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Assessing the FTC Investigation of Google: No Presumption of Guilt, But Certainly Worthy of Investigation (Part 1)

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A Guide for Assessing Arguments For and Against Investigation

The recent FTC investigation of Google has, as expected, produced a firestorm of response in blogs and in the popular press, and as expected much of it is quite supportive of Google. It's clearly premature to assume that an investigation will lead to litigation or that litigation will result in rulings that are adverse to Google. Since we don't know what the results of the investigation will be, it is clearly inappropriate to speculate about legal remedies within antitrust law. However, it is equally inappropriate to assume that the investigation is unwarranted and to dismiss it before it begins.

I will classify the principal arguments that bloggers have offered against the investigation and assess their strengths and weakness. I do not address here arguments explicitly made by Google on its own websites, or counter-arguments from Microsoft or other directly affected parties.

It is no longer possible to be surprised by the support and loyalty Google engenders among its users. Google appears to be free, and indeed it appears to be free-er than free when gifts to consumers like free Gmail and free YouTube and subsidized phones are included. Sometimes loyalty to Google exceeds not only reason, but patriotism, as was visible even from comments posted on Search Engine Land as long ago as 2007:

  • I don't think that GOOGLE should be worried about the GOVERNMENT ... now vice versa...
  • If they break up Google after they declined to break up MS I'll be pretty shocked. In fact, at that point, I'll just assume that all government is pure evil.
  • They can take my Google when they pry the keyboard from my cold, dead hands.

But what are the arguments in favor of an investigation, what are the arguments opposed, and how can we assess them?

Arguments Against Investigation

Since I am indeed in favor of the investigation, and indeed, believe it is long overdue, I will start by deconstructing the arguments that others have offered against an investigation, before providing my own reasons in support of the investigation.

1) There is no need for any investigation. Antitrust law is to intended to benefit consumers, not protect incompetent or less competent competitors, or even less lucky competitors. This action is intended solely to benefit Google's competitors, especially Microsoft.

[See, for example, the opinion of David Balto, an antitrust lawyer, who argues in In Antitrust Probe, Google's Critics Have it Wrong, that "it's about the consumer, stupid".]

It is true that antitrust legislation does not exist to protect the competitors of a monopolist or of an alleged monopolist. A monopoly, legally obtained, and a monopoly whose power is legally used, cannot be reined in simply because competitors complain (☝). But a monopoly that is abusive, through price fixing for example, and one that harms its own customers, can be subject to litigation or regulation (☟). This is true even if the injured parties are not consumers; Big Steel was subject to litigation in 1911 and again in the 1960s, and IBM was subject to litigation in the 1960s as well. Even though consumers did not buy steel, they were harmed if car companies were overcharged for steel, and even though consumers did not purchase mainframe computers, they were harmed if companies that relied upon computers were overcharged for them (☟). Finally, as Google expands into businesses not directly related to search, if Google were to use its power in search to redirect consumers to its own business and away from competitors, as the EU litigation alleges, this is a pretty traditional essential facilities abuse, and one that fits cleanly into traditional antitrust (☟).

Summary: This gets one thumb up, and three thumbs down. If Google's customers are harmed, consumers may be harmed, and if Google hurts companies by abusing search, this looks like an antitrust violation.

2) This is just sour grapes! It is only Microsoft and Google's other competitors who are complaining!

[See, for example, J is For Jealousy, or Is Just a Bunch of Whiners.]

Attempts to dismiss complaints because they originate with Google's alleged victims are misguided. Actually, it is not uncommon for complaints to be brought by injured competitors. Microsoft and Google have both complained to appropriate regulatory authorities, in the US and abroad, when they feel they are being treated unfairly. Google has not been silent or reticent in expressing its opinions to the US Government on topics such as Net Neutrality. Objection overruled. It does seem premature to blame the companies in Fairsearch for being losers and whiners, and to conclude that they are complaining because they have lost, and that they have lost because they are somehow inferior. Foundem, Hot Wire, Trip Advisor, and Expedia, FareLogix, and Sabre aren't complaining or looking for protection because Google does search better than they do, but because they fear that Google can use its control over search to take all of their customers away regardless of how well these other companies do their own jobs. Assessing this is the very basis of the investigation, not the subject of a mocking editorial.

