You think Google's search engine is great. Gmail is easy to use. YouTube gives you instant access to funny pictures of dogs and music videos. And Google maps helps you find where you are and the nearest pizza place. And it's all free.
So you're a happy customer and don't understand why anyone would think antitrust action is needed against Google. Or why government officials from Europe to the U.S. Congress and, just last week, U.S. state governments are bringing antitrust investigations against Google.
Except remember -- it's free! Google doesn't make a dime of profit from you, so you aren't the customer. In fact, all those cool products are just bait to get your information in the Google ecosystem so your attention and eyeballs can be sold to Google's advertisers.
The pleasant experience of using Google products is little different (in any economic analysis) from the pleasant massage administered to Kobe beef cattle in Japan; each is just a tool to increase the quality of the product delivered up to the real customers.
What is Google's Market in a Web 2.0 World? So here's the key place to start in understanding proper technology policy for Google: there is no market for search engines; there is no market for online geolocation mapping software; there is no market for online video.
Google, by making these products free, has destroyed those markets in favor of an alternative economic model of selling individual attention and precise information about those users to advertisers. You are the product, not the customer. That market between Google and its advertisers is where antitrust authorities ultimately have to look to understand what public policy is needed.
As law professor Siva Vaidhyanathan describes in his just-published The Googlization of Everything (and Why We Should Worry), "Google's method of generating and selling advertisement placement is brilliant." Through user queries and searches, as well as personal information about those users, Google can deliver a product to advertisers tailored to their exact needs -- people looking for shoes are delivered to shoe sellers, people located in a certain town are delivered to local restaurants, and so on.
And while individual users may think the brilliance of Google is in the technical design of its search engines, as a company, its profit is driven by its brilliance in nearly monopolizing the online search marketplace serving these advertising companies.
And what profits! With revenue coming overwhelmingly from its advertising monopoly, in 2010, Google's net income was $8.51bn, up 30 percent from 2009 on total revenue that grew 24 percent to $29.32bn. And to understand Google's dominance, look at this chart of data from E-marketer, which shows Google's overwhelming dominance over its competitors in delivering search advertising:
Note that Google's dominance is growing and is projected to grow more. In mobile phone advertising, Google has established a phenomenal 97 percent of paid mobile search advertising, which by itself is projected to be worth $1.1 billion by the end of 2011 and is likely to skyrocket as a percentage of advertising.
And this dominance cannot easily be overcome by some alternative upstart website, even by well-capitalized competitors, since underlying Google's enterprise is, in Vaidhyanathan's words, a "monumental collection of physical sites such as research labs, server farms, data networks and sales offices." Given the interplay of different Google services and customization of results based on having so many users involved in its ecosystem, there are so-called "network effects" from being dominant that any competitor has too large a challenge in displacing Google.
So what are all the cool new Google products like Android, Chrome and Apps for? First, they are more ways to collect the personal information to target advertising to individuals (and new threats to personal privacy as described below).
But they also serve a sinister role from an antitrust perspective. They help destroy any alternative economic base for a competitor to challenge Google's dominance of online search advertising. Citing Warren Buffet's observation that strong businesses are "economic castles" protected by "moats," analyst Bill Gurley describes these free products as moats to drown any competitor who "stands between the user and Google":
Android, as well as Chrome and Chrome OS for that matter, are not "products" in the classic business sense. They have no plan to become their own "economic castles." Rather they are very expensive and very aggressive "moats," funded by the height and magnitude of Google's castle... Google is also scorching the earth for 250 miles around the outside of the castle to ensure no one can approach it.
To understand how this plays out in antitrust analysis, look at a top current focus of the Justice Department's Antitrust division, namely Google's proposed acquisition of travel software provider ITA Software. ITA provides the underlying technology used by online travel agents, travel websites and airline websites. Now, some analysts worry that Google could use its position to unfairly price access to the database to potential competitors in the travel search market or skew search results to favor key partners.
But if it just destroys the business model for competing travel agents and websites by absorbing the service into its overall search system, it will undermine a whole set of potential competitors for advertising dollars. Tim Wu, a law professor and author of the book The Master Switch, argues of such a deal, "In the longer term, however, the risk is that this deal could give Google such an advantage that travel search becomes like other forms of search, dominated by one engine, which could eventually stifle innovation." (And of course, Google may just flat out skew results in travel, given complaints across a wide range of areas by businesses involved in its search and advertising market, as I detailed in my post, The Case for Antitrust Action Against Google.)
How Privacy is Threatened by Google's Business Model: So why should individual users care about any of this if they are still getting the goodies for free?
The reason this is not a dry economic issue of whether Google is cutting into the profits of a few competitors or deciding a few winners and losers desperate for a higher ranking in its search results is that Google is not giving anything away for free. Google's whole business model is based on systematically stripping away user's privacy to trade Google's knowledge about you to advertisers.
