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Four Reasons Fairsearch Is Wrong

Google’s competitors “are locked in hand-to-hand combat with Google around the world and have the mistaken belief that criticizing us will influence the outcome in other jurisdictions.”
— (Former) FTC Chairman Jon Leibowitz, Jan. 2013

The coalition of companies that for years has unsuccessfully been pressing antitrust complaints against Google for search “abuse” — FairSearch.org — insists Google must be restrained for fear the Mountain View company will steer search users to its commercial products, like flight bookings. The group’s most recent publicity event, held at the ABA’s Antitrust Section annual spring meeting last week, repeated those same claims. FairSearch ventured as well into new ground, attacking what it terms Google’s unreasonably restrictive Android licensing practices.

There are four straightforward reasons FairSearch is wrong.

1.  Predictions of Foreclosure Have Proven Totally Baseless.

When Google purchased travel software maker ITA in 2011, FairSearch maintained that Google would exploit its control over the ITA tools that power other online travel agencies, along with many of the airlines’ own sites, to usher competing search services off the stage, then jack up ad rates for travel queries and favor flights from particular airlines. google-eu-antitrust Three years later, nothing like that has happened. In fact, Google Flight Search is not among the top 100 or even the top 200 travel listing sites. Rather, it’s in 244th place, behind Hipmunk, with just .04% of travel queries. Real-world experience, in other words, reveals that the predicted competitive risks on which FairSearch bases its advocacy are both hypothetical and fanciful. Continue reading Four Reasons Fairsearch Is Wrong

Defamation, Autocomplete And Search Royalties: How Not To Govern the Internet

With the controversy surrounding the International Telecommunications Union (a UN treaty organization) just recently subsiding, it is time to take a look at Internet governance from a different perspective. We all know that laws and legal principles differ among countries. What many do not realize is that these laws — most completely non-tech oriented — are having a massive and negative impact on Internet innovation.

In America we proudly have the First Amendment, the fair use doctrine and the DMCA. The first limits the reach of liability for libel (defamation) at least to cases, for non-celebrities, where a publisher is at fault (i.e., negligent). Section 230 of the last allows ISPs, websites and Internet hosts a legal safe harbor from copyright and other legal offenses resulting from user-generated content or any other content that a customer, client or some third-party has published. These landmark legal regimes are hallowed in the U.S., for instance used to strike down overreaching Web censorship efforts by federal government. Fair use, in turn, permits non-commercial or transformative use of a portion of copyrighted content. Think Google image search thumbnails or blockquotes from a news source in someone’s blog or a movie clip in a televised review.

Things are very different elsewhere. Three cases in point.

  1. In Germany and perhaps soon other EU nations, search engines that display snippets of indexed Web pages in response to user queries are now by statute responsible for paying copyright royalties to the original publisher, regardless of whether the content owner charges for its stories with a paywall. 
  2. In France, Italy, Ireland,  Australia and now Japan, courts permit individuals to recover for libel based on autocomplete and search results that return incorrect or harmful personal information, but against the search provider, not the writer or content publisher.
  3. A Denmark court ruled deep linking illegal, as did Germany, leading some to believe that linking to a website other than the front page was illegal throughout Europe. While the German courts overturned that decision, it was Agence France Presse (AFP) which eventually sued Google News for brazenly daring to send search  traffic to the organization’s news articles.

AutomcompleteThese results are foreign, literally, to U.S. jurisprudence. But they also illustrate a vitally important point. Legal regimes that have nothing to do with the Web are being applied in ways which upset existing services users take for granted and that threaten to impede future innovation.  Linking is inherent in HTML and represents the essence of the Web. No one in America would argue seriously today that a hypertext URL link represents copyright violation. Search “autocomplete,” in turn, is not a creative activity, but a very useful technical advancement; it applies computer algorithms based on past searches to predict what the current user wants to see, speeding the retrieval of information from the Web.

Permitting autocomplete defamation suits against Google or Bing because other Web users have searched for information that damages an individual’s reputation is alien to our American way of thinking. It’s censoring completely accurate factual information about stuff on the Web, although that stuff may itself be factually wrong.  The augmentation of liability is also just plain silly, because both autocomplete queries and search results themselves merely return an indexed link to something someone else has posted on the Web.

