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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.”
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.  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
Thirteen months after the U.S. Federal Trade Commission settled its antitrust investigation of Google Inc. by flatly declining to regulate the company’s search practices, the European Union is poised to do just that. This development highlights a serious rift between the two most influential competition authorities worldwide — and their very different value systems.
It has been true for years that on important Internet policy issues such as privacy, defamation, censorship and government surveillance, the 30-member EU has adopted principles far more intrusive for businesses, and likewise more protective of consumers, than in the U.S. Similarly, ever since a proposed General Electric-Honeywell merger was scuttled by the European Commission’s competition directorate in 2000, there have been a few highly visible cases in which the EU’s view of antitrust as a basis for protection of smaller entities in the marketplace has produced sharply different results.
So it is hardly surprising that EU Competition Commissioner Joaquin Almunia announced recently that several expanded concessions offered by Google to resolve his concerns about the fairness of the company’s search practices — which would fundamentally alter search by requiring Google to display links to rival search competitors on results pages served to its own search users — had finally borne fruit. The most basic competition issue asserted by the European authorities was that Google gives preference to its own services, like travel search, by placing those “specialised” (in European spelling) results above “organic” or natural search results. Google proposes to label these specialized results as paid placements and to add prominent links to rivals alongside. Despite vocal complaints by Google’s so-called vertical competitors that these substantial changes in search display — putting Expedia travel link results, for instance, on the same level of visibility as Google’s own sponsored links — still do not meet their needs, the fact that the EU is using its power to force serious search engine revisions on Google represents a watershed moment illustrating how far apart the two systems were and can still be at times.
There are three principal ways in which the inconsistent U.S. and EU Google settlements epitomize this continuing war of the worlds over antitrust enforcement:
- Is Google a Bottleneck “Gateway”? Almunia’s investigation was overtly premised on the concept that Google’s 90 percent share of Web searches in Europe (compared to some 70 percent in the U.S.), equals monopoly power as a gateway essential to success for Internet businesses. American jurisprudence, in contrast, has largely abandoned the bottleneck classification and its corollary, the “essential facilities” doctrine. Moreover, U.S. competition enforcers and courts distinguish between consumer preferences (which are changeable) and a dominant’s firm’s economic power (which can persist for long only when sheltered by entry barriers) in a way that contradicts the EU premise. As one federal court explained in January, the “ability to act as a ‘gatekeeper’ distinguishes broadband providers from other participants in the Internet marketplace — including prominent and potentially powerful edge providers such as Google and Apple — who have no similar control over access to the Internet for their subscribers and for anyone wishing to reach those subscribers.”
- Is Consumer Deception an Antitrust Issue? The EU has been focused, in large part, on the fact that when redesigning its search result displays, Google may have confused Internet users by not specifically indicating that some results are now based not on generic search algorithms, but instead a decision to integrate links to Google’s own services on results pages. Almunia believes that the potential for misleading consumers justifies a competition remedy, saying that Google must “signal what are the relevant options, alternative options, in the way they present the results.” In contrast, American antitrust law is clear that fraud, deceptive advertising and other commercial bad acts alone are not of competitive concern. Consumer protection remains important in the U.S., but our legal principles separate regulation of consumer issues from the competition-preservation function of antitrust policy.
- Should Antitrust Protect Traffic to Google’s Competitors? By far the biggest difference in the EU approach to competition enforcement is the historical European preference for domestic firms in established industries. In France, for instance, Internet publishers pay a tax that subsidizes newspapers and printed mapmakers, something anathema to the American idea of a free market. Where Google is concerned, the question becomes whether, as an important source of Web traffic for competing specialized search services, its practices should be regulated in order to guarantee hits to rival sites. The EU has been somewhat schizophrenic, at first condemning what it termed “diversion of traffic” to Google itself and characterizing its mission as to “guarantee that search results have the highest possible quality,” then later stressing that its “aim is not to artificially send traffic to sites that compete with Google.” The bottom line, however, is that by seeking to stop Google from “diverting” Internet search users from the complaining sites, the EU is in part attempting to dictate the results of competition, something American antitrust leaves to the marketplace.
Yes, these differences can sometimes be overstated. Both the EU and American antitrust agencies mutually believe that competitive markets produce the best outcomes and that, absent abuse by firms with monopoly power, the government should not try to pick winners and losers. The contrasting values typically appear only in hard cases, where the facts are ambiguous or the competitive consequences difficult to predict. Different enforcement decisions in Europe and the U.S. are uncommon, but when they do occur, are important as more than isolated instances.
There is a ray of light in all of this, one conclusion on which both Almunia and Jon Leibowitz, the former FTC Chairman who closed the U.S. government’s investigation of Google last year, agree wholeheartedly. Neither the EU nor the FTC accepts the premise of complaining search competitors that antitrust law embraces a concept they term “search neutrality,” namely that search providers must treat all queries and results under the same objective standard. The FTC said it had neither the desire nor institutional expertise to “regulate the intricacies of Google’s search engine algorithm.” The EU likewise concluded that its Google remedies should address “the way they present their own services” rather than “discussing the algorithm” used for Internet search.
This is one way, unlike the Martian invaders in the H.G. Wells novel, that the shared histories of America and Europe give the developed world a sustainable advantage in economic performance. On both the continent and in the New World, new business ideas succeed if they are better designed to meet the needs of consumers. With rare exceptions, we do not intervene in the marketplace to achieve government-desired competition results or to exclude some firms for political or social reasons. That is particularly key to the different Google search remedy approaches. Since everyone admits Google got to its present position by building a better search engine, the consequences of allowing competition policy to morph into an artificial tool of technology regulation by way of search neutrality are enforcement quicksand for the government, regardless of which “side of the pond” it sits.
Tech business news these days is dominated by headlines about the trial of United States v. Apple, Inc., where the U.S. Department of Justice (DOJ) is charging Cupertino with masterminding a massive conspiracy among publishers to increase prices for e-books. Apple’s defense lawyers and CEO Tim Cook call the allegations “bizarre.” What is really bizarre, though, is the plethora of private treble-damages lawsuits seeking to hold Apple liable under the antitrust laws for its vertical integration strategy with iTunes, iPhone and the App Store.
