Supernova 2009: Eric Clemons and the Prospects for Antitrust Action Against Google

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Eric Clemons presentation from Supernova 2009: "Prospects for Antitrust Action Against Google"

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Supernova 2009: Eric Clemons and the Prospects for Antitrust Action Against Google

  1. Self-Regulating Public Servant or Rapacious and Unscrupulous Monopolist: Prospects for Antitrust Action Against Google Eric K. Clemons [email_address] Information Strategy & Economics The Wharton School 2 December 2009 Eric K. Clemons © December 2009
  2. Context <ul><li>Explosive subject! </li></ul><ul><ul><li>“ Government touches google = we revolt… this is sacred ground people!” </li></ul></ul><ul><ul><li>“ What if GOOGLE broke up the GOVERNMENT, would be a more interesting story” </li></ul></ul><ul><ul><li>“ I don’t think that GOOGLE should be worried about the GOVERNMENT … now vice versa…” </li></ul></ul><ul><ul><li>“ They can take my Google when they pry the keyboard from my cold, dead hands.” </li></ul></ul>
  3. Context <ul><li>Clarifying disclaimer </li></ul><ul><ul><li>I am not describing why Google should face antitrust litigation </li></ul></ul><ul><ul><li>I am not describing why Google should lose antitrust litigation </li></ul></ul><ul><li>I am describing what the litigation will look like, if indeed it comes </li></ul><ul><ul><li>And indeed, Google also believes that the issues raised here are those that they will face in court </li></ul></ul><ul><ul><li>Hence their preemptive attempts to put the best possible spin on them </li></ul></ul>
  4. Outline and Overview <ul><li>Relevant market share </li></ul><ul><ul><li>Is Google just another advertising company or the dominant player in search? </li></ul></ul><ul><ul><li>Was Microsoft just another software firm or the dominant player in operating systems </li></ul></ul><ul><li>Search as a form of electronic distribution, with its own economics </li></ul><ul><ul><li>Essential facility </li></ul></ul><ul><ul><li>Parallel monopolies, not competitive markets </li></ul></ul><ul><li>Google as a potentially predatory monopoly </li></ul><ul><ul><li>Monopoly profits in a non-contestable market </li></ul></ul><ul><ul><li>Evidenced by massive cross subsidies </li></ul></ul><ul><ul><li>With harm to the competitive process </li></ul></ul>
  5. Motivation for Studying Antitrust Problems at Google <ul><li>Why study Google? </li></ul><ul><ul><li>Because it’s beloved — always interesting! </li></ul></ul><ul><ul><li>Because it’s the best? </li></ul></ul><ul><ul><li>Because it does an amazing job free? </li></ul></ul><ul><ul><li>Because it did all this while doing “no evil”? </li></ul></ul><ul><ul><li>Because it may indeed be violating antitrust laws? </li></ul></ul><ul><ul><li>Because it may indeed be able to spend its way out of trouble? </li></ul></ul>
  6. Motivation for Studying Antitrust Problems at Google <ul><li>How would you know? </li></ul><ul><ul><li>Because it’s the best? — do some experiments </li></ul></ul><ul><ul><li>Because it does an amazing job free? — Like Elliot Ness, follow the money </li></ul></ul><ul><ul><li>Because it did all this while doing “no evil”? — follow the complaints and litigation trail, from Rescuecom and American Airlines to ShoeMoney.com </li></ul></ul><ul><ul><li>Because it may indeed be violating antitrust laws? — relevant market, essential facilities doctrines </li></ul></ul><ul><ul><li>Because it may indeed be able to spend its way out of trouble? — Hal Varian x 60, press conferences in response to blog posts, claims that they are only an ad company, 2.8% of the relevant market ... </li></ul></ul>
  7. Relevant Market Share <ul><li>What is the market whose share you are trying to estimate? </li></ul><ul><ul><li>Microsoft is a small portion of the global economy </li></ul></ul><ul><ul><li>It is a larger portion of the technology sector </li></ul></ul><ul><ul><li>And it is a huge portion of the Intel operating system market </li></ul></ul><ul><ul><li>Microsoft tried to argue it was about 3% of the software market </li></ul></ul><ul><ul><li>And the DoJ and David Boise argued that it was closer to 90% of the relevant market , the market at the time for operating systems for Intel-based machines </li></ul></ul>
  8. Relevant Market Share <ul><li>What is the market whose share you are trying to estimate? </li></ul><ul><ul><li>Google is a small portion of the global economy </li></ul></ul><ul><ul><li>It is a larger portion of the internet economy </li></ul></ul><ul><ul><li>And it is a huge portion of the market for internet search </li></ul></ul><ul><ul><li>Google is now trying to argue it is about 3% of the advertising market </li></ul></ul><ul><ul><li>And the DoJ will certainly argue that it is closer to 70% of the relevant market , the market for online search </li></ul></ul>
