THE BLOG

Taking on Google's Monopoly Means Regulating Its Control of User Data

09/24/2013 07:37 am 07:37:01 | Updated Nov 24, 2013

European regulators appear likely to take action soon against Google as a monopolist in the online economy.  This is in contrast to the U.S. Federal Trade Commission, which took a pass on action against Google this past January.

However, the measures discussed in Europe, which largely focus on whether Google is treating potential competitors fairly in its search results, are unlikely to address the core anticompetitive power that Google has -- namely its overwhelming control of user data.   Google is not in the search business; it's in the data collection business, and as I write in a newly released legal paper, Search, Antitrust and the Economics of the Control of User Data, it makes its money and dominates the online economy through de facto sale of information about its customers to its advertisers.

If "big data" is the oil of the information economy, Google has Standard Oil-like monopoly dominance -- and uses that control to maintain its dominant position. Google currently receives 95 percent of all search advertising revenue, the largest component of online advertising, and the marketplace is unlikely to change that absent strong antitrust intervention.

It's not just that Google collects data from everyone using its search engine.  It also collects data on what they're interested in writing in their Gmail accounts, what they watch on YouTube, where they are located using data from Google Maps, a whole array of other data from use of Google's Android phones, and user information supplied from Google's whole web of online services. The integrated profile of users offered to advertisers seeking to target their pitches gives Google an unassailable advantage.

The core product Google sells is a "click" on an ad online.   Given its dominance, it's hardly surprising that Google gets far more clicks than any competitor and more revenue.  But in a competitive world, you'd at least expect that a single click on a competitor's site taking them to an advertiser would be worth the same as one on Google, even if the latter was getting far more of them.  But that's not the reality.  Instead, Google gets a very large premium even on an individual so-called Cost per Click (CPC).  How much of a premium is disputed, since Google is extremely secretive about such data, but one advertising analyst estimated that for the same keywords, the "average CPC on Bing is somewhere around 1/4 or 1/5 of our average CPC on Google," while others found that on specific search terms, CPC rates on Bing were slightly higher but still were discounted 49% to 71% compared to Google.

The source of this premium for Google seems to largely be due to its monopolistic control of user data.  With that data on users, Google can deliver customers more likely to purchase an advertiser's product and, as importantly, help sell those products at the highest price the user may be willing to pay.   Where collection of behavioral data has been restricted, as in parts of Europe, studies found that advertising effectiveness dropped drastically, indicating the critical importance of user data to online advertising.

So any competitor to Google has to pay the fixed costs of setting up a competing service not only with fewer initial users but making far less per user clicks on ads as well.   And since advertisers want a company with enough customers to generate broad data to help in targeting ads, you have a chicken-and-egg cycle creating barriers to entry that only antitrust intervention will likely solve.

No cute programming innovation is going to overcome this data advantage by Google.  The gain for Google from its network of users is not just data on each individual user but the cumulative data on how similar users behave, which can anticipate their interests (and the returns on advertising) based not just on their own previous actions but on the behavior of similar users in its network.   While Google no doubt got a leg-up into its dominant position through innovation in its core algorithm, even its own leaders have admitted that it's consolidated its control based on overwhelming control of data.   As Google's Chief Scientist Peter Norvig has admitted, "We don't have better algorithms than everyone else; we just have more data."

And from a legal standpoint, the reality is that Google didn't get to its dominant control of that user data through just innovation, however much may have gone into its early search algorithms.  From its illegal spying on Wi-Fi connections via its Street View program, which a 9th Circuit Court of appeals just this month confirmed violated the federal Wiretap law on a mass scale, to its pressure on manufacturers not to use rival geolocation services on Android phones to the illegal hacking of the Safari browser to collect user data, Google has expanded its control of user data not through customer choice but through illegal invasion of user privacy and abusive maneuvers against corporate rivals.

Beyond the violations of user privacy that are illegal on their face, Google's aggressive expansion into related product lines, where it could collect ever more personal information about online users, constitutes illegal monopoly behavior if the goal was not to compete in those markets but to gain control of those subsidiary markets to reinforce its core search advertising monopoly.  Much as Microsoft was found to have violated antitrust law by seeking control of the browser market to reinforce its Windows monopoly, Google's forays into email, mobile operating systems, and video all deny potential rivals access to the critical mass of user data across those markets which might otherwise give them a beachhead of user data to become viable competitors to Google.

The consumer harms from Google's monopoly are both obvious and incredibly subtle, but the result is a distorted online marketplace and a dangerous shift in power to Google and its advertisers, who end up knowing too much about consumers to the latter's disadvantage. Google's monopoly distorts the online economy, driving up advertising rates with costs passed onto consumers down the line, while Google's willingness to forego immediate revenue in providing free products to online users in order to collect their data can seem benign, but it destroys innovation by potential providers for rival services in sectors that end up with no viable economic model beyond Google's advertising-controlled version.

More deeply, as I detail in a companion legal paper, The Costs of Lost Privacy: Consumer Harm and Rising Economic Inequality in the Age of Google, the extraction of user data by Google has a broader negative impact on consumers. (See this post and this one for more on this as well).  With Google's dominance and lack of viable competition, you end up with a stunted "market" for valuing user privacy in the search and related sectors, so Google feels less and less compunction about violating personal privacy to benefit its advertising customers.

More broadly, the deeper harm to consumers from Google's power in the market -- and one that is at the heart of the increasing economic equality in our society -- is the way profiling by Google of its users for advertisers allows the kind of price discrimination and predatory marketing we saw in the subprime housing bubble globally and in a range of other sectors.  Notably, subprime-related advertisers were the largest Google's advertisers at the height of the financial bubble and payday lenders and other financial firms continue to be bedrock of its advertising revenue.   Google is part of and a large facilitator of a broad shift towards information inequality between regular consumers and corporate advertisers that is helping to drive the overall rising economic inequality we see in society.

Regulators need to take far more seriously the way monopolistic control of information in markets is a fundamental threat to both functioning markets and economic equity.  Joseph Stiglitz, former World Bank Chief Economist and Economics Nobel Prize Winner, has been an intellectual leader on the issue of how unequal access to information in particular markets undermines the easy assumptions of many economists that competition will correct problems of monopoly.

Information is itself a commodity and particular companies can in Stiglitz's words "appropriate the returns to creating information for economic advantage in the market place."  A company like Google has the economic incentive, pushed by advertisers seeking their own information advantage in marketing to users, to increasingly violate user privacy to appropriate more and more information to solidify its economic dominance.  Internet visionary Jaron Lanier sums up the change as "wealth is measured by how close you are to one of the big servers" and Google sits on one of the largest network of servers in the world acting as "private spying agencies" on behalf of its advertising clients.

Contra conservative rhetoric that government intervention undermines innovation, antitrust action that addresses Google's disproportionate control of user data could restore a competitive threat to Google and increase innovation in a range of sectors.   In a latter post, I'll detail the specific steps antitrust authorities could take to accomplish this, but the key goal should be to better protect user privacy, thereby reducing Google's advantage vis a vis potential rivals, while encouraging innovation in online markets that fosters competition based on better serving user privacy and consumer economic interests, rather than undermining them.