Just a bit more than a decade ago, Apple Computer (having since changed its corporate name) was decidedly stuck in the backwater of the PC industry. Its introduction of the USB-only iMac in 1998 failed to change the marketplace dynamics, where Apple’s closed Macintosh design and refusal to license its Mac OS to other manufacturers was viewed as the source of diminishing relevance. Apple was such a non-entity that its presence was flatly rejected by the federal courts as part of the relevant market in the Microsoft monopolization cases. Pundits predicted that like the fabled Betamax, Apple’s proprietary strategy would lead to its ultimate competitive demise.
But then along came the “iLife” software suite and the first generation iPod. What differentiated these products was not that Apple invented the technologies — after all, MP3s had been around for years and digital cameras as well — but rather that they all worked well together. Since then, the same business model has been applied to iPads and iPhones: native sync integrated with the Mac OS and Apple’s iCloud service, plus software content, whether media or apps, available easily through Apple’s online stores, with the company taking a 30% cut of retail prices for third-party content.
 When the iPod and iPhone proved to be winners, big ones, Apple’s financial fortunes turned around dramatically. iTunes now is the largest digital music retailer, accounting for some 60% of all downloads, and the various iPhones are the most popular smartphones globally. Apple’s annual revenues soared from $5 billion in 2001 to $108 billion last year. But what short memories we have. The plaintiffs’ antitrust bar accuses Apple of unlawfully monopolizing these markets and has filed a series of sometimes confusing consumer class actions challenging Apple’s vertical integration and closed product systems. (Nine separate lawsuits have been unified into one action in California focusing on the tight grip Apple exerts on the iPhone’s services and applications; other individual and class suits are pending elsewhere.) The EU reportedly has investigated Apple’s App Store restrictions, and more recently its deals with European wireless carriers, to determine whether the company “abused” a “dominant position.”
Continue reading Five Reasons Apple’s Private Antitrust Risks Are Minimal
In the ongoing saga of governmental antitrust investigations of Google, recent weeks have witnessed a new level of rhetoric and disingenuous use of the regulatory process to handicap, rather than promote, competition and innovation. The current case in point relates once again to search neutrality, but this time complaining rivals remarkably object to getting exactly what they’ve asked for over many years.
Just a little less than four months after the U.S. Federal Trade Commission (FTC) closed its monopolization investigation into alleged “search bias” by Google, the European Commission (EC) — the pan-European competition authority for the 30-nation European Economic Area (EEA) — released a set of proposed commitments by Google designed to resolve the competition “concerns” preliminarily outlined by EC competition chief Joaquin Almunia. That set off a firestorm of criticism from so-called “vertical” competitors (e.g., travel booking or consumer shopping sites), led by UK firm Foundem, a plaintiff against Google in its own antitrust lawsuit in England.
 The first and most basic competition concern asserted by the EC was that Google gives preference to its own services, like travel search, by placing those “specialised” (in European spelling) search results above “organic” or “natural” search results. Google proposes to label these specialized results as paid placements and to add equally prominent links to vertical rivals alongside. Under the commitments Google would auction links for commercial services to qualifying rivals using a lengthy set of rules for transparent and equal treatment. It is precisely the paid link insertion remedy that Google critic and long-time legal adversary Gary Reback called for at an April 2013 FairSearch.org event in Washington, DC.
Foundem opposes that solution. But making heads or tails of Foundem’s rather incoherent response to Google’s EC settlement proposal is difficult. In part that’s because the response is a hodge-podge of discredited claims, incorrect assumptions and fuzzy reasoning. In part it’s because Foundem’s use of over-the-top language and Chicken Little predictions makes it impossible to decipher facts and reality from mere opinions and sour grapes. For instance:
If the Commission were to adopt Google’s proposals in anything like their present form, it would be unwittingly playing into Google’s hands — aiding and abetting Google in its long running strategy to transition commercial searches away from its natural search results and into its paid advertisements. Under these proposals, Google would not only continue to profit from the traffic it hijacks from rivals, but it would now also profit from the traffic it sends to rivals…. Any vertical search companies that survive the transition to such a radically altered and unfavourable marketplace would be left eking out a living on the slimmest of margins from the scraps left over from the traffic, and now revenues, that Google would be diverting to its own services.
If one separates the adjectives from Foundem’s substantive criticisms, there are four principal contentions it makes.
1. “Universal Search” labeling does not fix organic search manipulation. Foundem says the EC proposal addresses only the “preference” of Google’s own links in a prominent area of its redesigned Universal Search results pages, not the use of search algorithms allegedly to demote links to vertical rivals. “Instead, with a flourish of misdirection, they focus exclusively on its [sic] Universal Search inserts.” Because the commitments “ignore Google’s natural search results, they are misdirected in their application and fall far short of their target.”
2. Paid Rival Links would benefit Google financially. Foundem complains that Google’s proposal to insert paid links to vertical rivals for commercial searches will allow it to “monetise” (again in European spelling) rivals’ Web traffic. The proposal, Foundem claims, would allow Google to become “the main beneficiary of its rivals’ vertical search services as well as its own,” which would “extend Google’s existing monopoly powers and could eventually leave it in sole possession of the efficient, low-overhead, business model that has characterised and fuelled the internet revolution.”
3. Google should be prohibited from applying site quality algorithms. Foundem asserts that the use of website quality metrics designed to weed out malware, spam and search-manipulated sites that lack content is inherently anticompetitive, but that Google’s corresponding commitment to include all vertical rivals absent “some clearly defined Harmful Practices (such as illegal content and consumer deception)” or with “prior individual approval from the [European] Commission” is inadequate.
4. The Google commitments do not extend to non-search services. Foundem complains that ”vertical search was simply the natural first target for Google. Google can (and will, if it isn’t stopped) extend the same abusive practices into other sectors, including e-commerce, auctions, and social networks.” It opposes the proposed commitments because they do not cover these other Internet-based services.
