Why An FTC Case Against Google Is A Really Bad Idea (Part I)

Folks in the tech industry have for the most part been conspicuously silent, at least publicly, about the Federal Trade Commission’s lengthy investigation of and apparent intention — perhaps as soon as year end — to file an antitrust case against Google for monopolization. In part that’s because Silicon Valley companies typically do not understand or want to get bogged down in legal and political controversies. In part, it’s because many tech innovators realize that staying part of Google’s AdWords ecosystem can be very profitable.

This silence is not driven by fear of retaliation, as Google has never done that to its vertical channel partners or even erstwhile ex-corporate joint venturers like Apple and Yahoo!. But it is likely emboldening the FTC to think that the Washington, DC agency has the interests of competition in high-tech at heart in moving against Mountain View. That’s a disquieting conclusion which should be especially troubling to young Internet-centric companies from Facebook and Twitter to shoestring-funded app developers.

This series of posts dissects the threatened FTC case and concludes that a monopolization prosecution by the federal government of Google would be a very bad idea.  We divide the topic into five parts, one policy and four legal. We’ll start with policy because that’s something which does not turn on the rather arcane elements of antitrust law.

1.   Using Government For Competitive Reasons Is Counterproductive

It’s an old DC adage that if you cannot win in the marketplace, try to win through political influence. Yet the high-tech sector has exploded over the past few decades because it does not act like established legacy industries. Oil companies have successfully lobbied Congress for years to enact oil depletion allowances, other special tax breaks and to eliminate subsidies of renewable energy producers. Big pharma’s close relationship with politics is legendary. There are too many other examples even to list.

But computing and technology are different. They are arenas of inspired innovation, out-of-the-box thinking, tremendous product life cycle compression and absolutely ruthless competitive rivalry. At the same time, technology — especially Internet technology — is achieving a profound and increasingly central significance in the lives and workplaces of consumers (both individuals and enterprises). Take for instance the communications revolution ushered in by social media, which is today, a short four years after going mainstream, producing serious disruptions in corporate marketing, sales, news distribution, social and political movements (e.g., Occupy Wall Street) and many other aspects of modern life. Who would have thought in 2009 that “flash mob” advertisements would routinely air on network television, for instance?

The mantra in Silicon Valley for nearly a decade has been “self-regulation.” If the industry creates norms or best practices — for instance on privacy, such as “do not track” browsing — the prevailing ethos has been that government can best act by staying out of the way. Regulation and legislation, by their very nature slow processes, lag technology by years if not decades. And the “solution” even for outliers, like the spam merchants the 2003 CAN-SPAM Act was supposed to eliminate, can often be worse than the problem itself.  TechNet, eTrust and other Silicon Valley industry organizations largely confine themselves as a result to subjects on which government remains sovereign, such as trade tariffs, immigration rules for skilled tech workers and the like.

All of this is to say that the aggrandizement of government regulation is something the tech industry has historically, and rightfully, feared. If the Internet were regulated like the telephone industry, we would probably not have high-speed broadband, ubiquitous WiFi or YouTube, let alone streaming IPTV. While the lines demarcating industries are blurring as a result of technological convergence, the message remains the same — enlist government as an ally to “protect” competition and one runs the very real risk of having government expand its mission and reach, for good or ill.  Furthermore, attempts to “protect” competition often view the market as a static creature and threaten to lock in the paradigm that is on the brink of shifting.  Measures aimed at preventing Google from aggressively competing with mobile platforms or mobile apps threaten to remove a positive competitive force from those relatively young markets.

Many in the public interest advocacy community fear that without government regulation, technology companies will enrich themselves at the expense of consumers. What they sometimes forget is that consumer allegiance in technology is fleeting.  Four years ago Myspace had three-fourths of the social media market and some analysts were calling the service an unbeatable natural monopoly.  America Online was poised to become the dominate online player a decade ago (and yes, people were calling them a monopoly as well).  And, even in the search space, academics were at one point weary of Yahoo!’s impending dominance.  The changing fortunes (and relative market positions) of these major online players were the result of the rapid rise of disruptive business models that were fueled by sweeping changes in the underlying technology, not something produced by government interference.

To sum up Part I, the technology industry invites government into its business only when it does not fear the consequences. And in turn, that means high-tech companies generally turn to politicians only when they are losing in this ultra-heated competitive space. Yet what is good for the goose is sauce for the gander. 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.

In the next post in this series (Part II) we take on the legal issue of whether the FTC’s supposed focus on the “search advertising market” has any antitrust validity. Hopefully, even non-lawyer readers will follow the analysis, which by its very nature must address some relatively arcane antitrust concepts such as “market definition.”

Note:  Originally prepared for and reposted with permission of the Disruptive Competition Project.