Google's strategy of search engine user lock-in

The Financial Times reported earlier this month (paywalled):

A US federal judge has ruled that Google spent billions of dollars on exclusive deals to maintain an illegal monopoly on search, in a landmark win for the Department of Justice as it seeks to rein in Big Tech’s market power...

The ruling follows a weeks-long trial in which the DoJ argued the search giant paid tens of billions of dollars a year for anti-competitive deals with wireless carriers, browser developers and device manufacturers — and in particular Apple. These payments, which cemented Google as the default search engine, totalled more than $26bn in 2021, according to the decision...

Google’s years-long agreement with Apple to make it the default search engine on the iPhone’s Safari browser has long drawn scrutiny. Unsealed court documents showed that Google paid Apple $20bn in 2022 alone. This would amount to a substantial portion of Apple’s $85bn-a-year services business, which includes its App Store and Apple Pay...

Also at issue in the case were contracts the tech giant reached over the years with browser developer Mozilla, Android smartphone makers Samsung, Motorola and Sony, and wireless carriers AT&T, Verizon and T-Mobile.

Clearly, despite paying billions of dollars to Apple, Samsung, and others, Google was able to make this strategy pay off. Otherwise, they wouldn't do it. To see how this works for Google, we need to understand customer lock-in. Customer lock-in occurs when customers find it difficult (costly) to change once they have started purchasing (or, in this case, using) a particular good or service. The switching cost could be explicitly monetary, like a contract termination fee, or it could simply be the time and effort required to switch.

In the case of search engines, Google relies on customer inertia to keep them locked in. Once a user has a default search engine set up on their phone, or their internet browser, or operating system, the user is unlikely to change. Sure, there are alternatives to Google available, like Bing or DuckDuckGo. But there is a switching cost involved in changing to those other search engines. The user would have to spend time and effort to set up the new default search engine. Why spend that time and effort, when they already have a search engine ready to go?

The extent of customer lock-in arising from customer inertia is arguably fairly low, because the switching cost is actually very low. And yet, this can be particularly profitable for firms. In my ECONS101 class, I use the example of subscription services. All of us probably have various subscriptions on the go that we aren't using, and some that we haven't used for some time. And yet, we keep those subscriptions going because of the time and effort required to cancel. That is customer inertia at work.

Unlike subscriptions though, Google isn't benefiting from charging a monthly subscription fee to the users of their search engine. In my ECONS101 class, we talk about selling complementary goods and services as one way that firms can profit from locked-in customers. Usually, we're considering firms selling complementary goods to its locked-in customers. However, as an intermediary in a platform market that connects search engine users and advertisers, Google has two customer groups. It offers one side of the market (search engine users) access for free, and benefits from them being locked in. It then sells access to the locked-in users to the other side of the market (advertisers). The larger the locked-in user base, the more advertisers are willing to pay for advertising, and the more profitable selling advertising can be for Google. And Google is immensely profitable (as I noted in this post last year).

Coming back to the antitrust case against Google, it seems obvious that signing exclusive contracts with the likes of Apple and Samsung reduces competition in the market for search engines, and therefore reduces competition in the market for search engine advertising. It will be interesting to see what happens on appeal. These cases can take years (decades, even) to resolve.