Each of these criticisms is misplaced, but none more so than the claim that the Google proposal should be rejected because it somehow misses the big problem in search. The EC’s principal competition concern was that Google gave undue preference to its own vertical services with the invention of Universal Search. Therefore, inserting links to rivals in that same “preferential,” prominently outlined space above organic search results provides obvious parity between Google’s shopping service, for instance, and Foundem’s consumer electronics listings. The second concern was that Universal Search deceives users into thinking results are something other than promotion of Google’s own commercial services because the lack of a clear distinction between a promoted link and normal search results “left some consumers less able to make an informed choice.” Hence, as I’ve addressed in detail before, a label remedy is precisely the right solution to what is, at heart, a contention of misleading trade practices.
The FTC notably concluded that Google’s switch to Universal Search was a bona fide search innovation that benefited consumers. Mr. Almunia has made essentially the same concession. To the extent Foundem believes the practice is inherently anticompetitive and should be banned, as it appears, its critique is inapposite to an evaluation of the effectiveness of Google’s proposed EC commitments. Even in Europe, competition authorities do not outlaw products developed by firms with market power, and EC competition law, like that in the US, is strongly disinclined to sanction an antitrust case based on allegations of “anticompetitive product design.”
The reason for this restraint is simple: competition officials and courts are not engineers or businessmen and thus have no objective basis on which to assess whether product designs are “good” or not. That is a decision left to the marketplace, with consumers literally voting with their clicks and wallets. Indeed, such reserve is essential in technology markets, where product innovation occurs at the speed of light in and in which user interface and consumer experience are so subtle and competitively important. It is the reason former FTC chairman Jon Leibowitz — on behalf of a unanimous, politically diverse five-commissioner agency — rejected calls that antitrust should be used to “regulate the intricacies of Google’s search algorithms.” Ditto Mr. Almunia, who likewise told the Financial Times back in January that his concern is “the way they present their own services” and that he was “not discussing the algorithm” used for Internet search.
Foundem’s other critiques are nonsensical. Including Paid Rival Links alongside Google’s own universal shopping and commercial links (themselves paid) requires someone to set a fair price. That is something bureaucrats and antitrust agencies again do not do well, if at all, but an auction does perfectly. There is plainly no room to include links for every commercial search site on every Google search results page, so an auction system allocates that scarce space to businesses based on their own financial calculus of the benefit of preferential placement. That’s not monetizing rivals’ traffic and does not require Foundem or any other Google competitor to participate. If these Paid Rival Links are as worthless as Foundem implies, then its prediction of Google using them as a way to usurp competitors’ revenues is especially silly, because the auction prices will be negligible. Indeed, to suggest that paid placement is for some reason invalid as a competitive search service represents the height of hubris for Foundem, whose business model is to sell all search results. If paid placement is OK for Foundem it is equally permissible for any other search firm, small or big or anywhere in between.
It’s hard to take seriously a company which contends that site quality algorithms are invalid, when we all know the entire SEO, pornography and content piracy industries try their damnedest to game search results and avoid content filters established by responsible search engines like Google. Foundem never explains why the objective criteria Google has committed to apply do not resolve its allegation that rival links were targeted for demotion unfairly. While I personally disagree with the need or justification for any such remedy, the fact is that Google’s proposed settlement directly addresses organic link results by precluding exactly the type of targeted “link demotion” that FairSearch.org, Mr. Reback and Foundem itself have long alleged Google engages in as a matter of ordinary course.
Lastly, consider for a brief moment Foundem’s odd criticism that Google has not offered proposals for “other sectors” like auctions and social networks. Foundem itself does not operate in those markets, which are obviously not Internet search. With the rather spectacular failure to date of Google+ to challenge Facebook and Twitter, or any Google service to take on eBay, no one has even claimed Google has any chance of monopolizing these very different markets. When and if there are problems of Google accumulating market power in new services against entrenched Web firms — an eventuality that is all but inconceivable today — antitrust authorities can intervene. To do so in a case about allegations of Web search dominance and abuse is unseemly by any standard, European or American.
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.
Just a couple of weeks ago I put together a brief synopsis of the now-closed Federal Trade Commission (FTC) investigation of Google, Inc. for alleged monopolization, titled Deconstructing the FTC’s Google Investigation. To make the article fit within the space constraints of the American Bar Association’s Monopoly Matters newsletter, though, a few thoughts had to be edited out. One that is particularly appropriate now is the cogent observation by former FTC Chairman Jon Leibowitz that rivals frequently operate under the “mistaken belief” that criticizing the agency “will influence the outcome in other jurisdictions.”
Last Wednesday’s PR event by the FairSearch.org coalition made that evident in spades. We’ve discussed before that use of competition law to handicap other firms, rather than removing barriers to market competition, is unabashed protectionism, which can (perhaps should) backfire. The FairSearch companies continue to insist, as the coalition’s U.S. lawyer summarized, that the FTC “did not take on the issue of search bias.” That’s hogwash. The Commission found no evidence of harm to competition and, more importantly, rejected the FairSearch call for “regulating the intricacies of Google’s search engine algorithm.” And yet like Chicken Little, these companies continue to claim the sky is falling.
Leave aside for a moment that the FairSearch media event featured four legal presenters, all of whom are supporters of its lobbying positions, instead of a “fair and balanced” debate. And forget for a moment that the European Union’s parallel investigation (wrapped in much of the secrecy typical of an EU approach to competition regulation) is some 42 months old, with a possible end just recently within sight. What is most remarkable about the denial exhibited at the FairSearch media event is its blatant internal inconsistency. Three examples of the group’s positions make this abundantly clear.
- “Deception” Warrants a Disclosure Remedy. Former Assistant Attorney General Tom Barnett testified in 2011, for a founding FairSearch member, that Google acted anticompetitively because its “display of search results is deceptive to users.” FairSearch’s European counsel said the same thing recently, namely that Google “uses deceptive conduct to lockout competition in mobile.” But as I’ve noted previously, deception of this sort raises consumer protection issues, not legitimate antitrust concerns. Remarkably, Gary Reback scoffed at the reported suggestion by the EU’s Joaquin Almunia that a labeling remedy for Google’s revamped universal search results is appropriate, saying it’s “like telling McDonald’s customers they should eat healthy…it will not make a difference.” To the contrary, if deception is the problem then full disclosure has always been the answer. Where consumers are free to choose other search engines, and are told explicitly that some search results point to Google’s own “vertical” sites, whether they opt not to act is something about which competition authorities should be indifferent. Antitrust, at least in the United States, is not a Mayor Bloomberg-type vehicle for social engineering.
