Some Much-Needed Antitrust Skepticism on Senate Letter Urging FTC Google Investigation
By Geoffrey Manne and Berin Szoka
[Cross posted at TechFreedom.org]
Back in September, the Senate Judiciary Committee’s Antitrust Subcommittee held a hearing on “The Power of Google: Serving Consumers or Threatening Competition?” Given the harsh questioning from the Subcommittee’s Chairman Herb Kohl (D-WI) and Ranking Member Mike Lee (R-UT), no one should have been surprised by the letter they sent yesterday to the Federal Trade Commission asking for a “thorough investigation” of the company. At least this time the danger is somewhat limited: by calling for the FTC to investigate Google, the senators are thus urging the agency to do . . . exactly what it’s already doing.
So one must wonder about the real aim of the letter. Unfortunately, the goal does not appear to be to offer an objective appraisal of the complex issues intended to be addressed at the hearing. That’s disappointing (though hardly surprising) and underscores what we noted at the time of the hearing: There’s something backward about seeing a company hauled before a hostile congressional panel and asked to defend itself, rather than its self-appointed prosecutors being asked to defend their case.
Senators Kohl and Lee insist that they take no position on the legality of Google’s actions, but their lopsided characterization of the issues in the letter—and the fact that the FTC is already doing what they purport to desire as the sole outcome of the letter!—leaves little room for doubt about their aim: to put political pressure on the FTC not merely to investigate, but to reach a particular conclusion and bring a case in court (or simply to ratchet up public pressure from its bully pulpit).
The five page letter concludes with, literally, three sentences presenting Google’s case, one of which reads, in its entirety, “Google strongly denies the arguments of its critics.” The derision is palpable—as if only a craven monopolist would deign to actually deny the iron-clad arguments of Google’s competitors so painstakingly reproduced by Senators Kohl and Lee in the preceding four pages. This is neither rigorous analysis nor objective reporting on the contents of the Senate’s hearing.
While we worry about particularly successful companies being singled out for punishment, we hold no brief for Google in this debate. Instead, in all our writings, we’ve tried to present a consistently skeptical view about a worrisome trend in antitrust enforcement in high tech markets: error-prone and costly intervention in markets that are ill-understood and fast-moving, to the great detriment of consumers and progress generally. Although our institutions have received financial support from Google among a range of other companies, organizations and individuals, our work is focused on this broad mission; we have no obligation or intention to support any company simply because it finds value in supporting our mission.
We’ve defended (and one of us has even worked for) Microsoft in the past, and just yesterday, we lamented the fact that the Obama Justice Department and the FCC have effectively blocked Google’s arch-rival, AT&T, from buying T-Mobile. Rather than defend any particular company, our goal, to paraphrase Hayek, is to “demonstrate to [regulators] how little they really know about what they imagine they can design”—lest they undermine how competition actually works in the name of defending outdated models of how they think it should work. Unfortunately, the letter from Senators Kohl and Lee does nothing to assuage our concern and suggests instead that crass politics, rather than sensible economics, could determine the outcome of cases like this one—if not in a court of law, then in the court of public opinion and extra-legal intimidation.
To begin with, the letter asserts that “Google faces competition from only one general search engine, Bing,” suggesting that only Bing (and it, only ineffectively) could keep Google in check. In essence, the Senators are prejudging an essential question on which any case against Google would turn: market definition. But why would the market not include other tools for information retrieval? Is it not at least worth mentioning that more and more Internet users are finding information and spending time on social networks like Facebook and Twitter, while more and more advertisers are spending their money on these Google competitors? Isn’t it clear that search itself is evolving from “ten blue links” into something more social, multi-faceted and interactive?
In a remarkable leap, the senators then identify the specific alleged abuse that Google’s alleged market power leads to: search bias. That’s remarkable because, other than the breathless claims of disgruntled competitors (given plenty of air time at the September hearing), there is actually no evidence that search bias is, in fact, harmful to consumers—which is what antitrust is concerned with. (Read both sides of this debate in TechFreedom’s free ebook, The Next Digital Decade: Essays on the Future of the Internet.)