Continue reading Defamation, Autocomplete And Search Royalties: How Not To Govern the Internet

A Vietnam of Internet Regulation

Given news that a European consortium of rivals has submitted yet another monopolization complaint against Google to the EU Commission, it is time to take stock of where we are in this long-running saga. A month ago the U.S. Federal Trade Commission (FTC) dropped its independent investigation, concluding that the facts did not support an antitrust prosecution of Google. Since then, the rhetoric from Google’s critics has reached absurd levels.

For instance, Bloomberg ran an editorial titled The FTC’s Missed Opportunity On Google. There the editors opined that “The FTC missed an opportunity to explore publicly one of the paramount questions of our day: is Google abusing its role as gatekeeper to the digital economy?” It is unfortunate that a leading American business publication could have so little understanding of competition policy and the role of antitrust law in policing the U.S. market economy. The editorial starts from an incorrect premise and proceeds to suggest, of all Luddite things, regulation of Internet search engines as “a public utility of sorts for e-commerce.” That’s obviously the theme of Google’s commercial rivals, but it’s neither correct nor appropriate.


Google’s alleged search dominance is hardly that of a gatekeeper. The fact is that Google neither acts like nor is sheltered from competition like the monopolists of the past, something the company’s critics never claim because they just can’t. Google succeeds only by running faster than its competitors. There’s nothing about Internet search that locks users into Google’s search engine or its many other products. Nor is new entry at all difficult. There are few, if any, scale economies in search and the acquisition of “big data” in today’s digital environment is relatively low cost, due to massively scalable storage architecture. Microsoft’s impressive growth of Bing in a mere three or so years shows that new competition in search can come at any time. Facebook’s recent, disruptive entry into search, leveraging its own trove of personalized user data, proves the point. As a result, Google remains surrounded by scores if not hundreds of competing providers of search, and succeeds relative to those rivals because its algorithms and search results are deemed superior (more accurate and useable) by Web patrons.

So what of this supposed “gatekeeper” role? North Korea is a gatekeeper to Internet content for its repressed citizens, but Google has none of that awesome economic and censorship power. If Google were really a search or Internet advertising monopolist, it would increase price like all classic monopolists, because monopoly power gives a firm the ability to do so. Yet Google search is a free product, supported by advertising. And that advertising is not priced by Google itself, rather through an auction among advertisers bidding on the use of search keywords. Google doesn’t control price, let alone raise prices. In fact, as its 2012 SEC filings admit, AdWords prices have fallen 15% in recent quarters.

The facts on the ground simply do not support the claim that Google’s search engine represents a bottleneck through which rivals must pass to gain website traffic. “Vertical” search competitors such as Yelp get nearly 50% of their traffic from smartphone apps, bypassing search engines, and thus Google, entirely. The only empirical data point supporting the Bloomberg thesis is that Web users tend to click much more on links displayed on the first or second pages of search results. But consumer inertia, lethargy or laziness doesn’t make Google itself any more powerful; and it certainly is no basis for antitrust intervention.

The call by the FTC to stay out of Internet search was a dispassionate end to a highly politicized investigation. Stripped of rhetoric, the Commission’s chairman, hardly a wallflower when it comes to aggressive enforcement, realized that the risk of transforming U.S. antitrust enforcers from prosecutors to regulators — something all knowledgeable antitrust lawyers regard as anathema — is very substantial in the area of Internet search. Search is inherently subjective, since its object is to produce results predicted to best satisfy a user’s interests. There is no objective standard against which to gauge the reliability, rank or relevance of Web sites in response to a search query. So putting Google under the antitrust lens for how it treats its own links versus so-called “organic” search results would embroil federal antitrusters in the Vietnam of Internet oversight, where ad hoc rules must be made up and the only way to “save” the search market would be to cripple the algorithms Google has used to make it the most popular search engine in the world. Further, treating Google as a public utility is nonsense in an era when even telephone and cable television companies, which have long-standing geographic exclusivities and control real bottleneck monopoly facilities, are no longer regulated as utilities.