- Price Regulation Is Not the Job of Competition Enforcers. Ironically, the newest FairSearch approach raises the even more subtle antitrust issue of whether Google can be required to sell sponsored link ads to vertical rivals like Kayak and Yelp.
 Known in competition parlance as a “unilateral refusal to deal,” the idea is that the remedy for Google’s preferential placement of its own services in organic search results should be a mandatory sale of ad space to purportedly “demoted” competitors. That’s hard to swallow under American antitrust doctrine, which makes unilateral refusal cases very difficult to win, described by the Supreme Court as the “outer limits” of the Sherman Act. More importantly, as Reback put it, the obligation would be to sell ad space on “reasonable and nondiscriminatory terms,” which in turn means that an enforcement agency or court would have to decide whether the ad rates charged by Google were “reasonable.” So while disclaiming an intention to create a federal search regulatory commission, the FairSearch companies are in fact doing just that. Even in price fixing cases, antitrust agencies and courts do not decide what a fair or reasonable price is, because they lack the ability to do so and because, after all, that’s the function of competition.
- Mobile Really Is Different. The FairSearch event also included a competition lawyer for Nokia (Ms. Jenni Lukander), who contended that Google acted irrationally by giving away its Android mobile operating system, claiming the OS is merely a “Trojan Horse to monetize mobile markets.” So what? Providing free or open source software while profiting from ancillary products or services is a valid business strategy, pioneered by Netscape nearly 20 years ago and exemplified by Java, MySQL and numerous “freemium” sites such as Dropbox, Evernote, etc., available today. (This complaint is even stranger given that Nokia open-sourced its own mobile operating system in 2010, presumably for rational business reasons.) The FairSearch panelists argue that mobile is different because Google is supposedly “dominant” in mobile search, citing a market share of some 97%. That is both factually wrong and immaterial. Mobile is indeed different because Web search is rapidly being replaced by voice-search and app-based queries, which make any Google advantage in desktop search engines irrelevant. When Yelp gets nearby 50% of its traffic from its own smartphone app, it is impossible to seriously maintain that Google’s search engine is “diverting traffic” in the mobile space from rivals. Moreover, what the newest FairSearch complaint in Europe contends is that Google’s control over the Android OS limits OEM freedom by requiring some Google app icons (like the Google Play app store) to be displayed. As Dan Rowinski observed in readwrite mobile, that’s incorrect — “all kinds of stupid,” in his words. See Amazon’s locked-down Kindle, which runs Android without a single Google icon or app, as just one example. Most significantly, none of these vertical restrictions, even if they have the effect Nokia suggests, has any impact at all on search or search advertising in the mobile market. It is a fair conclusion that by venturing into the mobile OS arena, FairSearch is not looking for search fairness as much as to handicap and distract a rival with the threat of government regulation.
Here is how the New York Times summarized the new Android complaint by FairSearch.
The complaint was filed by Fairsearch Europe, a group of Google’s competitors, including the mobile phone maker Nokia and the software titan Microsoft, and by other companies, like Oracle. It accuses Google of using the Android software “as a deceptive way to build advantages for key Google apps in 70 percent of the smartphones shipped today,” said Thomas Vinje, the lead lawyer for Fairsearch Europe, referring to Android’s share of the smartphone market.
Any believer in the merits of competitive market economies must object to such misuse of competition laws. They should also, I suggest, react the same way to the most recent indication from Mr. Almunia that the EU’s purpose in investigating Google is to “guarantee that search results have the highest possible quality.” Nothing distills the difference between the European and American approaches to competition law as much as that revealing admission. Product quality is a function of the marketplace, not the government. And if regulation of search quality is deemed a subject warranting governmental regulation (which this author hopes never occurs), the one principle on which every objective observer would agree is that a regulatory scheme should apply uniformly to all firms in the market. That is plainly not what FairSearch strives to achieve, and thus why its proposals should be rejected by enforcement authorities worldwide.
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.
This article was published by the ABA Antitrust Section’s Unilateral Conduct Committee in its Monopoly Matters journal for Spring 2013. (Reprinted with permission.)
The recently closed Federal Trade Commission (“FTC”) investigation of Google, Inc. for alleged monopolization[1] illustrates a truism of antitrust practice. The flexibility of antitrust law in adapting to new industries and modes of anticompetitive conduct is also a source of frustration, because the ex ante application of the domain’s broad principles to particular business practices is tricky to forecast without highly intensive, fact-specific analysis.
While a lot of ink was spilled following now-former Chairman Jon Leibowitz’s January 3, 2013 press conference, not much has attempted an analytical review of the merits. With the caveat that no outsider knows precisely what evidence the agency collected, this article tries to do just that. The lessons drawn are surprisingly unremarkable. Even in “new economy” industries, the tried-and-true elements of a monopolization claim remain crucial. Where unilateral conduct exhibits plausible efficiencies without serious evidence of competitive harm in a relevant market, it is impossible to make a viable case of monopoly maintenance under Section 2 of the Sherman Act (“Section 2”).
A. Market Definition
As every antitrust practitioner can recite, being a monopoly is not itself illegal, rather it is unlawful to obtain or maintain monopoly power by exclusionary or anticompetitive means in a relevant antitrust market. The existence of a putative “Internet search” market is thus a core proposition in any attack on Google for unlawful monopolization; the necessary premise is that Google’s high share — estimated to be anywhere between 65 to 80% — for Web searches is the foundation of an alleged monopoly.
