U.S. Google Antitrust Probe Spurs Internet-Regulation Debate

The Federal Trade Commission's antitrust investigation into Google could have unintended consequences for U.S. innovation

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Since going public in 2004, Google has built a dominant position in the Internet-search market. As Google’s market share has grown, its rivals have waged an increasingly vigorous campaign arguing that the company is abusing its search power in violation of federal antitrust law.

After nearly two years of investigation, the U.S. Federal Trade Commission is on the verge of suing Google, according to multiple reports. Four of the five FTC commissioners believe that Google has used its market power to harm its rivals, according to a Reuters report. Agency investigators are circulating a draft memo recommending legal action against Google, according to Bloomberg, with a final decision expected as early as next month. If it happens, this lawsuit would be the most dramatic action taken by the U.S. government against a major technology company since the Department of Justice challenged Microsoft in the 1990s.

The FTC is under enormous pressure to crack down on Google. In my opinion, the Feds should think very, very carefully before pursuing such a lawsuit. It’s not at all clear that the FTC would win this case, for reasons I’ll discuss below, and a loss could harm the FTC’s credibility as it brings antitrust cases in the future. As a result, the chances of an actual trial are slim. Google and the U.S. government will likely settle this matter within the next six to 12 months. In the near term, no FTC action is expected until after the presidential election.

Even if the FTC case is strong — and we haven’t seen the government’s evidence yet — federal regulators would be wise to tread carefully in the rapidly changing Internet space. In two decades, the Internet has become one of the most dynamic commercial platforms ever. Over that time, regulators have largely, and wisely, taken a hands-off approach. If government bureaucrats start bigfooting around the industry, they could hamper the development of one of the most powerful economic engines in U.S. history.

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For years, several of Google’s competitors and sympathetic interest groups have been urging federal action against the search giant, which has amassed a 70% market share. This loosely knit coalition opposing Google includes the FairSearch.org consortium, which is composed of several of Google’s competitors, most notably Microsoft, which has been waging a not-so-clandestine campaign against Google for years. FairSearch.org argues that Google has been using its market power to harm competitors illegally.

Specifically, the group argues that Google has been using its dominance to “foreclose competitors from the search marketplace — particularly in high-traffic specialty segments, like travel, jobs, health, real estate, media and local search.” In other words, the companies charge that Google unfairly demotes rivals  — i.e., them — in its search-engine results in order to steer users toward Google’s own competing products.

Take the travel industry. When Google announced plans to buy online travel firm ITA Software in 2010 for $700 million, rival travel-search firms, including Expedia and Kayak, cried foul. (Expedia and Kayak are both members of FairSearch.org.) In order to win U.S. Justice Department approval — and to dismiss a threatened antitrust lawsuit — Google agreed in 2011 to license ITA’s technology to its competitors for five years. That settlement telegraphed the current dispute over whether Google uses its market clout to favor its own products.

One year later, it’s not hard to see why Google’s travel rivals are still angry. A simple Google search for “Miami flights” displays a large Google results box underneath the top sponsored links featuring airfare quotes from Google’s partners. One could argue that since Google owns its search page, it has the prerogative to display its own services, but this kind of apparently clear favoritism goes to the heart of why Google is facing charges that it discriminates against rivals in its search rankings. One of Google’s most prominent critics is Scott Cleland, president of the Precursor Group. In a recent blog post, he said:

At bottom, Google’s antitrust defense is that Google is better for consumers and for innovation than competition or the competitive process, based on all the consumer benefits and innovation Google has so graciously given the user to date. The fallacy in this self-serving and circular Google position is the broad and deep market experience we have that monopolies have less competitive pressure to improve and tend to lose sight of consumer/customer interests and the need to innovate — the longer they are a monopoly.