Continue reading A Vietnam of Internet Regulation

FTC Overreaching And A Commentary Bitch-Slap


Late Friday afternoon, several stories appeared quoting unnamed sources that the Federal Trade Commission (FTC) has received a staff memo recommending an antitrust prosecution of Google. Now, in a letter just days ago to FTC Chairman Jon Leibowitz, Colorado Rep. Jared Polis — founder of bluemountain.com and ProFlowers.com — counseled that an FTC monopolization case against Google could lead to legislative blowback.

I believe that application of antitrust against Google would be a woefully misguided step that would threaten the very integrity of our antitrust system, and could ultimately lead to congressional action resulting in a reduction in the ability of the FTC to enforce critical antitrust protections in industries where markets are being distorted by monopolies or oligopolies.

Google Antitrust Action Could Cost FTC Power, Dem Warns | Law360. That’s consistent with what I suggested in my five-part series Why An FTC Case Against Google Is A Really Bad Idea, but of course goes even further as my legal analysis did not address potential political or legislative reaction to a formal FTC complaint.

Meanwhile, commentators are whacking each other silly.  Sam Gustin observed in TimeBusiness that “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.” In response, John Paczkowski at AllThingsDigital noted the Polis letter’s “fortuitous timing” and implied that it “seems a bit odd” for a junior legislator to threaten a sitting FTC chairman, concluding that “maybe we should all wait and see the FTC’s evidence and the merits of its case — if there is one — before threatening to limit the agency’s authority.”

It is clear to any objective observer that there is a case in the works and that the FTC, which on background leaked that four of five commissioners are already on board, sent a trial balloon out through the press last week. Paczkowski is naive if he believes the timing of the stories last Friday was also not “fortuitous” or that the “merits” of the FTC’s case may not properly be a matter of policy and political debate. Having witnessed this same pas de deux for years in connection with United States v. Microsoft Corp., it’s just business as usual in Washington, DC. That may not make it right or courteous, but it does make it completely unexceptional.


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

[This series of posts dissects the threatened FTC antitrust case against Google and concludes that a monopolization prosecution by the federal government would be a very bad idea. We divide the topic into five parts, one policy and four legal. Check out Part I, Part II, Part III and Part IV.]

The FTC, a federal agency established in 1914, enjoys some unique powers. It can prosecute some claims before an Administrative Law Judge instead of the courts. Additionally, Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45) allows the agency to challenge “unfair methods of competition.” Use of Section 5, expanded to include “unfair or deceptive practices” in 1938, has received a rather checkered reaction from the federal judiciary.

There have been hints by the FTC that it may rely on Section 5 as the basis for a potential case against Google. This strategy could have serious repercussions because the FTC’s use of unfair competition as a surrogate for what the antitrust laws do not or cannot reach would be unbounded from the rigorous Sherman Act standards of unlawful monopolization. The FTC has never won a pure Section 5 lawsuit before.

5.   A “Pure” Section 5 Case Would Almost Certainly Lose, And Should

There is one point of law on which everyone agrees. As the Supreme Court held, Section 5 can reach business conduct that is not, of itself, violative of the antitrust laws. But exactly how far the statute extends beyond the Sherman Act is unclear; in the FTC’s 2008 public workshop on Section 5 As A Competition Statute there was much debate on that issue. Here’s how the FTC described the problem:

The precise reach of Section 5 and its relationship to other antitrust statutes has long been a matter of debate. The Supreme Court observed in Indiana Federation of Dentists that the “standard of ‘unfairness’ under the FTC Act is, by necessity, an elusive one, encompassing not only practices that violate the Sherman Act and the other antitrust laws but also practices that the Commission determines are against public policy for other reasons.” In the early 1980s, however, lower courts were critical of efforts by the FTC to enforce a reading of Section 5 that captured conduct falling outside the Sherman Act. In striking down the FTC’s orders, the Second Circuit in its “Ethyl” decision expressed concern that the Commission’s theory of liability failed “to discriminate between normally acceptable business behavior and conduct that is unreasonable or unacceptable.”