Here the legal analysis begins to break down. Internet search is a free product for which 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, Google’s high “market share” may not in fact reflect any actual market power. More importantly, search users are like television viewers; they are an input into a different product, search advertising, in which consumers are effectively sold by virtue of advertising rates based largely on impressions and click-throughs. Just as NBC and ABC compete for television viewers in order to sell more advertising, so too do search engines monetize the service by selling Internet eyeballs to advertisers.[2]
Relevant market analysis must therefore focus on the area where Google in fact competes with other search engines, namely the sale of search advertising. There are two significant problems with a “search advertising” market. First, this market definition does nothing to advance the cause of complainants such as Yelp, Kayak and other so-called “vertical” competitors of Google’s non-search products, because they do not compete for search advertisers. Second, the relevant market cannot be so limited:
- Web search ads are good substitutes for display (e.g., banner) ads. Because advertisers pay for users who click through to their sites, both represent alternative ways to reach consumers. If Google raised prices for search ads,customers would switch more of their advertising dollars to display ads. And the Internet display ad segment is something in which Google has lagged well ll behind the leader, Facebook.
- Both search and display ads increasingly compete against mobile search ads. This rapidly growing segment is radically different, with searches designed to retrieve more targeted results and in which a near-majority of searches are performed within smartphone and tablet apps like OpenTable, FourSquare and others, bypassing traditional search engines.
- Advertising-supported Internet services increasingly compete with traditional media for revenues. Newspapers have lost huge swaths of advertising revenues — especially, though hardly just, classified ads to Craigslist, etc. — but are making money in digital advertising. Nearly 1/3 of the New York Times’ total revenue came from online ads as far back as 2010.[3]
Neither the Chairman’s press conference nor the FTC’s parallel opinion on standard-essential-patents reveal whether the Commission agreed search advertising is a relevant market. One point seems clear: whatever the FTC concluded in its 2007 Google-DoubleClick merger review,[4] there are precious little indicia today supporting either Internet search or search advertising as stand-alone product markets for Section 2 purposes. See, e.g., Peterson v. Google, Inc., 2007 U.S. DIST LEXIS 47920 (N.D. Cal. 2007) (no basis to distinguish search advertising from other Internet advertising in market definition). As the Commission cautioned in 2007, “accounting for the dynamic nature” of “the online advertising space … requires solid grounding in facts and the careful application of tested antitrust analysis.”[5]
B. Monopoly Power
This author has written elsewhere about The Fantasy Google Monopoly,[6] in which I observed 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.” The facts suggest that regardless of Google’s share in a properly defined market, Google does not enjoy market power.
No Bottleneck or “Gateway” Control. Ten years ago, when the FTC believed America Online had market power, the conclusion rested on the fact that a vertically integrated AOL controlled access to competing Internet content.[7] Much like the pre-divestiture Bell System, the concern was that AOL held a “bottleneck” through which consumers had to pass to reach rivals. Yet Google does not control the Internet’s physical network and is thus not a bottleneck. “Google, or any search engine, cannot be a gateway to the Internet.”[8]
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 criterion of control over price. Google’s search ads are priced via an auction system — the highest bidder for an advertising keyword buys at its winning bid price. Certainly, there are ways to game an auction to favor some bidders and exert indirect influence on price. But such a novel theory of auction pricing power was apparently not asserted in the FTC’s investigation of Google.
No Network Effects. Nothing symbolizes modern antitrust so much as an emphasis on “network effects.”[9] 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. There is little to suggest there are significant network effects in search or search advertising. That Sears may buy some search ad keywords, for example, makes it only slightly more likely (and a consequence of retail competition, not Google) that Macy’s will purchase search ads.
No Entry Barriers. A monopoly in a market in which entry is unlimited cannot be sustained for long. It is difficult to make a serious case that there are substantial entry barriers in Internet search. Web page indexing, the key input, is a product of computing horsepower and storage capacity. Both are commodities with steadily falling prices, per Moore’s law, in today’s economy. That Facebook has recently launched its own search product[10] says it all: entry into search only requires investment capital, which the antitrust laws rightfully do not regard as an entry barrier.
“Data” Is Not a Search Entry Barrier. Proponents of a Google prosecution argued that the demographic data assembled from Web searches is a barrier to entry. Yet data about consumer preferences and behavior is also a commodity. Whether credit and commercial transaction data via the “big three” reporting agencies, consumer satisfaction data from J.C. Power or the emerging “big data” marketplace, data can easily be bought, in bulk, for cheap.[11] The corollary suggestion that economies of scale pose an insurmountable barrier to search entry represents an even more subtle concept which, unlike network effects, has not been recognized as a dispositive Section 2 factor — every large-scale business enjoys scale economies, after all.
C. Exclusionary Practices
The proponents of an FTC case obviously did not make a credible showing that Google’s search practices meet the requisite tests for exclusionary conduct — competition on a basis other than efficiency or the predatory sacrifice of short-term profits.[12] The failure was an analytical one, summed up with a Web ad running now, asking whether consumers can “trust” Google. Unfairness is a qualitative judgment that has nothing to do with current antitrust law. As the 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.”[13]
Search “Fairness” Is Not An Antitrust Obligation. The firms pushing for a prosecution contended that Google’s algorithms artificially lowered search results for specialized vertical rivals. Their theory that Web search has an inherent standard of fairness, something once called “search neutrality,” is epitomized by the name of the coalition that lobbied the FTC: FairSearch.org.
Dividing this issue into two parts, first consider whether such practices have an adverse effect on competition. Even if travel booking sites, for instance, compete with Google in search, there is no evidence that so-called link demotion diminishes their Web traffic. Some of these are the same companies that forecast Google would force them out of business but now boast of successful IPOs. Moreover, driving traffic to a website can easily be duplicated through other low-cost means, from email campaigns to QR codes.[14]
Second, consider whether there is a practical way to ferret out from Google’s constant tweaking of its algorithms which changes “demoted” quasi-search rivals. Since nearly everyone admits Google got to its present position by building a better search engine, the trade secret and IP consequences of such a monopolization theory are enforcement quicksand.
Most importantly, the changes Google makes to its search algorithms are designed to offer consumers a superior product. As Leibowitz summarized, “Google’s primary reason for changing the look and feel of its search results to highlight its own products was to improve the user experience.” [15] Where unilateral conduct exhibits such plausible efficiencies without evidence of substantial competitive harm, the exclusionary conduct element of a Section 2 case is not present.
