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United States vs. Google

October 12, 2006

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 AdSense 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 AdSense 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.

Comments

Great post Nick!

I just after the deal between Google and YouTube wrote a similar, yet much less substantial post with the same conclusion. It is however interesting that very few people are willing to discuss the similarities between what Microsoft got accused of before and what Google is now persuing.

http://inthefieldonline.net/blog/2006/10/09/free-independent-market/

Posted by: Erik Sundelof [TypeKey Profile Page] at October 12, 2006 12:40 PM

Interesting speculation, but it won't happen under this Presidential administration.

Posted by: Seth Finkelstein [TypeKey Profile Page] at October 12, 2006 12:41 PM

I also anticipate a federal showdown — over copyright law. Google would like to apply the 'opt-out' fair use model it uses with web content across all copyrighted media. We saw this first with their book scanning project. Now video.

From an old piece of mine, Imminent Domain over Intellectual Property?:

Opt-in versus opt-out almost sounds like a silly technicality. In fact, the important issues are the assumptions behind these terms. “Opt-in” means that Google can’t index works without publishers’ permissions. “Opt-out” means that Google can index any books it wants under fair use. The opting-out part is just a courtesy extended by Google to publishers. And “Opt-out” sounds better than “SOL.”

After figuring this out, I understood Tim’s position better. Under the opt-in assumptions, he argues that even publishers sometimes have their hands tied. Under the opt-out assumptions, publishers, Google, and most anybody could index, well, anything they wanted.

I can also see how this battle is bigger than books. Copyrighted magazines, newspapers, audio and video would be open for indexing under these “opt-out” assumptions. And hold the opting-out part — that was just a temporary courtesy designed to lull publishers into a sense of control.

And now, with YouTube, the copyright battle appears to be even bigger than indexing.

Posted by: Sid Steward [TypeKey Profile Page] at October 12, 2006 12:49 PM

That pro-anti-trust "the public would suffer" stuff isn't axiomatic, not even when you state it without evidence.

Posted by: Brad [TypeKey Profile Page] at October 12, 2006 06:55 PM

This posting seems to miss the point of the forementioned United States v. X cases. In the first one, the plaintiffs alleged that IBM was "monopolizing or attempting to monopolize the general purpose electronic digital computer system market." In the latter, plaintiffs alleged that Microsoft "abused monopoly power in its handling of operating system sales and web browser sales." Thus, the cases were about some ways of acting, and not about some state of things. The market share of Google, which is a state of things, would not warrant a case against Google. Nevertheless, if Google acts in a way to monopolize the market or abuse the monopoly power, a case U.S. v. Google will be meaningful.



Almost 70% of web sites use Apache as their web server, yet no one seems to be disturbed about this fact; since there is no "monopoly" at work, whatsoever. On the other hand, the share of IE was only around 30-40% when U.S. alleged MS for abusing the monopoly power.

Posted by: erkantekman [TypeKey Profile Page] at October 12, 2006 07:21 PM

Nice post, though I think Google has a sort of natural "we are not a monopoly" protection MS did not have - the barriers to entry online are effectively zero and Google's been good at saying "bring it on other dudes!". The main blessing for Google/curse for others is that Google is so darn good at monetizing content. Thus the issues are less monopoly than simply paying the most. Anyway, people don't mind "monopolies" if they are getting fed/paid well.

Posted by: JoeDuck [TypeKey Profile Page] at October 12, 2006 07:50 PM

funny how all the pieces of googlezon seem to be falling into place in one way or another.

http://mccd.udc.es/orihuela/epic/ols-master.html

Posted by: QuadsZilla [TypeKey Profile Page] at October 13, 2006 03:21 AM

let's start with Verizon and At&T. Then move to Oracle and databases. Then keep shackling Microsoft. HP in PCs. If you want to waste tax money to try and create competition there are so many bigger, more consolidated tech sectors to focus on. And each of these companies is 3 to 15X Google's size...

Posted by: vinnie mirchandani [TypeKey Profile Page] at October 13, 2006 08:06 AM

Being a monopoly is not illegal (it's not necessarily good, but it's not a crime). Abusing that monopoly is a crime.

So simply having 70% of the search & advertising market isn't going to get Google into trouble. To do that, they'd have to stifle competition in some way. For example, going to some other company and threatening to pull their ads if they use Yahoo Mail rather than Gmail, or something like that.

Remember how Microsoft got in trouble - it wasn't until they went to the PC manufacturers and threatened to jack up the price for Windows if they pre-installed Netscape. That's monopoly abuse.

In Google's case I'm not especially worried, because they do have stiff competition from Yahoo and Microsoft (and even Ask), as well as dozens of niche players in specific domains (Technorati, Mapquest)

Same goes for the advertising market. The only thing I foresee causing problems is if ISP's kill net neutrality, as that opens the door for much more anticompetitive tactics than are available today.

Posted by: ejp1082 [TypeKey Profile Page] at October 13, 2006 09:12 AM

Where I see the major potential for abuse is in the fact that, by dint of its dominance in search/ad-serving, Google has the market and economic power (and incentive) to enter virtually any online product or service market and set the price of that product or service at zero. Controlling the ad auction provides a subsidy for those other businesses that other (non-ad-serving) companies lack. At what point does "free" become predatory?

Posted by: Nick Carr [TypeKey Profile Page] at October 13, 2006 09:59 AM

It may be not ease for the DOJ to sue Google.
I made a small cartoon.

Bye,
Oliver

Posted by: Oliver Widder [TypeKey Profile Page] at October 13, 2006 07:21 PM

Nick, in my recollection I have never seen you pick on IBM, HP, Verizon, AT&T. Each of them is 10 to 15X Google's size. If we are going to waste tax payer money on anti-trust (we tried with IBM , Microsoft, Oracle without much success), should we not go after the big guys first?

Posted by: vinnie mirchandani [TypeKey Profile Page] at October 14, 2006 08:02 PM

Nick, sorry for the dupe comment...I wrote one yestreday on a WI-FI network and thought the line had dropped...obviously it had not...

Posted by: vinnie mirchandani [TypeKey Profile Page] at October 14, 2006 08:04 PM

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