The vast majority of non-merger FTC cases enforce the Sherman Act. However, beginning in the early 1990s the Commission reached a number of consent agreements involving invitations to collude, practices that facilitate collusion or collusion-like results in the absence of an agreement, and misconduct relating to standard setting. Because the complaints in these cases did not allege all the elements of a Sherman Act violation, the Commission’s theory of liability rested on a broader reach of Section 5.  As consent decrees, none of these cases was reviewed, let alone endorsed, by the courts.

And that’s the rub. Take “invitations to collude” for instance. Under Section 1 of the Sherman Act, an agreement among competitors, whether express or tacit, is the predicate to illegality. This has been interpreted to mean attempts at price-fixing are not unlawful unless the other company says “yes.” Famously, the Justice Department initially lost, but then won on appeal, a 1982 challenge to American Airlines’ overt attempt at fixing airfare rates using an antitrust theory of attempted joint monopolization, fashioned to end-run the requirement of a horizontal agreement. That case presented unique market circumstances (American and Braniff sharing dominance of Dallas “hub” flights) and unequivocally anticompetitive behavior that lacked any efficiency or competitive justification. Unfair competitionMost antitrust scholars and practitioners thus generally agree that an invitation to fix prices is something the FTC should, as it has in the past, prosecute pursuant to Section 5, because the underlying conduct itself has no economic legitimacy other than to override marketplace competition.

Hence the problem where Google is concerned. First, there is a recognized basis under Section 2 for attacking unilateral attempts to monopolize a relevant market. Absent the necessary dangerous probability of success, something woefully lacking here, an unfair competition case premised on conduct by a dominant firm that falls short of attempted monopolization is very likely to receive the same hostile judicial reaction the Commission acknowledged in 2008. Second, as private unfair competition cases (which may only be brought under state law, not Section 5) have explained, the absence of legitimate business justification can support an inference of anticompetitive behavior. Yet, in organizing and structuring its organic search results, no one disputes that Google has a real business justification to deliver better results to users and thus more eyeballs to advertisers: in other words to make money. Without the predatory sacrifice of short-run profits — i.e., with normal, profit-maximizing behavior — there is real economic legitimacy to the conduct forming the basis for a case against Google.

Continue reading Why An FTC Case Against Google Is A Really Bad Idea (Part V)

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

[This series of posts dissects the threatened FTC antitrust case against Google and concludes that a monopolization prosecution by the federal government would be a very bad idea. We divide the topic into five parts, one policy and four legal. Check out Part I, Part II and Part III.]

To make out a monopolization case, any plaintiff, FTC or otherwise, must not only show monopoly power in a relevant market, but also that anticompetitive practices led to (obtained) or protected (maintained) that power. Antitrust lawyers dub this the “conduct” element of Section 2. It’s what differentiates lawful monopolies, earned by innovation and business skill, from unlawful acts of monopolization.

Exclusionary or anticompetitive conduct — the terms are the same — is something other than competition on the merits. A colloquial definition which basically matches the judicial one is that anticompetitive conduct is business behavior that defeats competing firms on a basis other than efficiency. Likewise, conduct that sacrifices short-run profits in order to “recoup” those relative losses with higher future prices is not rational business behavior and is thus regarded by the law as presumptively predatory, the most egregious form of anticompetitive behavior.

4.   Google Has Not Engaged In Exclusionary Practices

Try as they might, the proponents of an FTC case against Google have not made a credible showing anything Google has done meets these accepted tests for exclusionary conduct. The fallacy of their critique is summed up with a Web ad running now asking whether we can “trust” Google. Neither trust nor fairness have anything to do with the antitrust laws. Monopolization is not unfair competition, it is illegal competition.

Unfairness represents a qualitative judgment that has nothing to do with current antitrust law. As the modern Supreme Court has written:

Even an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws; those laws do not create a federal law of unfair competition or “purport to afford remedies for all torts committed by or against persons engaged in interstate commerce”…. The success of any predatory scheme depends on maintaining monopoly power for long enough both to recoup the predator’s losses and to harvest some additional gain.

