United States vs. Google (revisited)

Summer is a good time to pick lazily at the archives. Here’s a post that originally appeared on Rough Type on October 12, 2006. Given last week’s news that the Federal Trade Commission has launched a formal anti-trust investigation of Google, it seems timely to repost it now.

Every era of computing has its defining antitrust case. In 1969, at the height of the mainframe age’s go-go years, the Justice Department filed its United States vs. IBM lawsuit, claiming that Big Blue had an unfair monopoly over the computer industry. At the time, IBM held a 70 percent share of the mainframe market (including services and software as well as machines).

In 1994, with the PC age in full flower, the Justice Department threatened Microsoft with an antitrust suit over the company’s practice of bundling products into its ubiquitous Windows operating system. Three years later, when Microsoft tightened the integration of its Internet Explorer browser into Windows, the government acted, filing its United States vs. Microsoft suit.

With Google this week taking over YouTube, it seems like an opportune time to look forward to the prospect – entirely speculative, of course – of what could be the defining antitrust case of the Internet era: United States vs. Google.

That may seem far-fetched at this point. In contrast to IBM and Microsoft, whose fierce competitiveness made them good villains, Google seems an unlikely monopolist. It’s a happy-face company, childlike even, which has gone out of its way to portray itself as the Good Witch to Microsoft’s Bad Witch, as the Silicon Valley Skywalker to the Redmond Vader. And yet, however pure its intentions, Google already has managed to seize a remarkable degree of control over the Internet. According to recent ComScore figures, it already holds a dominant 44 percent share of the web search market, more than its next two competitors, Yahoo and Microsoft, combined, and its share rises to 50% if you include AOL searches, which are subcontracted to Google. An RBC Capital Markets analyst recently predicted that Google’s share will reach 70 percent. “The question, really,” he wrote, “comes down to, ‘How long could it take?’”

Google’s AdWords ad-serving system, tightly integrated with the search engine, is even more dominant. It accounts for 62 percent of the market for search-based ads. That gives the company substantial control over the money flows throughout the vast non-retailing sector of the commercial internet.

With the YouTube buy, Google seizes a commanding 43 percent share of the web’s crowded and burgeoning video market. In a recent interview, YouTube CEO Chad Hurley said that his business enjoys a “natural network effect” that should allow its share to continue to rise strongly. “We have the most content because we have the largest audience and that’s going to continue to drive each other,” he said. “Both sides, both the content coming in and and the audience we’re creating. And it’s very similar again to the eBay issue where they had an auction product that gained critical mass.”

Google has been less successful in building up its own content and services businesses, but it’s a fabulously profitable company, thanks to its AdWords money-printing machine, and it can easily afford to acquire other attractive content and services companies. It can also afford, following the lead of Microsoft in the formative years of the PC market, to launch a slew of products across many different categories and let them chip away at their respective markets – which is exactly what it’s been doing. Moreover, its dominance in ad-serving enables it to cut exclusive advertising and search deals with major sites like MySpace, expanding its influence over users and hamstringing the competition.

Google’s corporate pronouncements are carefully, and, by all accounts, sincerely, aimed at countering fears that it is building a competition- and innovation-squelching empire. But its actions often belie its rhetoric. Its founders said they had no interest in launching an internet portal, but then they launched an internet portal. They said they wanted customers to leap off Google’s property as quickly as possible, but then they began cranking out more and more applications and sites aimed at keeping customers on Google’s property as long as possible. The company’s heart may be in the right place, but its economic interests lie elsewhere. And public companies aren’t known for being led by their hearts.

Nothing’s written in stone, of course. Someone could come up with a new and more attractive method of navigating the web that would quickly undermine the foundation of Google’s entire business. But it’s useful to remember that the commercial internet, and particularly Web 2.0, is all about scale, and right now scale is very much on Google’s side. Should Google’s dominance and power continue to grow, it would inevitably have a chilling effect on innovation and hence competition, and the public would suffer. At that point, the big unasked question would start being asked: should companies be able to compete in both the search/ad business and the content/services business, or should competition in those businesses be kept separate? If there is ultimately a defining antitrust case in the internet era, it is that question that will likely be at its core.

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