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Assessing the FTC Investigation of Google: No Presumption of Guilt, But Certainly Worthy of Investigation (Part 2)

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This is the second installment of a two-part series. Read part one here.

I have posted before on what an antitrust case against Google might look like, on the correct issues on which to focus investigation, and on why consumers have reason to be afraid of Google, indeed very afraid. My views have been clearly stated, and there is no need to repeat them. Below I summarize why the investigation is necessary, and why we need to know more about Google's business practices.

Google is large enough and powerful enough that we need to know with certainty that its business practices are fair. Large size and great power are not offenses; large size and great power used to stifle competition can harm consumers and the use of Google's size and power needs to be understood. Google has over 70% of the market for search in the United States, with estimates of between 90% and 95% for the EU and Australia. This alone is not proof of abuse, but it does demand investigation. More detailed and specific arguments are provided below.

  1. Google is profitable enough that its pricing structure needs to be understood. Google's total cash has more than doubled in the couple of years that I have been writing about them, and now stands [as of 18 July] at36.68 Billion. Unprecedented profits and unprecedented profit margins are not proof of abuse, but someone is paying for this, and this does, once again, demand investigation.
  2. Google is not fair and does not acknowledge the need to be fair. While Google does claim that its search results are ranked to maximize relevance to consumers, they also claim that search order is a protected opinion, protected by their first amendment right to freedom of speech. In that case, Google claims the right to harm anyone ... a politician, a company that does not bid on keywords, or a small company whose offerings compete with Google's ... simply by lowering their ranking in organic search, or hiding them entirely. We have already explored how Google's power over search could limit the first amendment rights of all citizens. Small competitors like Foundem are already alleging that Google hides them; these are not small search engine providers, but small shopping support companies. We are not saying that where there's smoke there's fire, but there is certainly a lot of smoke here. Google's power once again demands an investigation.
  3. Google may actually become less fair in the future, or have more to gain by being unfair. As Google and their competitors move away from providing "ten blue links" and seek to provide answers a search engine's ability to rank the company's own offerings above those of competitors increases. We believe that Google's power, and their stated intention to move away from ten blue links, once again demands an investigation.
  4. More importantly, vertical integration increases the opportunity for search engine vendors to abuse their power and become even less fair. As search engine providers vertically integrate, and begin to offer additional marketplaces that they directly own and operate, the opportunities to redirect consumers increase. This is not of merely theoretical interest, nor does it affect only those new competitors affected by vertical integration. As consumers are directed away from hotels' and airlines' own reservation systems and towards the sites operated by a search engine vendor, the distribution costs of hotels and airlines increases. This will, of course, ultimately be paid by consumers just as New York's Javitz Center Fee and Hotel Occupancy Tax or Hawaii's Rental Car Surcharge are paid by travelers. Vertical integration will create real and inevitable harm to consumers. We believe that Google's power, and their stated intention to provide vertically integrated services, once again demands an investigation.
  5. Google's third party payer business model may be outside the discipline of the marketplace. Consumers (party 1) use Search Engine Providers (party 2) to find Sellers (party 3); even well known sellers are forced to pay search engine providers, not because they "want to be found", but because they "need to be not found." This business model was found to be illegal in the 1980s when it was employed by the airlines' computerized reservations systems. Recent litigation between American Airlines and Travelport and Orbitz and similar litigation involving US Airways suggests that even in an internet age, the power of redirection remains surprisingly high. Being one click away offers little protection to a seller, if searchers have no incentive to make that one click, or if searchers are even compensated for not making that one click; that does not mean that consumers do not ultimately pay for the high costs of third party payer business models. We believe that Google's power, combined with third party payer business models, demands an investigation; we believe that third party payer business models will need additional regulation no matter who offers them.

Antitrust investigation is appropriate at this time, and antitrust legislation can deal with Google. Google's size alone provides motivation for an investigation. So does their extraordinary profitability, which at least suggests monopoly power. The absence of direct charges to consumers does not prove the absence of indirect charges or the absence of harm to consumers.

While Google's acquisition of its power, even if it were shown to be monopoly power, may be ultimately be shown to be legal, their use of their power to harm competitors outside of search, and the potential to harm consumers, demands an investigation. As Google engages in vertical integration, and moves into more and more businesses not directly related to search, search becomes an essential facility. In the 1980s the airlines' CRSs' charges to competing airlines were found to be an unreasonable abuse of an essential facility. Before breakup and divestiture, The Bell System's charges to MCI for access to its last mile local loop was likewise seen as subject to regulation since the local loop was seen as an essential facility. Google, and search engine providers more generally, may be leaving themselves open to investigation simply by extending the power of search as an essential facility.

Google's own defense of its competitive posture can be found online, framed more as an attack on Microsoft role in the investigation than as a rebuttal of the merits of the FTC investigation; to be fair, we need to know more about the FTC investigation before Google or anyone else can prepare a rebuttal.

And to reiterate, my own concerns have more to do with the Power of Big Search and the need to regulate the search engine industry than they have to do specifically with Google. I'm not sure I trust Google not to be evil after Wi-Spy recording of sensitive data during the preparation of street views, or the inexplicable actions of Doodle 4 Google, recording of enough information about kids to perform identity theft, or German concerns about Google Analytics' potential abuse of privacy of users of websites that report IP addresses of users back to Google. I'm not sure I would trust any company with similar power.

The possibility of harm to consumers is at least real, and an investigation is at least justified so that the enforcement officials can assess the impact of Google's actions on competitors, on key word customers, and on consumers. The process of legal discovery is a wonderful thing, and will allow us all to see to what extent Google is acting in the best interests of consumers, and to what extent it is knowingly stifling competition. Claims of not being evil and of providing everything free to consumers not withstanding, Google is not Robin Hood. Google keeps far more for itself than Robin Hood would ever have dreamed of. The first point on Google's statement of its philosophy is "focus on the user and all else will follow." I'd like to understand more of what it is doing while claiming to support me and consumers like me.

Ultimately, after we have seen the results of the investigation, we can conclude if Google is just another successful technology company, or the owner of an essential facility, or a brutal competitor that abuses its power, or the owner of an essential facility that is too important to leave unregulated. Regulation is not necessarily worse than its absence, and America had the best telephone system in the world for most of the seven decades that AT&T was regulated. I have some thoughts on what remedies might be appropriate if the investigation establishes need for remedies. But we do need to see the results of the investigation first.

With a $36.68 billion surplus Google is well positioned to defend itself; I would not worry about Google losing too much as a result of investigation, unless the evidence of consumer harm were clear and overwhelming.

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