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Summary:

Being a monopoly may be irritating to competitors, but it’s not illegal. The problem with applying antitrust law to Google is that even if you assume it has a monopoly and is being anticompetitive, it’s not at all clear how that is bad for consumers.

Much has been made of Google chairman Eric Schmidt’s admission on Wednesday that the web giant might be a monopoly, during his testimony before a Senate hearing into Google’s market dominance and its effect on consumers and the marketplace. But despite the howls of outrage at Google’s size and dominance in the search market, the fact remains that — for the purposes of U.S. antitrust law at least — being a monopoly isn’t illegal. What is illegal is either acquiring that monopoly by nefarious or anticompetitive means, or using that dominant position in a way that harms the market for those services. The problem with applying that to Google is that even if you assume it has a monopoly and is being anticompetitive, it’s not at all clear how that is bad for consumers.

As Stacey described in her post on the hearing — which was convened by the members of the Senate Judiciary Committee on Antitrust, Competition Policy and Consumer Rights and entitled “The Power of Google: Serving Consumers or Threatening Competition?“– heard from Schmidt as well as a number of Google critics, including the co-founder and CEO of Yelp, who said the search company took user reviews from his service without his permission and then threatened to remove Yelp from the Google index altogether.

Is Google’s behavior harming consumers?

The committee also heard from antitrust experts such as Thomas Barnett, the former Assistant Attorney-General and the head of the Justice Department’s antitrust division for several years. Barnett, who is now an advisor to Expedia — one of the companies that has been most critical of Google’s entrance into new markets such as the travel-information market. In a statement filed with the committee, which is available on Scribd and also embedded below, Barnett laid out the case against Google in some detail, but summed it up with these four points:

  • Search is the critical gateway by which users navigate the web: As one Google executive has noted, “[S]earch is critical. If you are not found, the rest cannot follow.”
  • Google dominates search and search advertising
  • Google is expanding its dominance into a broadening range of search-dependent products and services (which also protects and reinforces its search dominance)
  • As one company gains control over access to more and more products and services on the Internet, consumers can expect to face higher prices and reduced innovation

The first three of Barnett’s points are fairly obvious: Search is definitely the main interface for many people when it comes to the web (although social networks and social media are growing rapidly as a source of traffic). And while Barnett doesn’t come out and say that the company is a monopoly, he notes that Google clearly has a “dominant position” in search and search advertising — which is true, given a market share that is estimated at 65 percent for search and 80 percent for search advertising. It’s also true that Google is expanding into new products and services, although how “search dependent” they are is debatable.

Having a large market share is not illegal

The hard part comes when Barnett says that Google’s dominance in these areas affects consumers because they will face higher prices and reduced innovation. This is the core of an antitrust case (which the Senate hearing isn’t technically part of, but which is currently underway at the Federal Trade Commission and possibly the Justice Department as well, since both share responsibility for antitrust). It’s not enough that a company like Google has a dominant or even monopolistic market position — as judge Learned Hand has written: “The successful competitor, having been urged to compete, must not be turned on when he wins.”

And it’s not even enough to argue that a company with a monopoly is using that position unfairly. It has to be proven that consumers or the marketplace as a whole are being harmed by that behavior, either through higher prices or reduced choice, or both.

The problem with a company like Google — as opposed to a company like Microsoft, the last major antitrust investigation in the technology sphere — is that users don’t actually pay for the vast majority of its products and services. Microsoft’s behavior arguably affected physical goods like computers and software, which people had to pay for. What does Google’s behavior affect? I’m not paying any more to use Google Maps than I would to use some other service, nor am I paying more to use Yelp because it has somehow been disadvantaged by Google’s attempts to “scrape” its content for local recommendations.

So how does Barnett try to answer this point? He uses Google’s dominance in the search-related advertising market as a side door into the pricing argument. In other words, since Google controls a majority of the market for search advertising, Barnett argues that it influences prices in that market, causing advertisers to pay more — and these higher prices are then passed on to consumers.

How do higher search advertising prices affect me?

That’s an interesting argument, but it’s going to be a very tough case to make. For one thing, Google’s ad prices are set by an open auction, so how are Barnett or antitrust officials going to prove they are somehow higher than they should be? What’s the actual market value of a click on an ad? And even if a court accepts the argument that prices are higher because Google controls the market, it’s not at all clear that the end user or consumer will have to pay more for a particular product or service simply because the cost of advertising it on Google searches is a penny or two higher.

Even arguing that innovation is being reduced is a tough sell. Rich Skrenta, the founder of one of Google’s most innovative competitors — a search engine called Blekko — has said that he doesn’t support an antitrust investigation into Google, and even a former antitrust attorney who worked on the Microsoft case has argued that attacking Google is a mistake. Has Google’s move into mobile with Android or into local recommendations or travel, or any other new market, caused innovation in that market to decline and thus affected consumers or choice? If so, there are very few tangible signs of it. And as I’ve pointed out before, innovation has disrupted more monopolies than any government.