In sum, marketplace competition is not boxing and there are no Marquess of Queensberry Rules governing how firms must fight “fairly”.  Anything goes in our market system so long as it pits product against product and is not illegal — in other words, so long as the challenged practices do not use the power of a monopoly position to drive out equally-efficient competitors.

Continue reading Why An FTC Case Against Google Is A Really Bad Idea (Part IV)

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

[This series of posts dissects the threatened FTC antitrust case against Google and concludes that a monopolization prosecution by the federal government would be a very bad idea. We divide the topic into five parts, one policy and four legal. Check out Part I and Part II.]

Antitrust law is characterized by rigorous, fact-intensive analysis, so much so that the prevailing jurisprudence holds that market definition (explored in Part II) generally should not be resolved on the “pleadings” alone, in other words without factual discovery. Nothing typifies the demanding analytical framework of antitrust more than monopoly power, part of the first element of a Section 2 monopolization case — possession of monopoly power in the relevant market. With respect to monopoly power, the potential case of FTC v. Google, Inc. will likely run into some especially significant barriers, no pun intended.

3.   Google Has No Monopoly Power, Even In Internet Search/Advertising

There’s precious little room in a relatively brief blog series to expound on all the various elements that factor into a judicial finding of monopoly power. The basic principle is that a high market share (typically 70% or more), coupled with barriers to entry, allows an inference of monopoly power to be drawn. But like nearly all legal inferences that’s merely a rebuttable, prima facie construct, as direct proof of the “power to control price or exclude competition” is the best evidence of monopoly. (It’s just hard to find.)

This author has written elsewhere about The Fantasy Google Monopoly, in which I noted that “the reality is that Google neither acts like nor is sheltered from competition like the monopolists of the past, something the company’s critics never claim because they just can’t.”

Like the Red Queen in Through the Looking Glass, Google succeeds only by running faster than its competitors — merely to stay in the same place. There’s nothing about Internet search that locks users into Google’s search engine or its many other products. Nor is new entry at all difficult. There are few, if any, scale economies in search and the acquisition of data in today’s digital environment is relatively cost free. Microsoft’s impressive growth of Bing in a mere two or so years shows that new competition in search can come at any time.

While that sums up, rather cogently I must say, the antitrust analysis, let’s go to the coaches’ tape and break it down.

No Bottleneck or “Gateway” Control. Ten years ago, when the FCC and FTC both believed America Online — which boasted a very high share of dial-up Internet access — had monopoly power, the (fleeting) conclusion rested on the fact that AOL controlled access by its customers to the Internet and thus competing Internet content. Much like the pre-divestiture AT&T Bell System, the concern was that AOL held a “bottleneck” through which consumers had to pass to reach rivals. Yet Google does not own the Internet’s tramsission lines or 4G spectrum, and is thus not a bottleneck. Regardless of search share or volume, the reality is that Google has no Red Queencontrol over the content its search users can access on the Internet. Web search is one of many ways, together with links, URLs, browser bookmarks, directories, QR codes, email marketing and uncountable others, for Internet sites to drive traffic and hits. Google is not a gateway so much as it is a highly and quickly searchable index of the Web. When there’s a host of other ways to find a page, the index itself is just a convenience, as much for bound books as for Web sites.

No Power Over Price. Whether search ad rates are the price of search or alternatively the relevant antitrust market itself, they fail on the central monopoly power criterion of control over price. As micro-economics teaches, a monopolist can increase prices above marginal costs, resulting in a “deadweight” loss to consumer welfare. Yet Google’s search ads are priced via an auction system — the highest bidder for an advertising keyword buys the ads (as many or as few as it wants) at the winning bid price. Certainly, there are ways to game any auction to favor some bidders over others or to exert indirect influence on the wining auction price. But so far as we can tell, such a theory of pricing power is not involved in the FTC’s threatened monopolization claim against Google. And if it were, that case would be even harder to prove than this overview analysis concludes.

