THE BLOG
11/28/2012 12:48 pm ET | Updated Jan 28, 2013

Proposed Remedies for Regulating Google, Part 2: Forms of Abuse and Forms of Remedy

As noted in part one of this series, "When Fear turned to Loathing," Google is under investigation for a series of privacy abuses and for abuse of monopoly power, in both the EU and in the United States. Here we classify the forms of abuse and review the regulatory responses that may be appropriate as remedies.

3. The Need for Regulation, And Alternative Forms of Remedy for Abusive Behavior

Google actively and persistently engages in the forms of abuse detailed below. We review the range of remedies that have traditionally been proposed for these categories of abuse and discuss which might or might not prove effective in dealing with Google. Detailed and specific recommendations follow the discussion of abuse and the limitations of traditional remedies.

Google's problematic behavior falls into the following categories:

  • Deceptive practices that harm competition by damaging other web-based companies in ways that they cannot address without themselves becoming a dominant search engine
  • Deceptive practices that add to the sales and distribution costs of hotels, airlines, restaurants, and other sellers, harming consumers through higher prices
  • Deceptive practices that harm consumers by exposing them to poor quality sellers and defective products or inferior services
  • Monopoly pricing of keywords, raising companies' costs and raising consumers' prices
  • Privacy abuses, including abusing Google's own users; abusing the communications partners of Google's own users, without their consent; and abusing individuals who may come into contact with Google by accident (by visiting a website that uses Google Analytics) or as drive-by victims (as in the Wi-Spy scandal*).

Limiting this abusive behavior will require laws and regulations. It will require that search engine vendors act in accordance with laws and regulations.

Laws and regulations should be clear and should have sanctions and penalties that are clear, unambiguously enforced, and sufficient to encourage compliance. First and foremost, the penalties for breaking them should clearly exceed the expected financial gain from breaking them. The total penalty for the Wi-Spy scandal was a piddling fine of $25,000 for obstruction of justice, sort of like asking me for change of a penny. At half a billion dollars, the fine for the drug smuggling scandal seemed quite high, but it was merely revenue-neutral, requiring only that Google return the revenue that it obtained from its illegal activities.

To get Google's attention, the attention of their shareholders, and the attention of their board members, might require billion dollar fines, as well as the possibility of criminal prosecutions and jail terms for corporate executives or board members. Standard practices at Google now do appear to be evil. More specifically, they do now appear to be calculated to achieve maximization of Google's power and profits, regardless of harm to others and regardless of legal restrictions on Google's behavior. They do appear to place little or no value on respecting privacy rights of hundreds of millions of Internet users. Maybe one or two punitive assessments, measured in hundreds of millions or even billions of dollars, might have a sobering impact on key individuals at the firm.

Remedies imposed on Google should address the real problems with Google's activities. Most of the problems with Google's behavior would not be solved by labeling preferencing of Google's products as Google products. The problem is not merely deception; the problem also includes the catastrophic impact that these preferencing activities have on legitimate competitors, who cannot respond without becoming dominant search engine operators themselves. Today almost every search I performed led to a Google ad on the top, either near the top left just below the "ads" or on the very top of the column on the right. A search for digital cameras or gaming headsets takes you to shopping.google.com. A search for flights to Singapore takes you to Google.com/flights. Even a visit to the Google website often gets you an ad for some Google product or service. The problem is not that I can't tell these are Google sites. The problem is that for most users there is no obvious reason to click away from these sites, and thus no way for airlines, other comparison shopping sites, or other retailers to compete effectively once the user is directed to a Google site.

Google's positioning its own sales, reservations, booking, and ticketing services as intermediaries adds significantly to the cost of many services, including travel services. If consumers see a Google offering, clearly labeled, promising best prices, there is no reason for the consumer to search more deeply to find the primary service provider's own website. However, intermediaries can greatly increase the costs of distribution, and these additional distributions costs are eventually passed along to the consumer in the form of higher prices, just as higher fuel costs lead to higher prices for airplane tickets. There is no obvious indication to the buyer of just how much the use of these intermediaries eventually costs them through higher prices, but this practice, no matter how it is labeled, adds to costs and adds to prices. This undercuts one of the main advantages of online distribution. It is a nearly inevitable danger of vertical integration by search vendors.

Unfortunately, there is no simple, traditional remedy from antitrust that would solve the problems caused by Google. Mathematical analysis demonstrates that most problems with Google's monopoly power would not be solved by forcing Google to divest search, and most problems would not be solved by breaking the company up into a collection of baby Googles, analogous to breaking the Bell System up into a family of baby Bells.

The Sorcerer's Apprentice provides a useful metaphor for what would happens if Google were broken up into smaller search providers. In the story of the sorcerer's apprentice, a young magician tires of carrying water for his master and casts a spell on the broom, allowing the broom to come to life and carry water for him. Unfortunately, the enchanted broom is not easily controlled, and refuses to stop carrying water; the broom goes from being servant to becoming a terrifying menace. When the young magician attempts to stop the broom by hacking it to pieces with an ax, each piece becomes a fully formed fully sized new broom, and each new broom becomes a participant in a parade of mindless unstoppable water carriers! Breaking Google up would only lead to a larger number of misbehaving parties. The family of smaller competing baby Googles would exhibit worse behavior than the current search marketplace.

4. The Extreme Steps Required to Regulate Google

Unfortunately, most problems with Google's behavior can only be solved by the imposition of something akin to the Food and Drug Administration or the Consumer Products Safety Commission. It may be necessary to create an agency responsible for ensuring that search companies avoid practices that are harmful to consumers, harmful to competition, and harmful to the national economy. Oren Bracha and Frank Pasquale have called for a Federal Search Commission. That may be essential, but it will not be sufficient.

In addition to needing an agency to monitor the quality of search and the deception associated with the current provision of search, I suspect that the following two regulations may prove to be essential to dealing with Google's power over search.

  • Keyword auctions should be banned -- search cannot and should not be funded by forcing companies to pay for honest treatment in search. This does not mean that ads on the right hand side of the page should be banned, but sponsored links and manipulation of the left hand side of the page for any reason should be banned**.
  • Vertical integration should be banned -- search companies should not own companies outside of search. If a search company owns a company in an unrelated industry, the temptation to damage a competitor, and the temptation to promote the search company's own offerings, are both almost irresistible. This in no way limits innovation in search.

End Notes

*The Wi-Spy scandal occurred when Google was recording buildings for Street View. They also recorded six gigabytes of wireless Internet traffic, including account IDs and passwords. The drug smuggling scandal involved a multi-year conspiracy in which Google personnel, including senior executives, helped online Indian and Chinese vendors smuggle illegal and counterfeit drugs into the U.S.

**Yes, I know, I know. Google keeps telling us that competition is just one click away. That may be true for consumers but it is not true for corporations that buy keywords. As long as consumers can be enticed to stay with Google, then corporate buyers of keywords have no choice but to buy keywords. Some readers may believe that forcing a hotel or airline to spend hundreds of millions of dollars to buy back its own name represents just an extreme form of advertising. That's nonsense. Advertising is what makes the name valuable. Auctions enable Google to force firms to buy their names back, and it does not help a hotel to buy a keyword on Bing or Navor if the consumers are using Google.