A former Federal Trade Commissioner, Pamela Jones Harbour, highlighted the problem of this model for both privacy and antitrust policy in the American Bar Association's Antitrust Law Journal. Harbour, who served at the FTC from 2003 to 2009, dissented from the FTC decision to allow Google to take over the online ad display company, Doubleclick. If you understood that the relevant market was "data used for behavioral marketing," the merger brought together two companies already controlling large amounts of personal data, so the merger left Google even more dominant in this sector.
Harbour emphasizes the point made above that you miss the ball if you look at "search engine markets" or "map software markets", but instead you have to understand that the product is aggregated personal data where:
...[revenue] derives from the accumulation of data, which can then be put to myriad commercial uses... The sites are subsidized, in effect, by trading on the value of accumulated data. In many instances, the data come from individual consumers, who may or may not realize that they are paying for "free" information or services by disclosing their personal information.
Companies like Google with the most specific personal data can better target ads and thus dominate these advertising markets. What this also means is that non-price factors, such as privacy decisions by consumers, can easily be distorted in a non-competitive online environment. If companies' real constituencies are advertisers, they then have a strong incentive to violate privacy if it serves their behavioral targeting goals. Thus you end up with Google continually breaching consumer privacy, even going as far as the wi-fi spying through their Street View project, without too much worry about losing consumer support.
Some neoliberal doubters of the need for antitrust and other regulatory action on Google might argue that market competition will protect privacy, but if you understand that the relevant customers are the advertisers -- and it's the advertisers who want privacy violated to better target advertising -- you'll understand that the "market", such as it is, is driving the destruction of personal privacy online.
There may be a "market" for convincing customers that companies are trying to protect individual privacy, but, to return to the Kobe beef metaphor, that's the same incentive for hiding the slaughterhouse from the cattle. It's only a cosmetic change in a business model driving to the same result.
Why Active Regulation is Needed: What's clear is that "the market" is not going to solve either the antitrust or the privacy problems from Google or comparable actors in other sectors of the online world. A Web 2.0 world requires new tools and analyses, where a company like Google with such dominance needs to be treated a bit more like a public utility -- delivering important public benefits but also requiring public accountability to protect the public interest.
Mergers by Google deserve more skepticism -- and the privacy and antitrust implications of its actions need sharper scrutiny (something the judge who blocked the Google Books settlement this past week thankfully engaged in).
But that's just the first step. More active regulation is needed to protect privacy and keep competition alive to maintain pressure for innovation on even as dominant a player as Google. One flip side of understanding how critical violations of privacy are to Google's economic model is that enacting stronger privacy protection also will, in former FTC Commissioner Harbour's words "directly influence how much competition is able to emerge in related technology markets." Harbour points to strengthening the ability of consumers to port data from one service to another as an example. While it looks like a consumer protection practice, it also service competition policy as well:
Imagine that a given legal regime were to encourage greater consumer control over data (e.g., through open standards), such that a market emerged to accommodate the porting of data relatively easily among applications. In that entry-friendly environment, if consumers were unhappy with the level of privacy protection offered by a popular application or service, consumers would be better able to "vote with their feet" (or, more accurately, their data) and switch to competing providers, without losing the accrued value of their personal datasets.
Still, even data portability is not enough in a world where users often don't know how companies are misusing their data. Analyst and Seton Hall Professor Frank Pasquale argues that data portability and other market-based regulations will fail: "privacy regulators' monitoring of oligopolistic online entities will be more effective than waiting for the elusive concept of 'privacy competition.'"
That's one reason I do think U.S. policymakers need to look at policy innovations in Europe that are demanding specific rights for consumers and even promoting key technologies that bypass the privacy-destroying process of many current online practices. They are moving towards policies that give individuals the right to remove personal data from online databases, require transparency in what data has been collected, and require explicit consent to collect personal data in the first place. Germany, for example, is requiring new central online sites where individuals can track exactly what data is being collected on them -- and be able to remove it -- and even promoting alternative online mapping software that eliminates the requirement by consumers to share their location to access it.
Beyond Neoliberal Economics Online: Whatever the salience of the neoliberal economic argument that regulation is not needed and markets will protect consumers -- and the bloody financial meltdown should make anyone question the general doctrine -- what's clear is that the Web 2.0 world has its own dynamics that make even the basic assumptions of neoliberal economics invalid.
Markets online are odd multi-party affairs, where individuals (often unknowingly) trade off their private information to intermediaries like Google, which in turn market that information to advertisers, who in turn try to market products or services often from other companies back to individuals. Individual interests in privacy are at war with the interests of advertisers in obliterating that privacy and "network effects" allow a company like Google to attain greater and greater dominance, even as it uses giving away free products to undermine the business model of potential competitors.
Waving the magic "market" wand seems a very weak and uncertain tool in achieving what we want as a society. Instead, what is needed are clearer mandates on all online companies to deliver what is promised -- whether products, searches or social connections -- while severely limiting how those companies can resell or market based on personal data without explicit consent.
People deserve to be back in control of their online experience, not merely a data point in a product marketed to advertisers.
Crossposted from Tech-Progress.org