  9. Relevant Market Share <ul><li>Why isn’t it just advertising? </li></ul><ul><ul><li>Google calls its profitable businesses adwords and adsense … you can’t be more clear than than </li></ul></ul><ul><ul><li>But we know what advertising is … advertising creates a desire to buy now, or a sense of trust in a brand that leads to buying later </li></ul></ul><ul><ul><ul><li>Smart, Very Smart </li></ul></ul></ul><ul><ul><ul><li>We love to fly and it shows </li></ul></ul></ul><ul><ul><li>Google hijacks a brand so that if I search on Marriott Marquis or InterContinental London they send me to a bidder, not necessarily the owner of the brand </li></ul></ul><ul><ul><li>And brand owners really don’t have a choice </li></ul></ul><ul><ul><ul><li>Experiments conducted by hotels indicate that they cannot afford not to play </li></ul></ul></ul>
  10. Relevant Market Share <ul><li>Why isn’t it just advertising? </li></ul><ul><li>Why don’t they have a choice? </li></ul><ul><ul><li>Can’t you just take out an ad in the NY Times, The San Francisco Chronicle, or the CBS Evening News? </li></ul></ul><ul><ul><li>Not if the customers get sent somewhere else by Google after your ad </li></ul></ul><ul><ul><li>Advertising is not a substitute for search </li></ul></ul><ul><ul><li>Anymore than you can use Photoshop or SAP in place of Vista or Windows </li></ul></ul>
  11. Essential Facilities Doctrine <ul><li>If Google is not advertising, what is it ? </li></ul><ul><li>Google is a form of electronic distribution </li></ul><ul><li>And electronic distribution is an essential facility </li></ul><ul><li>Just like travel agent reservations systems were in the 1980s </li></ul><ul><ul><li>When United wanted to take over Denver it redirected passengers away from Frontier </li></ul></ul><ul><ul><li>When American wanted to take over Dallas / Fort Worth it redirected passengers away from Braniff </li></ul></ul><ul><ul><li>Both quickly went bankrupt </li></ul></ul><ul><li>Numerous service providers, especially airlines and hotels, fear that Google has the power to do the same to them if they refuse to pay </li></ul>
  12. Essential Facilities Doctrine <ul><li>Essential facility? </li></ul><ul><li>Why, with competing travel agent reservations systems, were Sabre and Apollo so powerful? </li></ul><ul><li>Parallel monopolies </li></ul><ul><li>Agencies only used one </li></ul>
  13. Essential Facilities Doctrine <ul><li>Essential facility? </li></ul><ul><li>How, with competing search engines, could Google be considered powerful? </li></ul><ul><li>Compare diagrams! </li></ul><ul><li>Parallel monopolies </li></ul><ul><li>With even greater concentration </li></ul>
  14. Potentially Predatory Monopoly <ul><li>Contestable Market </li></ul><ul><ul><li>Baumol, Panzar, and Willig </li></ul></ul><ul><ul><li>You don’t have to be a monopoly in order to have monopoly power </li></ul></ul><ul><ul><li>So how would regulators know? What are the signs? </li></ul></ul><ul><ul><li>Unprecedented profitability </li></ul></ul><ul><ul><ul><li>Compare Google’s profitability with that of traditional advertisers … like Business Week (sold) or the Philadelphia Inquirer and Daily News (bankrupt) or Seattle PI (gone) </li></ul></ul></ul><ul><ul><li>And money left over for cross subsidies </li></ul></ul><ul><ul><ul><li>Like gmail, YouTube, office systems, even below market outsourcing (dumping in Japan at JTB?) </li></ul></ul></ul>
  15. Potentially Predatory Monopoly <ul><li>But free stuff and cross subsidies improves consumer choice, right? </li></ul><ul><ul><li>Not always </li></ul></ul><ul><ul><li>Microsoft “free” IE provided an alternative to Netscape, until Netscape was killed </li></ul></ul><ul><ul><li>And Microsoft bundled and subsidized Excel provided an alternative to Lotus 1-2-3 </li></ul></ul><ul><li>The DoJ and the Courts are as concerned with harm to competitive process as with harm to competitors </li></ul><ul><ul><li>And in a range of markets Google could be stifling competition through its cross subsidies </li></ul></ul>
  16. But they’re not evil? <ul><li>Maybe not </li></ul><ul><li>But their recent online arguments about why they are good require some response </li></ul><ul><li>But most of the arguments about not being evil are more about being greedy than about being good </li></ul><ul><ul><li>You don’t have to be high bidder to be ranked first </li></ul></ul><ul><ul><li>Well yes … what Google now does is called rank by revenue instead of the previous rank by bid </li></ul></ul><ul><ul><li>They put the stuff they know you want first, because it generates more clicks and more revenue for Google </li></ul></ul><ul><ul><li>And because it generates adequate consumer satisfaction </li></ul></ul><ul><ul><li>Without signaling consumers that top spot may be weak and that perhaps bidders should be ignored, destroying Google’s business model </li></ul></ul>
  17. But they’re not evil? <ul><li>Maybe not </li></ul><ul><li>But most of their arguments about good and evil are more about being greedy than good </li></ul><ul><ul><li>They put the stuff you want first </li></ul></ul><ul><ul><li>And after charging companies billions of dollars to achieve their true rank, companies can get their true rank … but only if they are willing to pay </li></ul></ul><ul><li>If Google does turn out to be an expensive monopoly why can’t someone offer cheaper search? </li></ul><ul><ul><li>How could it be cheaper for consumers? </li></ul></ul><ul><ul><li>Consumers think it is already cheaper than free </li></ul></ul><ul><ul><li>And if that’s where the consumers are, that’s where the bidders have to be </li></ul></ul>
  18. Conclusions <ul><li>Wait and see … </li></ul>

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