Everyone likes to beat up on large companies — including the New York Times, which has written editorials about the dangers of Google becoming too large — but being big is not illegal, and no one (or at least no one credible) seems to be arguing that Google achieved its market size through nefarious means. And simply being unfair to competitors isn’t against the law either.

That leaves it to the government to prove that the company is somehow harming consumers by its behavior, and that is going to be a very difficult case to make.

Post and thumbnail photos courtesy of Flickr users Mark Strozier and bloomsberries

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  1. “seems to be arguing that Google achieved its market size through nefarious means.” Hmmm. Maybe not, but they did, from my understanding, break the copyright law…although that didn’t make them a monopoly, now that people can search the Hathi-Trust database of digital books.

    1. Where, when and how exactly did Google “break the copyright law”? Until you can provide facts, your comment will be treated as just an opinion… and a false one at that.

      1. You can find the details at book-grab dot com
        However, Google is not the problem. Its FB which is killing internet and all sites now stand so that they must use FB icons, buttons, even comment system – a deadly and evil monopoly that takes away the uniqueness of the sites, their independence, and everything making all sites having the same cookie cutter FB thingies. Its sheer amazing that the world likes so much to be slave. In some other planet people would have just quit FB and shared their love for at least another dozen social nets which are still thriving.

  2. There are so many nuanced emotionally charged issues here. You did a great job raising several notable details dispassionately/objectively.

    1. Thanks, Jack — much appreciated.

      1. Matt: I disagree. This is far from objective. Can you honestly say that Google Places has better reviews than Yelp? Here are some reviews for the restaurant Gary Danko in San Francisco.

        Yelp: http://www.yelp.com/biz/gary-danko-san-francisco
        Places: http://bit.ly/ofKtIN

        “love it” and “our favorite restaurant” in Places is not helpful. Not to mention Yelp has 3X as many reviews.

        Now, do a search for san francisco restaurant reviews. Google dominates the first 7 spots of organic search. Given the spots are smaller than normal so let’s say they take up 5 spots. If you know anything about SEO you know that having the first 5 spots is having 90% of the clicks.

        This is clearly bad for consumers and 100% anti-competitive.

        Look at it from GigaOm’s point of view. What if Google owned a tech blog and they dominated the first 5 results in Google and all other tech blogs were behind their results? Even if their writing was marginal they would still receive more traffic and ad revenue than you. How is that good for competition and how is that good for consumers?

        You can’t say, “Google wouldn’t do that” – Yes, they would. They are doing that right now, but just in a different content niche. It just doesn’t affect you so it is hard for you to empathize.

        I can’t figure out why the tech media aren’t more honest about Google? Are they still holding onto “do no evil” or are they afraid to speak out?

        1. Thanks for the comment, Tom. I have no idea whether Yelp’s or Google’s reviews are better. But if it turns out that Google’s are bad or unhelpful then I will start using Yelp instead — which is exactly the same thing that anyone else can do if they wish.

  3. And yet GigaOm, like the rest of the blogosphere, is still spreading FUD on the AT&T deal, making dire predictions of anti-competitive behavior and loss of innovation. Shouldn’t that be addressed if and when it occurs, according to law, rather than preemptively? Fear and emotion are OK in one case but not the other?

    1. Apparently you’re ignorant of the fact that the phone market has already been down that road before. It’s not ‘fear and emotion’ as much as it’s ‘learning from history.’

      1. > It’s not ‘fear and emotion’ as much as it’s ‘learning from history.’

        But learning from history can’t cross industry lines? Seems a bit ignorant as well.

  4. William Davidson Thursday, September 22, 2011

    Good article, but I would add an additional point.

    Economics 101: a company is only actually a monopoly if they can forcibly prevent competition from emerging. Given that there are numerous search options, labeling Google a monopoly is ridiculous.

    Besides, if anybody is dominant right now online, its not Google, its Facebook. Look at all of the companies reviewed at http://buyfacebookfansreviews.com that do nothing other than help businesses get more Facebook fans. This is Facebook’s ultimate sign of dominance: people are so desperate for traction on Facebook that they are trying to just buy their way to success. Nothing that Google does inspires this kind of devotion or activity.

    These companies provide jobs to people and Congress wasting these companies time is only detrimental to the economy. Google is no angel: they’re profit-driven and play dirty in many ways, but they are not worth attention here. I’m not a fan of Google, but the government’s activity is much worse here.

    1. “Nothing that Google does inspires this kind of devotion or activity.”

      How about the huge SEO industry?