No Network Effects. Nothing symbolizes modern antitrust so much as an emphasis on so-called “network effects.” Network effects exist when the value of a product increases in proportion to the number of other users of the product, hence a name which originated in telephone antitrust cases, where subscriber demand for service rose in proportion to the number of interconnected telephone companies (and thus other telephone subscribers) the end user could call. Network effects are in part a barrier to entry, by increasing requirements for scale economies by new firms, and a source of power to exclude rivals, by allowing the dominant network effects firm to deny competitors critical mass. Yet there is no, or at least precious little, evidence that with respect to search users and search advertisers, there are any network effects at all involved with Google. That you may conduct Web searches using Google’s engine makes it no more likely that me or any other Web users will select Google for search. That Sears may buy some AdWords keywords for search advertising makes it only slightly if at all more likely (and a consequence of retail competition, not Google) that Macy’s will purchase search ads via a Google auction.

No Entry Barriers. A monopoly in a market in which entry by new competitors is unlimited cannot be sustained for long. Thus, as noted antitrust law couples market share with barriers to entry in assessing monopoly power. It is difficult if not impossible to make a serious case that there are substantial entry barriers in Internet search or advertising. Web page indexing — the key input to search — is a product of raw computing horsepower and storage capacity. Both are commodities with steadily falling prices, per Moore’s law, in today’s Internet economy. That Facebook is planing to launch its own search product says it all: entry into search only requires investment capital, which the antitrust laws rightfully do not regard as an entry barrier. As the UK’s Daily Mail wrote, “Facebook is looking to tackle Google by making search a much more prominent part of it social network.”  The Red Queen strikes again.

“Data” Is Not a Search Entry Barrier. Proponents of a Google monopolization prosecution have recently refined their analysis, suggesting that the wealth of demographic data assembled by Google from users’ Web searches is a barrier to entry. That’s a smokescreen. Data about consumer preferences and behavior — aggregated and (much to the annoyance of privacy advocates) individualized — is also a commodity in our modern economy. Whether credit and commercial transaction data via the “big three” credit reporting agencies, product preference and consumer satisfaction data from  J.C. Power and the like, or the emerging “big data” marketplace, data can easily be bought, in bulk, for cheap. (The U.S. legal presumption that a company owns, and thus can sell, data about its customers plays into this point, but is not relevant for antitrust purposes.) The corollary to this argument is that economies of scale pose a barrier to entry, an even more subtle concept which, unlike network effects, has not been recognized by mainstream antitrust courts as a dispositive Section 2 factor — every large-scale business enjoys scale economies, after all. Suffice it to say, the FTC would have to make new antitrust law if it relies on this novel theory, which seems to contradict the factual realities of the ubiquitous availability of inexpensive data and data storage on consumer preference and behavior today.

To sum up, claims that Google enjoys monopoly power in Internet search or search advertising fail in the face of the recognized criteria for that crucial Section 2 monopolization factor. Without monopoly power, unilateral (as opposed to concerted among competitors) action by a single firm is of no antitrust significance. Indeed, an implicit — and sometimes articulated — presumption in the arguments in favor of an FTC monopolization case is that Internet search is a “natural monopoly,” one dictated and preordained by the economic structure of the market. As an antitrust lawyer who while with the DOJ in the 1980s railed against the proposition that cable TV represented a natural monopoly — something satellite television and IPTV have at long last conclusively disproven — this author abhors that construct.

Even if they are correct, the parties pressing for government antitrust action against Google cannot claim the courts have ever recognized the concept of natural monopoly as a surrogate for the United States v. Grinnell Corp. requisite demonstration of actual monopoly power, willfully obtained or sheltered by exclusionary practices. We’ll turn to that question, whether Google has engaged in conduct antitrust law deems anticompetitive, next.

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

Disco Project


Should the FTC Sue Google Over Search?


Last week I participated in a “parliamentary” debate, sponsored by TechFreedom, on the Federal Trade Commission’s anticipated lawsuit against Google for monopolization. The dialog is interesting, if I say so myself!!


Should the FTC Sue Google Over Search? | YouTube.


