Eric K. Clemons © December 2009

Self-Regulating Public Servant or Rapacious and Unscrupulous Monopolist:Prospects for Antitrust Action Against Google

Eric K. Clemonsclemons@wharton.upenn.edu

Information Strategy & EconomicsThe Wharton School

2 December 2009

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ContextExplosive subject!

“Government touches google = we revolt… this is sacred ground people!”

“What if GOOGLE broke up the GOVERNMENT, would be a more interesting story”

“I don’t think that GOOGLE should be worried about the GOVERNMENT … now vice versa…”

“They can take my Google when they pry the keyboard from my cold, dead hands.”

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ContextClarifying disclaimer

I am not describing why Google should face antitrust litigationI am not describing why Google should lose antitrust litigation

I am describing what the litigation will look like, if indeed it comes

And indeed, Google also believes that the issues raised here are those that they will face in courtHence their preemptive attempts to put the best possible spin on them

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Outline and OverviewRelevant market share

Is Google just another advertising company or the dominant player in search?Was Microsoft just another software firm or the dominant player in operating systems

Search as a form of electronic distribution, with its own economics

Essential facilityParallel monopolies, not competitive markets

Google as a potentially predatory monopolyMonopoly profits in a non-contestable marketEvidenced by massive cross subsidiesWith harm to the competitive process

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Motivation for Studying Antitrust Problems at Google

Why study Google?Because it’s beloved — always interesting!Because it’s the best? Because it does an amazing job free? Because it did all this while doing “no evil”?Because it may indeed be violating antitrust laws?Because it may indeed be able to spend its way out of trouble?

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Motivation for Studying Antitrust Problems at Google

How would you know?Because it’s the best? — do some experimentsBecause it does an amazing job free? — Like Elliot Ness, follow the moneyBecause it did all this while doing “no evil”? — follow the complaints and litigation trail, from Rescuecom and American Airlines to ShoeMoney.comBecause it may indeed be violating antitrust laws? — relevant market, essential facilities doctrinesBecause it may indeed be able to spend its way out of trouble? —Hal Varian x 60, press conferences in response to blog posts, claims that they are only an ad company, 2.8% of the relevant market ...

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Relevant Market ShareWhat is the market whose share you are trying to estimate?

Microsoft is a small portion of the global economyIt is a larger portion of the technology sectorAnd it is a huge portion of the Intel operating system marketMicrosoft tried to argue it was about 3% of the software marketAnd the DoJ and David Boise argued that it was closer to 90% of the relevant market, the market at the time for operating systems for Intel-based machines

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Relevant Market ShareWhat is the market whose share you are trying to estimate?

Google is a small portion of the global economyIt is a larger portion of the internet economyAnd it is a huge portion of the market for internet searchGoogle is now trying to argue it is about 3% of the advertising marketAnd the DoJ will certainly argue that it is closer to 70% of the relevant market, the market for online search

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Relevant Market ShareWhy isn’t it just advertising?

Google calls its profitable businesses adwords and adsense … you can’t be more clear than thanBut we know what advertising is … advertising creates a desire to buy now, or a sense of trust in a brand that leads to buying later

Smart, Very SmartWe love to fly and it shows

Google hijacks a brand so that if I search on Marriott Marquis or InterContinental London they send me to a bidder, not necessarily the owner of the brandAnd brand owners really don’t have a choice

Experiments conducted by hotels indicate that they cannot afford not to play

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Relevant Market Share

Why isn’t it just advertising?Why don’t they have a choice?

Can’t you just take out an ad in the NY Times, The San Francisco Chronicle, or the CBS Evening News?Not if the customers get sent somewhere else by Google after your adAdvertising is not a substitute for searchAnymore than you can use Photoshop or SAP in place of Vista or Windows

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Essential Facilities DoctrineIf Google is not advertising, what is it?Google is a form of electronic distributionAnd electronic distribution is an essential facilityJust like travel agent reservations systems were in the 1980s

When United wanted to take over Denver it redirected passengers away from FrontierWhen American wanted to take over Dallas / Fort Worth it redirected passengers away from BraniffBoth quickly went bankrupt

Numerous service providers, especially airlines and hotels, fear that Google has the power to do the same to them if they refuse to pay

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Essential Facilities DoctrineEssential facility?Why, with competing travel agent reservations systems, were Sabre and Apollo so powerful?Parallel monopoliesAgencies only used one

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Essential Facilities DoctrineEssential facility?How, with competing search engines, could Google be considered powerful?Compare diagrams!Parallel monopoliesWith even greater concentration

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Potentially Predatory Monopoly

Contestable MarketBaumol, Panzar, and WilligYou don’t have to be a monopoly in order to have monopoly powerSo how would regulators know? What are the signs?Unprecedented profitability

Compare Google’s profitability with that of traditional advertisers … like Business Week (sold) or the Philadelphia Inquirer and Daily News (bankrupt) or Seattle PI (gone)

And money left over for cross subsidiesLike gmail, YouTube, office systems, even below market outsourcing (dumping in Japan at JTB?)

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Potentially Predatory Monopoly

But free stuff and cross subsidies improves consumer choice, right?

Not alwaysMicrosoft “free” IE provided an alternative to Netscape, until Netscape was killedAnd Microsoft bundled and subsidized Excel provided an alternative to Lotus 1-2-3

The DoJ and the Courts are as concerned with harm to competitive process as with harm to competitors

And in a range of markets Google could be stifling competition through its cross subsidies

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But they’re not evil?Maybe notBut their recent online arguments about why they are good require some responseBut most of the arguments about not being evil are more about being greedy than about being good

You don’t have to be high bidder to be ranked firstWell yes … what Google now does is called rank by revenue instead of the previous rank by bidThey put the stuff they know you want first, because it generates more clicks and more revenue for GoogleAnd because it generates adequate consumer satisfactionWithout signaling consumers that top spot may be weak and that perhaps bidders should be ignored, destroying Google’s business model

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But they’re not evil?Maybe notBut most of their arguments about good and evil are more about being greedy than good

They put the stuff you want firstAnd after charging companies billions of dollars to achieve their true rank, companies can get their true rank … but only if they are willing to pay

If Google does turn out to be an expensive monopoly why can’t someone offer cheaper search?

How could it be cheaper for consumers?Consumers think it is already cheaper than freeAnd if that’s where the consumers are, that’s where the bidders have to be

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Conclusions

Wait and see …