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Summary:

The FTC is said to be close to opening an official antitrust inquiry into Google, which would put the search giant right where Microsoft was in the late 1990s — and even if it ultimately wins, the fight could have long-term effects on its ability to compete.

Updated: The U.S. Federal Trade Commission is close to handing Google and its executive officers a court order that will force them to testify in an antitrust investigation into the company’s practices, according to a report in the Wall Street Journal. The subpoenas are expected to be handed over within a matter of days. If and when that happens, it will put Google right where Microsoft was in the late 1990s — fighting to prove that its behavior as a quasi-monopoly is not anti-competitive. And the big risk for Google isn’t just that it might lose: As the case against Microsoft showed, such investigations can harm a company even if they are ultimately unsuccessful.

Google has already faced some antitrust-related investigations by the FTC, but these have been directed at specific acquisitions — such as the purchase of mobile advertising company AdMob, which was held up by the regulator until the purchase of a similar company by Apple paved the way for the deal to be approved. Google also faced antitrust concerns about its acquisition of flight-travel information company ITA, since that company provides data for a lot of other services. In the end, Google had to agree to a number of restrictions on what it could do with both the company and the data, but the deal was allowed.

The current investigation, according to the WSJ, will be different in that it “will examine fundamental issues relating to Google’s core search advertising business,” including whether the company unfairly directs users to its own services rather than those of its competitors. The European Commission has already opened a similar investigation, based on allegations by several companies that Google has harmed their businesses by favoring its own services when people search for specific keywords. Earlier this year, Microsoft filed its own complaint with the European Commission alleging that Google is being anti-competitive.

Should we be enforcing “search neutrality?”

The principle lurking behind this kind of allegation has been referred to by some as “search neutrality.” The theory is that Google is so powerful as a result of its market share in search — and searching has such a huge impact on how people interact with the web — that Google is controlling the behavior of users by showing them specific results and/or sending them to its own related properties (Picasa for photos, YouTube for videos, Google Maps for maps, and so on). The argument is that this distorts the market in the same way that “net neutrality” advocates claim telecommunications companies do (or want to).

Some Google critics — including the New York Times, in a surprising editorial written last year — have argued that the company should be forced to reveal the algorithms it uses to rank search results, since some companies claim they are being unfairly harmed by it. But others, including New York law professor James Grimmelmann, say the whole idea of “search neutrality” is absurd, since search engines by their nature try to determine what the best results are, and that this necessarily requires some kind of editorial decision-making.

Search Engine Land editor Danny Sullivan, meanwhile, has argued that Google should be free to point users toward its own properties, and that those who don’t like the results they get from Google are free to use Microsoft’s Bing or Yahoo (which is now powered by Bing) instead. Sullivan says that after covering the search market for 15 years, he has seen no convincing evidence that Google distorts the market in its own favor or harms competitors — and notes that even large players such as Yahoo have not made such claims against Google (at least not publicly).

Who is harmed?

Google draws a lot of fire for having a monopoly or virtual monopoly on search and search advertising, since it is estimated to control about two-thirds of the market for search. But simply having a dominant market share isn’t against the law — what is illegal under antitrust legislation is either obtaining this position through anti-competitive means or using it in anti-competitive ways against other companies (Microsoft, for example, was accused of “tied selling,” by requiring computer makers to install its browser along with Windows).

It’s also important to note that inconveniencing competitors isn’t the benchmark the courts look at when it comes to making an antitrust case: the real test is whether consumers are harmed in some way. Has Google somehow caused consumers to pay more for something as a result of its behavior? That would be a hard case to make, since Google typically makes things less costly or even free. Has consumer choice been reduced somehow? That’s another test a court would look at.

The long-term impact of an antitrust case

Regardless of the merits of the case, or even the eventual outcome, one of the risks for Google is that having to deal with the government inquiry could slow the company’s progress down or even cripple it. Even though Microsoft arguably won its antitrust battle (it agreed to a settlement in 2001 but didn’t have to change its behavior much), some believe the pressure and stress of that war altered the company’s fortunes forever — not just by tying it up in red tape but by making it more timid, and less likely to do something competitive, for fear of attracting the government’s attention.

What happens to Google if it no longer feels that it can make whatever acquisitions it wants to, or release whatever kinds of free services it comes up with, for fear that this will draw more fire from the government? And what happens to the share price if its legendary growth starts to slow?

Meanwhile, a report earlier this year from the Technology Policy Institute found that such government antitrust investigations rarely accomplish what they set out to do — despite the years of legal effort that were poured into antitrust investigations into Microsoft, IBM and AT&T, the report found that competition came to those markets not as a result of government regulation but because of external factors — including technological changes — that the government could never have predicted.

Update: Google Fellow Amit Singhal has responded on the Google blog saying the company has received a formal notification from the FTC that a review is underway, although it says that it is “still unclear exactly what the FTC’s concerns are.” The post also says that Google is “always focused on putting the user first” and that it is used to working in a world where “the competition is only one click away.” Singhal said the company will be working with the FTC over the coming months to answer whatever questions it might have.