As our colleague, Josh Wright, has thoroughly demonstrated, this “own-content” bias is actually an infrequent phenomenon and is simply not consistent with an actionable claim of anticompetitive foreclosure. Moreover, among search engines, Google references its own content far less frequently than does Bing (which favors Microsoft content in the first search result when no other search engine does so more than twice as often as Google favors its own content).
Of course, none of this is even hinted at in the Senators’ letter, which seems intended to condemn Google for “preferencing” its own content (under the pretense of withholding judgment). It’s a little like condemning Target for deigning to use its trucks to supply inventory only to its own stores instead of Wal-Mart’s, or, say, condemning a congressman for targeting earmarks for his own state or district. Earmark bias!
In Google’s case, the fundamental basis for these claims, according to the letter, is that “Google’s business model has changed dramatically in recent years.” This is a remarkably candid admission: a company that successfully advances its organization, keeping up with rapidly-shifting technology and mercurial demand, can be condemned—and its business practices adjudged illegal—simply by virtue of the fact that it has, indeed, evolved to offer products it didn’t offer before. Never mind that those products didn’t previously exist and, in some cases, were in fact invented by that company! How would punishing this serve consumers?
To add insult to injury, the story is “corroborated” by the senators’ parroting, without caveats, claims by Google’s rivals that they are harmed by Google’s favoring its own content, and that “they would not attempt to launch their companies today given GoogIe’s current practices.” As a general matter, antitrust law treats such self-interested claims of competitors with the skepticism they deserve. You wouldn’t know it from reading the letter (nor from reading the transcript from the September hearing), but harm to competitors is not the same thing as harm to consumers or competition more generally (which is what antitrust law cares about). The reason is simple: nothing harms competitors more than effective, vigorous competition. Reasoning backward from harm to competitors to infer anticompetitive conduct is the height of irresponsible antitrust enforcement.
The letter also reports, again with no caveats, claims by the CEOs of Yelp! and Nextag that “75 percent of Yelp!’s web traffic consists of consumers who find its website as a result of Google searches, and . . . 65 percent of Nextag’s traffic originates from Google searches,” and that losing this much traffic to Google preferencing its own content would be catastrophic. But the letter fails to mention that most searches for brand names on Google are “navigational” rather than “informational.” As Google competitor Expedia’s CEO recently explained:
The majority of, at least Expedia’s, and I believe Hotel.com’s traffic that comes from search to our site actually come through people searching for Expedia, for example. So in typing in Expedia in Google or so on, typing in Hotels.com in Google. So of the 25% for Expedia, for example, the majority of that traffic is someone who’s already looking for Expedia, and that person is going to find Expedia one way or the other because they are searching for something very specific. (Expedia earnings call, 10/28/10, quoted here).
Indeed, a recently published independent academic study conducted across search engines concluded that 52% of “business queries” (and 72% of organizational queries) were navigational. In other words, most of the Google traffic going to these sites was likely from users who simply typed in “Yelp” or “NextTag” as a convenient way of getting to those sites. Such searches are not diverted (and not even claimed to be diverted) to Google’s own sites, and the first search result for the search term “Expedia” will always be expedia.com. Thus, the majority of these searches that are claimed to make up 75% and 65% of the complaining companies’ traffic is not in any way threatened by Google’s business model, and is completely irrelevant to assessing the effect of Google preferencing its own content.
Furthermore, the letter does not mention Yelp’s recent boast that over 40% (and growing) of its searches are now conducted on its mobile app—insulating it from whatever “power” Google might exercise over traditional searches. While generic search may be the default navigational tool for many desktop users, a great many users seem to prefer searching with apps like Yelp’s on their mobile devices, further underscoring the complexity of the markets at issue and the problem with the kind of facile market definition on display here.