Deception Without Much More Is Not Exclusionary. Former AAG Tom Barnett said in 2011 that the search firm acted anticompetitively because “Google’s display of search results is deceptive to users.”[16] Hardly. Although the Microsoft decision broke new legal ground in assessing when networks effects matter under Section 2, it did not create a “deception” prong of monopolization.[17] Lying may violate truth-in-advertising and consumer protection statutes, such as Section 5 of the FTC Act, but does not constitute anticompetitive conduct for Sherman Act purposes.
Use of Monopoly Power For “Leverage” Is Not Unlawful. A final problem with an FTC antitrust case was that it represented the discarded notion of monopoly leveraging. Vertical rivals like TripAdvisor and Kayak in reality compete with Google’s complementary content (e.g., Zagat and profiles) and sales (e.g., Google Checkout and ITA travel booking software) products. In other words, the claim is that Google uses its purported power in the search market to gain a competitive advantage in a second, different market. Of course, monopoly leveraging has been overruled as a stand-alone Section 2 violation.[18] Only if the competitive impact in the second market amounts to an attempt to monopolize is this sort of behavior illegal. It is impossible to conceive of an FTC complaint that could have credibly asserted there exists a “dangerous probability” Google would monopolize airline bookings, travel reviews or any other Internet content.
E. Durability
Consumer allegiance in technology is fleeting. The dramatically changed market positions of Myspace, Yahoo!, AOL and other, former online behemoths are the result of disruptive business models fueled by sweeping changes in underlying technology. No firm, including Google, is immune to such inflection points. With the accelerating substitution of apps, voice-response and social search (e.g., Apple’s Siri and Facebook’s Graph Search) — bolstered by evidence that in 2012, Google’s search advertising rates fell significantly for the first time[19] — there is little to suggest that any market power Google may hold exhibits the durability necessary for proof of monopoly power.[20]
F. Remedy
Chairman Leibowitz noted that the complainants had asked to “regulate the intricacies of Google’s search engine algorithm.”[21] The evident implication is one of institutional competence. Just as the Microsoft court articulated a policy of avoiding extension of per se rules like tying to volatile technology markets,[22] the FTC was obviously worried that delving into the innards of Google’s “secret sauce” could do more bad than good.
There is ample basis for caution. Witness, for instance, the 1982 AT&T consent decree, which most knowledgeable observers conclude transformed the Antitrust Division from a litigation agency into a de facto telecommunications regulator. While the FTC is better-positioned institutionally to act as regulator, it nonetheless shares the same antitrust policy bias favoring what the late Judge Harold Greene famously called the “surer, cleaner” remedy of divestiture.[23]
It is true that in vertical mergers, the enforcement agencies have more recently fashioned consent decrees which impose behavioral conditions. Yet the deferential judicial oversight of merger settlements “leaves the issue of remedies as one where the antitrust agencies possess considerable discretion.”[24] That ambiguity has led former enforcement officials to bemoan the departure from a “law enforcement” antitrust model in favor of a regulatory one where “antitrust counselors find themselves focusing, not just on whether conduct contemplated by their clients is illegal,” but on what agencies are likely to seek in the nature of remedies.[25]
The late Judge Robert Bork and Prof. Greg Sidak have observed that “a mandate that Google provide its competitors access to the top Google search positions through antitrust injunction or consent decree would be virtually impossible to enforce.”[26] There are no neutral or objective criteria on which to assess the appropriate listing order of search results; by its very nature, Internet search is an effort to predict the information users are looking to obtain. “Rankings” of Web sites are based on a myriad of factors (reciprocal links, hits, metadata, etc.) that is the role of search engines to interpolate. To wade into the morass of regulating the operations of Google’s algorithms would place the FTC in the untenable position of deciding, as a legal matter, the business merits of nearly every change to the highly automated delivery of search results. As the Court emphasized in Trinko, antitrust remedies are inappropriate if they require courts “to act as central planners, identifying the proper price, quantity and other terms of dealing — a role for which they are ill suited.”[27] That is surely a recipe for subjectivity and ultimately disaster.
Conclusion
Unlike in the EU, a Federal Trade Commission decision not to institute enforcement action does not result in a formal opinion. That hinders exploration of the antitrust analysis utilized by the agency in closing its two-year monopolization investigation of Google. Deconstructing that analysis with informed inferences nonetheless reveals that the FTC faced a daunting task in seeking to hold Google accountable under Section 2. The decision to fold-up its tent represents an admirable instance of prosecutorial restraint by an agency that had been very publicly hounded by Google’s rivals.
* Glenn Manishin was counsel to MCI in the AT&T antitrust case and served as a principal lawyer for ProComp (AOL, Oracle, Sun, etc.) and several software trade associations in the Microsoft monopolization case. Manishin does not represent Google.
[1] See Google Press Conference, Opening Remarks of FTC Chairman Jon Leibowitz, Jan. 3, 2013, http://ht.ly/ j0vWQ (“Leibowitz Remarks”); In re Motorola Mobility LLC, a limited liability company, and Google Inc., a corporation, FTC File No. 121 0120 (Jan. 3, 2013), http://ht.ly/j0jcm.
[17] 253 F. 3d 34, 84 (D.C. Cir. 2001) (en banc). Microsoft was held liable under Section 2 for deceiving Java developers that programs written with Microsoft’s Java tools would be OS-indifferent. In reality, the Microsoft interface created Windows-only Java apps that would not run on any other platform, thus reinforcing the Windows desktop monopoly. No one argues that Google has tricked advertisers or search users into utilizing Google products when they thought they were creating a Google-free computing environment.
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
[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)
A few weeks ago, the head of competition for the European Union, Joaquin Almunia, reportedly instructed Google that the search giant must make “sweeping changes” to its business model by extending restrictions the Europeans are insisting upon for Web search into the mobile realm. (See EU Orders Google to Change Mobile Services | Reuters.)
Is he possibly for real? We all know mobile is growing by leaps and bounds, powering political revolutions, connecting the developing world to the new information economy, and disrupting legacy industries. That market dynamism should instead counsel for a restrained approach, delaying government intervention until at least some of the dust settles, because mobile is different. Here’s why — and how that matters.
