 2011. Apple´s iOS mobile operating system — which, lest we forget, also uses Google´s search engine — commands roughly half of the remaining market at 23.8 percent. Ergo, some three fourth of all smartphones on the market come Google-ready.

The Long and Winding Road

The decision by federal authorities to subpoena Apple comes as yet another turn in the downward spiral of Google and Apple´s corporate relations. Though largely characterized by a mutually profitable symbiosis throughout the early 2000s, the relationship between the two tech giants experienced an abrupt caesura when Google announced plans in 2007 to develop a Linux-based mobile operating system to compete with Apple´s iOS.

Google Inc. Chairman Eric Schmidt served on Apple´s board of directors until he was forced to step down in 2009 amidst FTC allegations that the two companies were in violation of federal antitrust laws, thus putting an end to the companies´ formal strategic harmony.

The tenuous relationship became even more strained in 2010 when Apple co-founder and tech-wizard Steve Jobs launched a series of patent-infringement lawsuits against smartphone manufacturers like Samsung and HTC that used the Android operating system.

As the global popularity of smartphones continues to spawn increasingly lucrative new markets, the once synergetic relationship has degenerated into a full-scale, tit-for-tat war for domination that now includes some 30 direct or proxy lawsuits across 10 countries.

With no clear victory in sight for either Apple or its competitors, the company has shown signs recently that it may be reweighing the long-term profitability of its aggressive legal strategy.


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