Post and thumbnail photos courtesy of Flickr user Mark Strozier

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  1. Dwayne Winseck’s Media Blog Thursday, June 23, 2011

    Interesting article, Matthew, and congrats on making Gigacom a viable and useful place and resource.

    I’ve found your stuff on Zeynep Tufecki useful https://twitter.com/#!/techsoc. A friend and colleague at SJC Carleton U, Josh Greenberg, had also recommended her a few days before. https://twitter.com/#!/josh_greenberg.

    When two people you know point someone out in rapid succession its always good to have a look and see. Anyway, she is interesting and I’m curious to see how the Keller/Tufecki conflab plays out.

    Your article raises some great questions and I really like the concept of ‘search neutrality’. I hadn’t heard that before, but grasp immediately what it means, I think (rings bells with Tim Wu’s Master Switch for me).

    I have several questions (some arguments dressed up as questions) about your take on Google and anti-trust, though. I hope you don’t mind me posting them here.

    First, Google accounts for 2/3rds of the search and ‘related online advertising markets’ in the US. Everywhere else except Russia, China, Taiwan, Korea, Google’s share of search is 80 percent plus (Canada), high 80ies (Latin America) and, at upper reaches, 93 percent (Aus.). That’s a lot.

    The FTC investigation will look at both the US and the global levels and, if nothing else, we could learn a lot.

    I agree with the first part of your proposition part way through the story — i.e. “The theory is that Google is so powerful” that it can have a strong “impact on how people interact with the web”. I think that’s true, but just how, I don’t really much know. Zeynep, again, is a good person to help us think about this.

    The second part of that sentence, however, obscures the significance of ‘subtle influences’ by pointing to a hammer: one of the primary harms could be that Google shows people “specific results and/or sending them to its own related properties”.

    Not even Danny Sullivan, as you observe, argues that. We have to cast our net more subtly though, I think, to reflect how the design/configuration of online spaces affect how we conduct our lives online, as Tufecki and those she draws on (Hampton, Baym).

    Google is a maximalist at many things (data gathering, sense making, distribution, collection, retention, etc.), and this cuts both ways in terms of making the web/dig media more ‘navigable’ (van Couvering) but also more central, invasive and often ‘gateway’ like. Gates are good, but often come with gatekeepers.

    The argument by people like Crandall and Jackson that you cite favourably elsewhere is a particular species of economic argument, as you know. It is Schumpeterian in origins. Schumpeter saw consolidation as ‘episodic’ and swiped away just as often, after time, by the creative destruction/techno-economic innovation.

    There’s some truth obviously in this, but two parts are problematic, me thinks. The processes of consolidation can also be seen as continuous (vs episodic). Eli Noam says that digitization actually magnifies such tendencies. Concentration at ‘digital hubs’ and ‘switching points’ is common, hence the intuitive appeal of ‘search neutrality’ (love the concept).

    The Internet is not immune to such processes at significant points — search, browsers, legit online music, video players, etc.. So, that Google is coming under pressure is not unusual. Another reason we want to be skeptical of ‘bigness’ just for the sake of it is because it is easier to regulated. Every liberal and conservative knows this, and I think it is an idea that we must be aware of with respect to any entity that has the scale and market power that Google has.

    Finally, I thought it was a bit of a stretch to say that Microsoft teaches us the lesson that well-meaning anti-trust regulation often strangles ‘big business’, the corporate goose that less us golden eggs — or so the fairy tale goes.

    Another way of reading that is that government intervention backstopped the principle of ‘open media spaces’. It stood behind the principle that keeping ‘layers’ in the ‘network media system’ — networks, applications, content, devices — separate was a good idea. So do I, and we have all benefitted from it. We should recall that it was the original guru of ‘the future of cyberspace’ Lawrence Lessig that played special maestro to, if my memory serves me correctly, Judge Greene’s court. And Judge Greene himself was no slouch but had overseen the break-up and divestiture of ATT and the operations of the 7 RBOCs thereafter. Tim Wu (Master Switch) convincingly makes much the same argument today.

    An old historian, R. L. Thompson, in his classic 1947 “Wiring a Continent” said that the telegraph had passed through three phases: methodless enthusiasm, strategic rivalry/ruinous competition, consolidation. I think that lesson applies to all media, Google and the Internet, are not exceptions.

    I see similar presumptions in the writing of, for example, Peter Nowak, who seems that somehow CRTC bungling got us UBB rather than the telecom-media-Internet congloms that put it into place in the first place. To my way of thinking, this is akin to the ‘government is congenitally incapable’ view.

    It was also the view of Schumpeter, who believed the notions of democracy were fairy tales and the best government could do would be to be run by experts who stayed out of the way.

    I should get going now. Late. Anyway, hope those questions, ideas, arguments, etc. were/are interesting/enjoyable. cheers. D.

    1. Thanks a lot for that, Dwayne — some good points. Appreciate the comment.

  2. Shankar Saikia Friday, June 24, 2011

    MEMO TO FACEBOOK

    Here’s the trajectory of a successful tech company.
    – Idea
    – Growth
    – More growth
    – Government feels that growth harms competitors
    – Government accuses company of anti-competitive behavior

    This happened to IBM, MSFT and GOOG. So, we should expect the same to happen to Facebook ;)

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