1. Apps Rule Mobile, Not Web Search
With more than 300,000 mobile applications released in the last year alone, “apps are increasingly replacing browsers as the method of choice for connected consumers to find and use information.”  This striking user preference is neither difficult to discern nor hard to understand. One can see it walking on nearly any downtown street as teenagers query Foursquare and Facebook apps for friend check-ins, businessmen find lunch spots with OpenTable or Yelp, and 20-somethings search for trending hashtag topics inside Twitter’s app. In other words, in the mobile realm apps rule.
Wired’s editor-in-chief Chris Anderson in 2010, along with Square’s COO Keith Rabois in 2011, both predicted flatly that the Web is dying and mobile devices with dedicated apps are to blame. Apple’s Steve Jobs (watch his keynote) said it a bit more provocatively:
On a mobile device, search hasn’t happened. Search is not where it’s at. People aren’t searching on a mobile device like they do on the desktop. What is happening is they are spending all of their time in apps.
The numbers now prove that all three of these pundits were correct. As much as 50% of mobile search is happening in apps today. In March, a remarkably small 18.5% of all smartphone and tablet usage was in the browser; the rest was through apps. Nearly half of smartphone owners today shop using mobile apps. The international wireless association GSMA reported as far back as 2011 that second only to texting (and even more than actual calls), native apps comprise the highest level of smartphone activity. Yelp’s CEO Jeremy Stoppelman told Wall Street on August 2 that a majority of weekend searches now come in through its mobile app and that “by choosing the Yelp app people are bypassing search engines and consequently their engagement is higher.” Even venerable Craigslist is today battling mobile apps.
So mobile Web search is either dead or dying. That’s in part, as explained in the next bullet, because mobile users need, want and expect immediate answers, not a listing of URLs for browsing. Blue links just do not cut it anymore when users are mobile.
2. Search Is Local, Targeted and Interactive For Mobile Users
CNN Mobile’s VP Louis Gump, a mobile legend, says that every business must “start with the assumption that mobile is different.” Reflecting that difference, mobile sites typically include only the most crucial and time- and location-specific functions and features, while desktop Web sites contain a wide range of content and information. The reason is that mobile users are looking for local, immediate and interactive information.
Consider these stats —
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Somewhere from 40% to 53% of all mobile searches are local. Coupled with GPS location detection, mobile users employ their devices to navigate and explore the world around them. Coffee anyone?
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Our “information needs and habits” are different on mobile, reports TechCrunch, where users want “smaller bits of information quicker, usually calibrated to location.” The end result is a relationship between device owner and information which is far more personal, immediate and reciprocal in the mobile environment than on the desktop. Marketers know this and are working feverishly to engage their audiences using these new selling points. Mobile marketing is “immediate, personal and targeted to specific consumer groups” says Twitter marketing rockstar Shelly Kramer.
3. Voice As the Mobile UI Is a Game Changer
Along with everything from in-car services like Ford’s Microsoft-powered Sync and even TV remote controls, mobile UIs are evolving rapidly to offer the consistency that made the graphical UI (GUI) so important in evolution of the desktop PC. But in the mobile environment, voice is becoming the always-available common denominator as the size of devices and the desire (and legal need) for hands-free use limit the effectiveness even of touchscreens.
Using market leader Apple as our example again, as Frank Reed commented in Marketing Pilgrim,
Siri is definitely a form of search. It’s a request and answer mechanism that can do tasks outside of search (texts, emails, etc.) but when a user asks it for the closest Italian restaurant it is, in essence, a search engine. It is presenting what its backend calculations have decided are the best possible answers for the question asked by the iPhone user. Sounds exactly like Google’s function as a search engine, doesn’t it? Different delivery of a result set but it’s search.
Android users have a similar capability with Google Now, which has been called “more than just a new voice search application for Android; it’s also an indication of how Google will overhaul the user interface for its search products.” Consumers will soon see this same sort of voice interaction in mobile apps (powered by Nuance and others), on Windows phones and from well-funded voice search venture AskZiggy.
Voice is “the most revolutionary user interface in the history of technology,” according to Forbes. And it is all about search: search on steroids that is. As far as Google, the Mountain View company countered with a just-announced voice search app for the Apple iOS and interactive search results on its mobile Web properties. Whether Google can recapture the inventiveness in voice and mobile search that allowed its Web algorithms to dominate is open to serious question. Right now it’s rather desperately playing catch-up.
4. No One Has Yet Figured Out How To Monetize Mobile
Look closely at that graphic. Notice the dramatic difference between advertising spending and usage rates on mobile platforms compared to other media? That’s because no one has really figured out yet how to monetize mobile services. Social media darling Facebook — illustrated painfully by its revenue and stock price stumbles — for years has stood as the dominant supplier of display ads on the Web, but has just barely tried to introduce advertising into its mobile app. Considering that in May total usage of Facebook mobile surpassed that of its classic website for the first time and the clear lesson is that profiting from mobile information is a difficult endeavor, lagging well behind most technology markets.
Other than wireless network carriers, that is. As The Economist explains:
The [mobile] combination of personalisation, location and a willingness to pay makes all kinds of new business models possible….. Would-be providers of mobile Internet services cannot simply set up their servers and wait for the money to roll in, however, because the network operators — who know who and where the users are and control the billing system — hold all the cards.
This is not the place to discuss data caps and shared wireless plans, but the fact is that few if any mobile Internet services except those employing a pay-per-subscriber model have even come close to monetizing the mobile experience. That will and must change, although when and how remain unclear. As BusinessWeek notes, “desktop Internet use led to the rise of Google, eBay and Yahoo, but the mobile winners are still emerging.”
5. Mobile FIRST Is The New Reality
Ten, five or even two years ago, developers all talked about the need to adapt content to fit the smaller form factor, screen real estate and touch navigation features of mobile devices. That’s already ancient history today. The new reality is that everyone from television and media companies to PC manufacturers are thinking “mobile first,” designing interfaces (gesture-based and voice-powered), content (shorter, punchier and more micro blog-like) and interactivity (social media integration, video clip streams, etc.) to cater to an audience that is dominantly mobile, most of the time.