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

[This series of posts dissects the threatened FTC antitrust case against Google and concludes that a monopolization prosecution by the federal government would be a very bad idea. We divide the topic into five parts, one policy and four legal. Check out Part I.]

Section 2 of the 1890 Sherman Act (15 U.S.C. § 2) makes “monopolization” unlawful. As every antitrust practitioner can recite by heart, this means that being a monopoly is not illegal, rather it is illegal to obtain or maintain monopoly power in a “relevant market” by exclusionary or anticompetitive means.

The most famous articulation of this basic principle comes from the case of United States v. Grinnell Corp. (“Grinnell“), 384 U.S. 563 (1966), in which the U.S. Supreme Court explained that a monopoly position reached as a result of a “superior product, business acumen or historic accident” is different from one achieved by the “willful acquisition or maintenance of that power.” That slightly schizophrenic approach reflects the basic conflict within antitrust itself. The law encourages, and permits, firms with market power (typically a synonym for monopoly power, although economists disagree at the margins) to compete aggressively on the merits, and even to eliminate competitors. Yet to tame the results of unbridled capitalism, Section 2 constrains companies from creating or defending monopoly power with anticompetitive practices.

2.   Internet Search and Search Advertising are Not Relevant Antitrust Markets

The starting point for every antitrust case is market definition — outlining the contours of a market, in which the defendant participates, in order to assess whether the firm possesses monopoly power in that market. In defining the relevant antitrust market, courts determine which products compete with the defendant’s product and thus limit or prevent the exercise of market power. Typically, this process involves examining substitutability of products (both from a demand and a supply perspective) to find whether consumers and rivals could switch to another source (or sources) if the defendant firm were to raise price or restrict output. For example, in the 1950s chemical innovator duPont was charged with monopolizing the cellophane market, a product it invented, but the courts ruled that the relevant antitrust market could not be so narrowly limited because cellophane was interchangeable with other food wrapping materials. The “great sensitivity of customers in the flexible packaging markets to price or quality changes” prevented duPont from exerting monopoly control over price.

The more broadly the relevant antitrust market is defined, the less likely it is the defendant has the ability to exercise monopoly power in that market. As a corollary, if the targeted firm does not have monopoly power in the relevant market, there generally cannot be Section 2 liability. Many recent antitrust cases, including the FTC’s controversial attempt to block Whole Foods’ acquisition of Wild Oats and the Justice Department’s challenge to the Oracle-PeopleSoft merger, have turned on market definition.

With that background, let’s look at the purported “Internet search” market. That’s obviously the core proposition in any attack on Google for unlawful monopolization, because the necessary premise is that Google’s dominant share — estimated at from 65 to 80% — of Web searches is the foundation of its alleged monopoly. But here the antitrust analysis begins to break down. Internet search is a free product in which the consumers (Internet users) are charged nothing, with the service supported by advertising revenues. Since monopoly power is the “power to control price or exclude competition,” one must necessarily ask whether Google’s high “market share” reflects any market power at all. More importantly, search users are just like broadcast television viewers; they are an input into a different product — search advertising — in which consumers themselves are effectively sold by virtue of advertising rates based largely on impressions and click-throughs. Just as NBC, ABC, CBS and Fox compete for television eyeballs in order to sell more advertising (hence profiting) to sponsors, so too do Internet search engines monetize the service by selling eyeballs to advertisers.

Google’s share of search by itself is therefore almost meaningless. 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. (It should go without saying that even the government does not contend that Google displaced Yahoo!, Alta Vista, Ask.com and the many former search giants that dominated the Internet in the 1990s with anything other than better, more useful, search results, a consequence of better algorithms — the epitome of Grinnell’s “superior product.”) So the relevant market analysis must therefore focus on the area where Google in fact competes with other search engine providers, namely in the sale of search advertising. We all know that the links displayed alongside so-called “organic” search results are paid, listed conspicuously as “sponsored” results. Without search advertising, in today’s Internet economy there would be no free search engine services.

Continue reading Why An FTC Case Against Google Is A Really Bad Idea (Part II)

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.

FTCThis 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.

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