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.

That is the final point. No one can say with any seriousness that Google has captured a large share of Web search, and search advertising, with anything other than smarter software writers and more refined product developers. It simply built a better mousetrap. The only thing that keeps Internet users returning to Google — which unlike AT&T or Microsoft has no technological means to lock consumers into its site or services — is running faster than its competitors. And this is plainly true despite the new assertions that Google obtained a search advertising monopoly through exclusive dealing arrangements. (Facebook again shows that Internet advertising is hardly a Google-only domain, having already outpaced its far older rival in the fastest-growing segment of mobile ad revenues.)

On closing the FTC’s investigation in January, soon-departing chairman Jon Leibowitz said that while “every” antitrust enforcer dreams of bringing “the big case,” it is “more important to faithfully execute the law.” He should be applauded for that prudence and humility. The only missed opportunity here was that of Google’s rivals, who wanted to have the government cripple a competitor they have been unable to match in the marketplace. It is sad that Bloomberg’s editors seem to have had a sip or two of that Kool Aid.

Now the baton is passed to the EU’s Joaquin Almunia, who as we speak is negotiating with Google over regulator-demanded revisions to its search practices. One would hope and expect he takes the same dispassionate approach. As Tim Worstall commented in Forbes:

Beating up on your competitors is not illegal. Nor is being the market leader. Nor, actually, is being a monopoly. The only thing which is illegal is the abuse of monopoly power. And that’s something that has to be proven, not something that can just be assumed. So Foundem’s results appear low down in Google? Well, maybe that’s just the way Google’s algorithm works? And perhaps we consumers like the way Google’s algorithm works therefore it has market dominance? There’s nothing wrong or illegal in that outcome.

And I do think that it’s this that is making Almunia hesitant to actually sue Google. Because I reckon he’s not sure that he would actually win such a suit. For we do have this big question. Is Google actually abusing its situation or does it have this situation just because consumers like the way it runs its search engine? If it’s the latter then there’s nothing to fine anyone for.

The EU’s challenge is that reality does not support the amorphous and transparently biased charges leveled against Google by rivals who have been unable to top it in the marketplace. Even in a system where the competition regulator has power to fine firms unilaterally, without seeking court authority or approval first, there’s really nothing for the EU to do here. Mr. Almunia should bow out gracefully like the FTC’s Leibowitz. The Europeans managed not to get embroiled in Vietnam in the 1960s. They should avoid at all costs creating a Vietnam of Internet regulation by dictating search “fairness.”

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