Remedies in Google’s Acquisition of ITA Software

The U.S. Department of Justice (“DOJ”) recently agreed to allow Google Inc. to acquire ITA Software, Inc. subject to certain conditions. Those conditions, which are set out in a proposed settlement (“Final Judgment”) that DOJ, Google, and ITA filed with the court, are unusual because they restrict Google’s post acquisition behavior rather than requiring a divestiture of assets. Agencies face a number of significant issues in implementing such behavioral remedies.

 DOJ feared that Google’s acquisition of ITA would reduce competition in the market for flight search services. ITA provides technological solutions for organizing and facilitating access to flight information, or as DOJ refers to it, “independent airfare pricing and shopping systems” (“P&S Systems”). ITA offers its services to major airlines, travel meta-search companies (such as Kayak), online travel agents (such as Orbitz), and consumers. Google currently does not offer travel search but plans to develop a travel website that will offer comparative flight search services.

DOJ’s main concern was that Google was acquiring a “critical input” to the provision of flight search. After the transaction, Google would compete with travel search providers that depend on the ITA services, and it could foreclose access to those services. DOJ did not address concerns that Google would use its position in general search to gain an unfair advantage in travel search. For example, it has been argued that Google could lower the ranking of unpaid search results from competing providers of travel search, but the Final Judgment does not address that possibility.

DOJ concluded that Google/ITA would have the ability and incentive to foreclose competing online travel intermediaries’ (OTIs’) access to ITA’s technology, and thereby weaken competition because “increased profits from driving customers to its new travel service from rival OTIs will likely outweigh any lost profits from reduced licensing revenues from QPX [ITA’s P&S system].” DOJ found that Google could refuse to renew contracts or enter into contracts at less favorable terms, or degrade the speed or quality of the services offered to competitors, and that it had the incentive to do so. That conclusion stemmed in part from DOJ’s finding that there are no adequate existing or potential substitutes to the system ITA offers.

DOJ sought to prevent foreclosure with a condition in the Final Judgment that requires Google to license ITA technology to Google’s rivals in travel search at commercially reasonable and non-discriminatory rates. Implementation of this type of remedy requires that in the future, DOJ must determine whether the prices of the licenses meet the terms of the Final Judgment. In effect, DOJ must determine what are “reasonable rates,” which DOJ in the past had been reluctant to do. The Final Judgment indicates that DOJ will use existing contracts as a starting point for determining reasonableness. Whether the terms in the contracts that Google offers its competitors are fair, reasonable, and nondiscriminatory will largely be determined by comparing them to the terms of licensing agreements with similarly situated OTIs existing as of or subsequent to the date of the Final Judgment.

Preventing foreclosure also requires DOJ to determine whether Google is licensing its most advanced technology or if Google is disadvantaging its rivals by only allowing them access to inferior technology. Upgrades to ITA’s software that take place during the term of the Final Judgment must be offered to competitors at the same price as Google charges to other customers, such as airlines, that license the software. Furthermore, the Final Judgment requires that Google offer the same version of ITA’s technology both to its competitors (other travel search companies) and to its other licensors.

The Final Judgment also has conditions that may affect future products. Google must continue to spend at least as much on research and development and maintenance of ITA’s system as it did in the prior two years. Certain circumstances may limit this obligation. For example, Google may reduce those expenditures if its third-party licensing revenue from QPX declines. Additional licensing requirements apply to ITA’s future InstaSearch product. (This product is still under development, and it may not prove commercially useful.)

The Final Judgment also provides for arbitration of disputes, requires Google to develop a website with forms for submitting complaints, prohibits Google from entering into an agreement with an airline that restricts the airline’s right to share information with other parties unless the airline enters into such an agreement with other OTIs, prevents tying of ITA’s system to other Google products, and requires a firewall to protect confidential data that it receives from OTIs in the course of servicing a QPX agreement.

The optimal terms of a behavioral remedy, including scope and duration, depend on the conditions in the market. DOJ limited the remedy’s duration to 5 years, which suggests that DOJ expects alternatives to ITA’s software to be available within that time period. If competitive issues continue to exist after that period, however, the Final Judgment will not address them.

DOJ’s reasons for accepting a behavioral remedy rather than attempting to block the transaction are unclear. DOJ’s complaint, settlement, and competitive impact statements failed to explicitly discuss any potential benefits to consumers associated with the transaction that might offset competitive harm. Nonetheless, potential benefits may exist. Combining Google’s technology and ITA’s software may result in better ways to access ITA’s data and improve overall travel-related searches. For example, being acquired by Google might hasten ITA’s development of a hotel-search capability. If the transaction facilitates or improves consumers’ travel searches and increases the volume of online bookings, and if ITA’s customers, such as travel search and airline sites, have access at competitive prices to any improved technology, then ITA’s customers likely would favor the transaction. Furthermore, if Google offers an integrated search service, consumers could benefit from more transparent fare offerings, which could allow them to find lower prices or enhanced service. Google has stated that it does not plan to sell tickets but would direct consumers to airline or online travel sites to make a purchase. Thus, Google’s entry into travel search could benefit consumers by increasing competition to meta-search companies. These benefits may have ultimately justified the application of remedies to preserve the transaction.

Stuart D. Gurrea and Gloria J. Hurdle are Vice Presidents at Economists Incorporated. Dr. Gurrea specializes in applied industrial organization and has consulted on airline economics. Dr. Hurdle has testified in a number of airline matters and co-authored a report on airline Global Distribution System rules. A longer version of this article appears in the Spring 2011 issue of Icarus – the newsletter of the Communications and Digital Technology Industries Committee of the ABA’s Section of Antitrust Law.