Summary: This is irrelevant. This gets neither a thumb up nor a thumb down.

3) This case does not look at all like the Microsoft case.

[See, for example, Google's enemies, or Google Subpoena: An Attack on Capitalism.]

Are these guys serious? Of course every antitrust case is different. So what. The Google case indeed does not have to look like the Microsoft case. The Microsoft case did not look like the IBM case of the 1960s and 70s, and IBM did not look like AT&T in 1913 or like Standard Oil before them. Monopoly power, and the abuse of monopoly power, may be difficult to establish, but concerns about them cannot be waved away simply by pointing out what they are not. To call this investigation an attack on capitalism defies belief, and justifies a loud rude noise. However, if one were looking for superficial similarities, Google's share of the search market and their claim that it is merely advertising, and Microsoft's share of the operating system market and their claim that it was merely software, are remarkably similar and both were deliberate misrepresentations of the companies' shares of the relevant markets.

Summary: This is irrelevant. This gets neither a thumb up nor a thumb down, just a giant raspberry for calling it an attack on Capitalism.

4) Consumers are happy. If consumers are happy they are well served, and if consumers are well served there can be no grounds for antitrust litigation.

[See, for example, the claim that a Google addiction is like addiction to chocolate and not like addiction to cigarettes and is therefore harmless, in Google's enemies, or the claims that consumers are not harmed in FTC Assaults Free Enterprise With Google Investigation.]

Consumer happiness is a good thing in and of itself (☝), but consumers are not always the best judges of their own welfare. If consumers were always right about cause and effect, even when there are long delays and complex mechanisms connecting causes with effects, much of current consumer protection regulation would indeed be unnecessary; few of us would have started smoking if the harmful effects were immediately clear and unambiguously obvious and few would argue about the beneficial effects of regulation that limits smoking in public places. It is clear that sometimes regulation is indeed necessary for consumers' protection, even when consumers are happy, undercutting this argument (☟). But if companies that rely upon Google for access to their customers pay far too much for this service, and if these expenses are passed through to consumers, then consumers are not well served even if they are happy (☟). See the discussion under point 1. Also, it is not clear that consumers are fully and accurately informed about the relationship they have with Google. The first point on Google's statement of its philosophy notes, "Placement in search results is never sold to anyone, and advertising is ... clearly marked as such." This clearly suggests the absence of bias in search results. If the EU litigation and other suits alleging that Google consistently preferences its own offerings are correct, and if Google actually does manipulate results, then consumers might have less reason to be satisfied than they currently believe. Finally, the recent fall-out from the email hacking scandal, currently wracking the Murdoch media empire, indicates that concerns for privacy are not dead. My own research suggests that many users express great concerns for their privacy but use websites that compromise this privacy. Perhaps these users are unaware of just how much privacy they lose every time they send email to a Gmail account, text from a Google phone, or use a website anywhere in the world that uses Google Analytics; if so these consumers would be far less happy if they were more fully informed (☟).

Summary: This gets one thumb up, and four thumbs down. Consumers can be hurt even if they are happy at the moment, if they do not know how much they are actually paying as a result of Google, if they do not know the amount of information that they are providing Google without compensation and the value to Google in controlling its keyword auctions, or if they do not know the extent to which search is biased. Consumer happiness might be very different if consumers were fully informed.

5) Google is free to consumers.

[See, for example, David Balto's comments in Google is No Microsoft or the Statement of Manne and Wright on the investigation.]