  5. Great article. As you point out, it’s not clear that the ‘higher price for customers’ argument cannot hold since most google services are free. However, what about the innovation part of the argument? Doesn’t google’s recent shutting down of products from startups previously acquired stunt innovation?

    1. No, Google is providing clear evidence to startups that it has no interest in the market.

  6. Matthew, are you confusing the “consumer” and “the market” Inyou’re first paragraph your first paragraph you switch fro n one to the ither in a heartbeat.

    The two are not at all the same. looking at the consumer completely misses the point.

    The ones who will, and should, complain are the companies that compete with Google’s other properties – photo sharing, flight info, books, insert your chosen field here.

    Google’s dominance in search gives them undue influence in other areas of commerce. If they behave well and fairly then all is good, but if they favour their own properties over the other companies who provide similar services then there is a legitimate reason to investigate.

    This is not about the consumer, it is about other companies and their ability to compete in the face of “the google” who can offer a similar service for no charge and promote themselves through search.

    Cheers. Michael

    IPhoneing so please excuse all the typos

  7. Its not that Google is controlling the ad prices, the bigger concern is that Google is manipulating the market in it’s favor. This puts Google in charge of what you see on the internet which in turn effects sales and prices because they are going to give more attention to their bigger customers. When consumers are only seeing certain services and products it kills the market for other companies which means only the strong companies profit even if their products or services aren’t the best. Say there were only two phones in the world, an iPhone and those old brick Nokia phones, and Google only ever showed the brick Nokia. Nobody would ever buy the iPhone cuz they don’t even know it exists. If you are the go to search provider on the internet you can’t sway your site to advertise certain services over others because it blinds the consumer. So yes, they are violating it and they are hurting you as a consumer. You may not realize it, but your search results can be pushed in any direction Google wants, and that’s a pretty scary thing when they are the monopoly on search. What if political groups were to get into Google, would you like it if you were searching a topic and all the results were pushed toward a certain political viewpoint? Nope, but apparently to you its ok that they push products and services in that way, hiding the competition.

  8. well the quality score means its not an open auction. And certianly having competing products with your customers puts you on shaky ground.

  9. If you have been following semantic technology developments and Web 3.0 then I came across an interesting forthcoming internet search engine, the first of it’s kind to understand concepts instead of keywords, pretty interesting stuff.

  10. Google’s ad monopoly has probably allowed it to crowd out higher quality content/journalism by commoditizing content and essentially making “free” the standard on the web.

  11. Google’s screwed & they know it! They have set many precedents in the last few years with their “questionable” actions. Oracle, Microsoft, Apple & now the “Justice Department” is interested in Google’s activities. You can’t steal & release all of your products in “permanent” Beta! That just shows Google has NO real clue how to make things work in a final version. When I see Google, all I see is bad-management & incompetent legal-advice!

  12. Google article. Let me complete the logic.

    “How do higher search advertising prices affect me?”

    If anybody starts ANY business over the internet, they’re heavily dependent on Google whims – whether they’ll get traffic or not. Thus new companies are prevented from starting internet companies.

    This leads to less innovation and fewer companies offering inferior products, and charging the consumer whatever they want.

    Example: It is a fact today that yelp and tripadvisor are better products than google places (which copies everything). If google kills these companies, are consumers better off?

    Also please don’t cite Skrenta. He claims to be a competitor to get some publicity but his engine sucks, and he does not have the team to build something to compete with Google

    1. Why are new businesses prevented from starting internet companies? Does Google actively prevent new companies from getting non-repeat traffic to a degree greater than Altavista did? Do new companies with no reputation deserve non-repeat traffic? Should Google be forced to give every new company a number of google homepage users in popup traffic?

  13. Google, as the gatekeeper of information on the internet has disproportionate power over whether a business like Yelp fails or succeeds. Yelp’s submission to the committee was interesting. Either Yelp helps Google develop their own local search powered by Yelp’s content, or they are shut out of Google’s database for good. It’s not hard to show that without being listed in Google, most online businesses will lose a significant portion of their audiences (and revenue). This leads to fewer such businesses and less competition, less innovation, less choices for the consumer.

    Google *could* therefore potentially destroy their competition if they use their search dominance (and their status as gatekeepers because of said dominance) to shut out any online business that competes with Google’s offerings. They haven’t done it yet, from what I understand, so this investigation is grossly premature, but it’s still good to get their practices out into the open.

    How that applies to anti-trust law in this country is, frankly, beyond my expertise.

  14. One thing that struck me about Schmidt’s testimony was that at one point his defense of Google featuring its own services in search results was “our competitors do it so we can too”. That’s the sort of logic that may no longer apply if Google is found to be a monopoly. When you’re a monopoly, the rules are different. That’s why it matters whether or not Google is a monopoly.

