Google: fighting shadows with antitrust inquiry

1Executive Summary

A decade ago, Microsoft finally settled a long-running antitrust case that was launched against the software giant by the Department of Justice, based on accusations that the company was using its monopoly on computer operating systems to crush competitors. Now it is Google’s turn to face the antitrust spotlight: Although it is not the subject of a formal government case yet, the search behemoth is involved in an official inquiry by the Federal Trade Commission, which is investigating whether Google is distorting the market for web search and search-related advertising.

What makes this case more difficult than the one against Microsoft — and ultimately a lot harder to prove — is the question of what a monopoly even means in the age of the web, when the browser has taken over from the operating system as the primary way in which we use our computers and mobile devices. Does Google have a monopoly in any real sense? And if it does, can it be shown that the company is using that position unfairly, causing harm either to competitors and/or to consumers of web services?

Critics of the company argue that both of these things are true. And the list of Google’s enemies is a fairly long one, including fellow giants like Microsoft — one of the main proponents of the antitrust allegations, somewhat ironically — as well as large web services like Expedia and the recommendation service Yelp, who argue that Google is giving its own competing services preferential treatment and thereby distorting the market. And Google isn’t just facing antitrust inquiries in the U.S.: It is also under investigation in several European countries for similar alleged offences.

A monopoly on search and search-related ads

The charges being leveled at Google are twofold. One is that it has a monopoly on search and on search-related advertising and that this gives it an unreasonable amount of control over how content is found online — since search is the primary way that many people discover websites and services — as well as an ocean of cash from search-related advertising. The second allegation is that Google uses the money from its advertising monopoly to develop or buy services that compete with those from other companies and that it then uses its control over search to give those services preferential treatment in its search results, which provides an unfair advantage.

So in the case of Yelp, whose founder and CEO, Jeremy Stoppelman, testified in a recent Senate hearing regarding Google’s behavior (which wasn’t part of the official FTC investigation but raised many of the same issues), the claim is that when Google couldn’t acquire the company for its local recommendations, it first tried to steal Yelp’s content and use it without asking, threatened to remove Yelp from Google’s search results altogether and then bought a competing service called Zagat.

This effectively pulls in all the different aspects of the antitrust case against Google, to the extent that there is a case: the use of its giant cash reserves to try and take over Yelp; the “scraping” of Yelp’s content for use in Google’s own local service, Google Places; the pressure on Yelp to play by Google’s rules or face deletion from its all-powerful search index; and finally, the acquisition of a competitor, to which Google is allegedly giving preferential treatment in its search results. Expedia made similar allegations about Google following its purchase of ITA, which provides travel-related information that is used by Expedia and other services (a deal that was reviewed by the FTC).

Having a monopoly isn’t enough for antitrust

As I tried to explain in a recent GigaOM post, antitrust law in the U.S. doesn’t make having a monopoly in a particular market illegal. What the Sherman Act is designed to fight are monopolies that have been achieved through illegal means (i.e., collusion or restraint of trade) and/or monopolies that are being used to harm a particular sector. But it’s even more complex than that. Unfortunately for Yelp and Google’s other critics, it’s not enough just to show that a company with a dominant market position is being unfair to its competitors. It has to be proven that being unfair has some tangible impact on the market, either by restricting choice or raising prices or both.

So Yelp might argue that Google is being unfair by a) taking its content without asking and b) giving its own Zagat results a higher ranking in search (assuming it can even be shown that Google is doing this). But does Google’s behavior have any impact apart from being unfair to Yelp? Does it restrict consumer choice when it comes to recommendations services in any real way? And if it does, will consumers have to pay more for those services? Similar questions would have to be asked about Google’s dominance in search itself or search-related advertising. Does that dominance affect consumers in a tangible way?

Thomas Barnett, the former head of the Justice Department’s antitrust division, argued in a presentation to the Senate committee that Google’s control over search-related ads would lead to higher prices for those ads and that consumers would pay more because the companies buying those ads would inevitably pass those higher costs on to their customers. But this is not obvious at all. Even if someone could prove that prices for search ads are higher than they should be (whatever that means), an antitrust case would then also have to prove that companies were passing those costs on instead of just absorbing them.

One of Barnett’s counterparts, a former antitrust specialist with the New York attorney’s office who worked on the Microsoft case, argues that Google simply doesn’t fit the description of an illegal monopolist in the same way that Microsoft did. One of the main reasons for this is that Google provides a web service that is free to anyone and that has multiple well-funded competitors (including Microsoft itself). Users are not forced to search in Google, nor are they forced in any real sense to pick Zagat’s reviews over Yelp’s, or Google Travel’s results over those from Expedia or Travelocity.

Dominant web players rarely last long

I’ve argued before that one of the most powerful arguments against a federal antitrust case against Google is that such investigations rarely have much impact, in many cases because they drag on too long and involve so much complicated testimony that is difficult to prove. Also, the market for technology itself usually does a good enough job of destroying or disrupting monopolies without the government’s help. A research paper that looked at several high-profile cases, including Microsoft’s and AT&T’s, came to a similar conclusion. In almost every case, technological change had more of a tangible effect than any government investigation or penalty did.

Google, for example, is under significant pressure from the socialization of the web. The way that people find content and services is being altered by the popularity of social networks like Facebook and Twitter — to the point where search may no longer be the primary way that people find new services. Google is trying to take advantage of that phenomenon by building its own Google+ network, and by adding “+1″ recommendation features to its search. But will this be enough? It’s entirely possible that Facebook’s social search (which is currently powered by a partnership with Microsoft) could become a significant competitor to Google.

If and when Google does wind up testifying to the Federal Trade Commission or the Department of Justice, it might even argue that Facebook is the real threat — due to its control over the social-networking market, its refusal to release data to competitors such as Google and its powerful relationships with Microsoft, Skype and other competing services. That might seem like a legal gambit, but there is a lot of truth to it as well. The web is still changing so quickly that even a seemingly unassailable monopoly like Google’s could be over before the government gets around to investigating it.

Relevant analyst in search
You must be logged in to post a comment.

6 Comments Subscribers to comment

Learn about our services or Contact us: Email / 800-906-8098