Moreover, who really knows what anyone might have done in 1999 (Nextag) or 2004 (Yelp)? It is facile and meaningless for the companies to imply that Google’s conduct is stifling today the same business models that emerged 7 or 12 years ago, before the ensuing evolution of the market. It would be a shame, in fact, if those same companies were emerging only today, and one shouldn’t be surprised in a rapidly evolving marketplace to find that many once-brilliant ideas turn out to be bested by the vagaries of uncertain, innovative markets. Remember, it wasn’t so long ago that Yahoo! ruled the “portal market,” which morphed into the “search” market “controlled,” in turn, by AOL and AltaVista. A static snapshot of the market at any given moment might have inspired the sort of hand-wringing Google inspires today. But the market kept evolving—without government intervention—each time rendering today’s tech titans tomorrow’s has-beens. Nostalgia and a reflexive preference for the status quo are the worst vices of regulating any evolving market, especially high-tech ones. Estimates that Yelp’s upcoming IPO may put the company at a valuation of $1-2 billion should at least make us somewhat skeptical of such claims, anyway.
It is for this reason—the disconnect between the interests of competitors and those of “competition” and the consumers it serves—that it’s particularly disingenuous for the letter to identify Tom Barnett only as “the Assistant Attorney General for Antitrust in the administration of President George W. Bush.” This is an ostentatious attempt to appeal to Republicans normally skeptical of government meddling, giving him the last word to claim that “the ultimate result of Google’s practices will be an Internet with fewer choices for consumers and business, higher prices, and less innovation.” (Sen. Lee himself seems to have fallen prey to claims by soi disant conservatives like Rick Rule (also, coincidentally, antitrust attorney to several of Google’s complainants) that antitrust meddling is a core part of capitalism—rather than another form of government regulation prone to capture by incumbents and politicization, precisely as Judge Bork warned in the Antitrust Paradox.)
A fairer letter would have noted the far more salient fact that Barnett is counsel for Expedia Inc., a member of the anti-Google Fairsearch coalition, for which he has served as spokesman. As Josh Wright has ably demonstrated, AAG Barnett and counsel-to-Expedia Barnett have wildly divergent views. While AAG Barnett is rightly celebrated as a thoughtful and restrained antitrust expert (indeed, he taught Berin antitrust law!), counsel-to-Expedia Barnett is a faithful and diligent advocate for his client (as well he should be). It is no disrespect to him to say that his client’s interests are not necessarily the same as those of the consumers Senators Kohl and Lee purport to represent; it is, however, questionable to hold out his views on this matter as representative of consumer interests.
The letter goes on to highlight mobile search as a particularly problematic arena. Why? Because “Google may, as a condition of access to the Android operating system, require phone manufacturers to install Google as the default search engine.” But . . . they haven’t actually done that! The mobile phone market is remarkably competitive and ever-shifting. (One can easily imagine this same letter being written to raise pressing, irreversible concerns about Apple’s iPhone a year or two ago—just before Google’s Android operating system managed to seize the 43% of smart phone operating system share about which this letter is so concerned). Nevertheless, the FTC is urged to “ensure robust competition” in a market marred only by the senators’ purely speculative story about what could conceivably happen some day in the future. Is this really a responsible use of antitrust law?
It certainly isn’t responsible analysis. The Senators’ professed concern for robust competition and protection of the free market is undermined by the letter’s uncritical repetition of attacks on Google made by its competitors. At best, this letter is a missed opportunity to fairly present both sides of this complex case. For this reason, as well as the inconvenient fact (oddly completely absent from the letter) that the FTC is, as we noted, already actually investigating Google, we urge Chairman Leibowitz to investigate nothing more pertaining to this letter than the shape of the arc it makes as it flies through the air into his office wastebasket.
Filed under: antitrust, error costs, exclusionary conduct, federal trade commission, google, Internet search, law and economics, markets, monopolization, regulation, technology Tagged: antitrust, expedia, Federal Trade Commission, ftc, google, Herb Kohl, Josh Wright, Kohl, Mike Lee, tom barnett