The title of Luke Wroblewski’s new book Mobile First says it all. In a mobile world, all we thought we had learned about the Web is reversed and upside down. Mobile starts from scratch and leads everything else.
So how do these profound differences matter? This author (and my Project DisCo colleague Dan O’Connor) has previously written about the difficulties of “market definition” in search, a big term for the simple idea that display ads, text ads and organic search results are all competing for the same customers. If the Federal Trade Commission (FTC), which is still “investigating” Google for alleged search monopolization two years on, took this into account, its lawyers would scuttle any government prosecution because Google’s market share would be well below that of search alone, hardly in monopoly territory.
Earlier DisCo commented about the European Union’s penchant for regulating nascent products and industries before they even exist. By moving against Google in mobile Web search, the EU is instead trying to regulate a market that is dying and all but irrelevant to the realities of today’s mobile Internet usage and experience. With news just days ago that Americans spend more time watching their smartphones than watching television, the reality is that the mobile market may have already hit an important inflection point. In the name of protecting the future, however, Europeans are living in the past.
The FTC should pay attention. Mobile is different and poised to surpass fixed Internet usage. Whatever “gatekeeper” functions Google plays on desktop PCs (which we think is a huge overstatement), it is plainly not the same in the mobile realm. Let’s free the competitive battles to flourish in mobile search before government steps in with its thumb on the scale. In a mobile world, everything is different; those differences need to and should be reflected in antitrust enforcement policies.
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.
People have been talking, and pontificating, about a coming “Internet of Things” since 1999. The idea is that the many sensors, actuators and digital data recorders in the environment around us — like the electronic control units (ECUs) in modern automobiles — will be uniquely identified and connected via IP to each other and to the world. This would allow instantaneous supply chain fulfillment, green initiatives like demand-side management and smart refrigerators, as well as simply cool stuff that puts remotely programming one’s DVR from a smartphone app to shame. As McKinsey & Co. noted in 2010:
The physical world itself is becoming a type of information system… When objects can both sense the environment and communicate, they become tools for understanding complexity and responding to it swiftly. What’s revolutionary in all this is that these physical information systems … work largely without human intervention.
So what’s going on? Two things. The obvious one is that more than a decade later (and despite the fact that by 2008 there were already more “things” connected to the Internet than people in the world) we are still not “there” yet. Refrigerators cannot detect when the last soda can is used, let alone order more autonomously; HVAC systems largely cannot interact with electricity genitors in real time to consume more energy when rates are lower, and vice-versa; and suitcases cannot communicate with airport luggage systems to tell the machines onto which flight they should be loaded (except with barcode readers). Partially, that’s because technologists frequently overstate adoption projections for new networks by 10 years or more. Less obvious is that there’s been a quiet push in the European Union (EU) to regulate the IoT even before it is fully gestated and born.
A European Commission “consultancy” on the Internet of Things was launched in 2008. By 2009 the EU had already issued an Action Plan for Europe for the IoT, which concluded:
Although IoT will help to address certain problems, it will usher in its own set of challenges, some directly affecting individuals. For example, some applications may be closely interlinked with critical infrastructures such as the power supply while others will handle information related to an individual’s whereabouts. Simply leaving the development of IoT to the private sector, and possibly to other world regions, is not a sensible option in view of the deep societal changes that IoT will bring about.
As a result, libertarian business groups such as the European-American Business Council and TechAmerica Europe have this summer come out in opposition to the EU’s approach, pressing for industry-led standards and application of existing measures, like the existing EU data protection rules (which already exceed the United States’ by a wide margin), “in lieu of a new regulatory structure.”
This is a scary prospect. That the EU would even consider crafting a regulatory scheme now for a technology revolution that realistically remains years away, requires immense levels of cooperation among industries, and holds the potential to transform business and life as we know it, is remarkable. Remarkable because such a philosophy is so alien to American economic values and to the spirit of innovation and entrepreneurship that launched the commercial Internet and Web 2.0 revolutions.
This article is not the place to debate the conflicts, trade-offs and differing views of government animating current technology policy issues like net neutrality, privacy and cybersecurity, copyright and the like. The reality though, is that issues such as those are generally being assessed within a spectrum of solutions, worldwide, which reflect known risks and benefits, some proposals of course being more interventionist than others. But that is far different from allowing a single bureaucratic monolith to dictate the shape of an industry and technology that remains embryonic. How is it even possible to develop fair rules for the IoT when no one has any real idea what or when it will be?
 More than 15 years ago, this writer worked for one of his corporate clients on a legislative amendment offered by Rep. Anna Eshoo (D-Cal.) to the Telecommunications Act of 1996. The so-called “Eshoo Amendment,” designed to limit the role of the Federal Communications Commission in mandating standards for emerging, competitive digital technologies like home automation, passed. The irony, of course, is that at the time Congresswoman Eshoo analogized home automation to a future world like that of The Jetsons. Now 16 years down the road, we are barely closer to George, Elroy and their flying cars, robotic maids and the like than we were then.
But that ’96 effort illustrated a fundamental difference between the United States and the European Union about the proper role of government with respect to innovation. The EU subsidizes research, sets agendas and looks to intervene in the marketplace in order to establish rules of the road even before new industries are launched. The US sits back, lets the private sector innovate, and generally intervenes only when there has been a “market failure.” That’s a philosophy largely embraced by both major American parties regardless of the increasingly polarized political landscape in Washington, DC.
This basic difference in world views between the home of the Internet and European regulators — as true today as in 1996, if not more so — could doom the Internet of Things. So if you are a fan of future shock, then it’s clear you should not react to the EU’s efforts to shape the IoT with a viva la difference attitude. The difference is dangerous to innovation and especially dangerous to disruptive innovation. It’s no wonder that few real digital innovations have come from Europe. Don’t expect many in the future unless the EU finds a way to decentralize and privatize its bureaucratic tendency towards aggrandizing government in the face of what IoT experts anticipate will be “a small avalanche of disruptive innovations.”
Note: Originally prepared for and reposted with permission of the Disruptive Competition Project.
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April 1st, 2014 | 
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