Google’s rivals are entitled to press their arguments to regulators. However, it’s hard not to interpret their campaign as sour grapes, as many experts have observed. Having failed to defeat Google in the marketplace, these companies appear to be seeking relief in the regulatory arena, according to experts. “It’s an old D.C. adage that if you cannot win in the marketplace, try to win through political influence,” Glenn Manishin, a partner at the law firm Troutman Sanders and a leading antitrust expert, wrote in a recent blog series exploring this issue:

Pursuing government regulation of market rivals entails a risk — a big risk — of untoward results. As the financial crisis of 2008 shows, once government deems an economic sector “essential” it takes on an implicit responsibility to regulate everyone, whether they have monopoly power or not. As we discuss last in Part V, this is an especially high risk in the potential case of FTC v. Google, because its proponents seek to extend the law into an uncharted realm to justify handicapping a rival. It may, and probably will, come back to bite the entire technology sector in the ass.

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Antitrust law is a fairly complex area, so let’s take a look at some of the key big-picture points. First, it’s crucial to understand that having a monopoly in a given market is not, in itself, illegal. What’s illegal is seeking to achieve or maintain a monopoly through anticompetitive practices. According to Google’s defenders, the company has built a dominating position not through anticompetitive methods — as Microsoft was accused of doing with its bundling of Internet Explorer with Windows — but rather through the merits of its superior product.

Google is simply more useful to users than rival services are, according to its boosters, but the day that fact ends, competition will be just one click away. And indeed, the rise of Facebook and Twitter — and Google’s contemporaneous failure to make inroads into social networking — illustrates how fast things can change in the Internet industry. Google also emphasizes that the fundamental purpose of U.S. antitrust law is to protect consumers; most of the complaints directed against Google are coming from its competitors, not consumers.

In building their case, FTC lawyers will have to define the “relevant market,” a legal term of art that helps shape the scope of the lawsuit. Let’s say the FTC defines the relevant market as the Internet-search market. Monopoly power is defined as the “power to control price or exclude competition.” But Google’s search engine is free for users, and it’s not doing anything to prevent users from switching to a rival search engine — other than providing a superior service.

“Google’s share of search by itself is therefore almost meaningless,” Manishin wrote. “Even if the relevant market is confined to search, moreover, there is nothing that enables Google to prevent users from switching, instantaneously, to another of the scores of search engine providers on the Internet.”

Now imagine that the FTC defines the relevant market more broadly, to encompass the larger Web advertising market. Here, the FTC would likely be on shaky ground, because it would be hard-pressed to prove that Google has a monopoly in this broader market. Google’s search advertising products compete with many other types of online advertising, including display ads and mobile ads, not to mention traditional forms of advertising (print, TV, radio, etc.). Manishin:

Taken together, all of these factors suggest strongly that the relevant antitrust market for assessing Google’s alleged monopoly power cannot properly be narrowed to Internet search advertising, and likely not even to Internet advertising to the exclusion of legacy advertising media. In an “Internet advertising” market Google’s share is almost certainly well below the 70-80% required as the minimum from which to infer monopoly power … In an “advertising” market Google undoubtedly has a share hardly worth worrying about.

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The FTC could face an uphill battle in trying to convince a federal judge of its case. But setting aside the potential merits of the government’s case — and we emphasize that we haven’t seen the evidence — any federal lawsuit against Google could have broad negative consequences. Google has revolutionized information discovery worldwide without government interference, and the company faces no shortage of well-funded, hard-driving competitors, including Apple, Facebook and Twitter. Online innovation is proceeding at breakneck speed. Does the U.S. government really want to step into the path of the digital revolution?

As for Microsoft and its FairSearch.org consortium, there’s something unbecoming about companies that have been beaten in the marketplace appealing to Uncle Sam for relief. It’s kind of like a child who loses a schoolyard ballgame and then runs to the teacher claiming that Johnny didn’t let him win. Microsoft and its anti-Google allies have spent untold millions waging an overt and covert campaign designed to persuade regulators to hobble the search leader. Perhaps if these companies spent a little less time complaining and a little more time innovating, they’d have a better chance of competing in the marketplace.