This gets no thumbs up and two thumbs down. I'm not sure that Google actually is free to consumers, although it appears to be free because there are no direct charges. Consumers are providing Google with vast amounts of personal information, which is of value to marketing firms, and they not getting paid for providing this information. There is nothing wrong with their providing this information if they choose to do so, but that does not mean they are not compensating Google for services they receive (☟). More importantly, the absence of obvious direct payments by consumers does not mean that there are no pass-through expenses. When the price of aviation fuel goes up consumers pay more to travel. When cities impose taxes on tourists, or states impose taxes on gasoline, the cost of hotel stays or of operating a car go up. Why would anyone assume that the high cost of keywords that companies pay to Google, and the high costs of accessing consumers, could not possibly result in higher consumer costs (☟)? Indeed, given Google's enormous profits, and its enormous profit margins, and its enormous cash balances, Google is charging someone vast amounts of money, and there is as yet no reason to assume that none of these charges are passed through to consumers.

Summary: This gets no thumbs up, and two thumbs down. Google is almost certainly not free to consumers.

6) Regulating Google will harm innovation.

[See for example, Uncle Sam's choke-hold on innovation by Vivek Wadhwa.]

Mostly Google does not innovate. What Google does very well is replicate, sometimes with improvement, sometimes without. What it does even better is give stuff away, or at least provide material without explicit charges. YouTube was purchased by Google, not a Google innovation, and it is now free to consumers. Of course, sometimes the content provided on YouTube is copyrighted and does not actually belong to Google, and only sometimes will Google actually stop the theft of content. Sometimes Google can afford to provide things free because of cross subsidies, but that does not make its office products innovative. Sometimes Google can afford to provide things free because it does not choose to pay royalties, as the current $ 2.6 billion dispute over stolen code in the Android operating system suggests. But it's hard to argue that most of Google's system offerings truly represent innovations, or that ending Google's ability to crush small competitors will necessarily harm innovation. (½ ☟). Stifling innovation is seldom the consumers' greatest concern in antitrust regulation, but it is always central to regulators and legislators; when lawyers refer to harm not to competitors but to the competitive process this is what has their attention. And as Tim Wu notes in The Master Switch, we have over a century of experience with Big Media and Big Technology, and with dominant players stifling innovation, especially innovation that might threaten their dominance.

Summary: This gets no thumbs up, and maybe ½ a thumb down. It's hard to argue that Google has been much an innovator. Given the track record of most monopolists, if Google is shown to be monopolist it is hard to argue that reining it in would harm innovation.

7) Even investigating Google is unwarranted. Google will be forced to defend itself unnecessarily and this will create burdensome expenses for Google.

[See, for example, Google's Monopoly Hex.]

We don't know what the investigation will find, but as we will explore below, there are certainly reasons to investigate. Moreover, if the expense of defending oneself was a protection against any and all litigation, no matter how justified litigation might be, then no company should ever be investigated for its business practices and no individuals should ever be indicted or even apprehended when suspected of a crime. This is just silly (☟) and if this had been published in the Wall Street Journal it would probably not warrant any notice at all, or would have been met with rude and raucous laughter.

Summary: This gets no thumbs up and one thumb down.

8) There cannot possibly be any need for regulation, since competition is only single click away.

[See, for example, Why the FTC's Case Against Google Has No Merit.]

Why did Willie Sutton rob banks? "Because that's where the money is." Why do companies continue to pay Google for keywords, even for their own trademarks as keywords, instead of switching to competitors' search engines? Because Google is where the consumers are. Yes, consumers could switch with a single click, but if Google overcharges its customers for keywords, and uses the resulting excess profits (that is, monopoly profits), to reward consumers, then searchers, at least, will have no reason to switch. Whether consumers would need one click to switch or five, until consumers have a reason to switch, Google's corporate customers are trapped and forced to remain in Google's keyword auction (☟). Moreover, if our decades of experience with a related industry, airline search through Sabre and Travelport provide any guidance, it is likely that Google software, like the Google Toolbar, Chrome and Android, will be seen to make it more difficult for users to switch away from Google, and that Google's contractual terms with firms that bid on search terms will be seen to make it difficult or impractical for these firms to switch to competitors' search offerings. Instances where Google has attempted to solve its one click away "problem" may also create liability for Google under the antitrust laws (☟).

This gets no thumbs up and two thumbs down. It's the basis for my arguments in favor of investigation and serves as transition to part two, which can be read here.

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