  15. Philip Elmer-DeWitt Saturday, September 24, 2011

    I think you make a fundamental mistake, Matthew, when you assume that we are Google’s consumers. We are not. Google’s consumers are advertisers. We are the product.

    1. Exactly. Google products are not free—you pay with your privacy and personal information in exchange for paid advertiser access to you.

  16. Brandon Mendelson Saturday, September 24, 2011

    Matt,

    If you’re going to continue to say this in your posts, “(although social networks and social media are growing rapidly as a source of traffic)”

    I hope you will at least link to a source to back this up. Thus far, the data available suggests this is only true for news websites, not the rest.

    1. I’ve seen stats from comScore and others that suggest Facebook in particular is driving traffic to far more than just news sites — I will try to find a link and include it. Thanks for the comment.

      1. It would be great if you can answer/reply other valid questions asked in comments above..

  17. To me monopoly just means that they’re running the business very well and have a very good product. It seems now being successful is bad according to the government!

  18. A monopoly requires some sort of control over the existence of competition, which Google does not have. What it does have are strong capital invested, huge commercial success and a billion satisfied clients.

    Anyone can start a business of search engine.

    1. People seem to forget that when Google started, Yahoo was the big name in search.

      Who the heck uses Yahoo now? Ten years from now, there may be a “new google”. Doing it better, cheaper, faster is what competition is all about. As far as I can tell, Google isn’t pointing a gun at anyone’s head telling them they can’t start their own search engine. And don’t give me any “first-mover advantage” crap — Google wasn’t the first. They simply did it better.

      Well, let the next guy figure out a way to do it better still!

  19. Hamranhansenhansen Sunday, September 25, 2011

    To me it is very simple: a person should be able to live a life free of any particular company. Apple-free or Microsoft-free or Google-free.

    In the late 1990’s, even though I used a Mac and Adobe and Macromedia tools that were far superior to anything Microsoft made, I had to buy Microsoft Office because my publisher’s book templates were Microsoft Word. In the early 2000’s, I had to buy Windows and VirtualPC because I had to test websites in IE6 which only ran on Windows and did not respect the HTML specification. That kind of stuff is oppressive. These days I make standard ePub books and standard HTML5 Web apps and have no Microsoft software, yet Microsoft users can still read my books and websites. Similarly, another author may work with no Apple tools and still I can read his books and websites. So the Microsoft anti-trust trial could have had a simple remedy of requiring Microsoft to conform to vendor neutral open standards. Instead, we had to wait for Mcrosoft to finally figure that out themselves 10 years later.

    So here is the thing with Google: I tried living a Google-free life and can’t do it. Even though I have ads from a different vendor and block Googlebot with robots.txt, my content still ends up in Google, Pasted into websites covered in Google ads, and showing as top hits in Google Search. Even when I let Googlebot in again, thinking the real version of the content ought to be in there, I can’t beat the other sites in results because I don’t have Google ads. The other sites make Google money and I do not. If I add Google ads, shafting the ad network I’m using now, and if I put at least 6 Google ads on each page, it looks like I would have a chance at the top hit for the name of my own original content, with the 9 below me all bootlegs.

    So is that just the breaks? Run Google ads on your content or someone else will? Welcome to the Web, do you have a Google account? Why even have HTML in that case? Why not use GHTML? A key feature of the Web is vendor neutral open standards. Why bother if the index that most people use is owned by a single company who uses it anti-competitively? Google Search should be something akin to Consumer Reports. The fact that there is even a question of impartiality means Google already failed.

  20. “The problem with a company like Google — as opposed to a company like Microsoft, the last major antitrust investigation in the technology sphere — is that users don’t actually pay for the vast majority of its products and services.”

    Customers didn’t pay for IE either, but the giving away of IE was part of a strategy which was an abuse of Microsoft’s monopoly powers.

  21. The real issue gets lost in the details of the article. People innovate when there is adequate incentive. Large companies can innovate (consider Apple). They cannot innovate forever in response to current need. They cannot possibly foresee what is next all the time. If a single human organization controls the majority stake in a world view or a product, then the people (producers and consumers) can be blind-sided by a disruption. Disruptions don’t just sometimes happen. They always happen. ‘Always’ is a strong word to use in rational arguments. However, can anyone demonstrate a reasonable counter-point to the notion that change occurs? While markets do work (and are working even with large consolidated companies) large human organizations homogenize philosophies, ideas, and culture. This becomes a problem when a disruption occurs that does not fit into the homogenized human behavior. The organization is overwhelmed by the new reality and comes apart. When these organizations are sufficiently large and interconnected with much of the economy, real and significant problems can occur for people who were not customers nor stock-holders nor employees. I do not think the collapse of a Microsoft or a Google would break innovation forever; it could delay it for a long time, though.

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