Google, Microsoft, and Antitrust

By Keith Hylton

Posted on November 18, 2011


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With Google’s trial before the Senate now seemingly far behind us, the serious issues about the legality of its conduct under the antitrust laws remain to be debated.
 
Given all of the attention from antitrust enforcers across the country, a government antitrust lawsuit still looks like a virtual certainty, in spite of the long period of silence following the Senate hearing. One Google rival, ShopCity.com, upset by the silence, recently filed a complaint with the FTC and complained loudly to reporters of foot-dragging in the Google investigation. When the lawsuit is announced, presumably it will claim that Google has illegally monopolized the search market.
 
Google has been busy shaping public opinion in anticipation of the lawsuit. Google and its supporters have taken pains to stress the differences between Google’s conduct today and Microsoft’s conduct in the 1990s. Some of the asserted distinctions between Google and Microsoft are valid, while some are questionable. 
 
The interesting points of comparison, in my view, are the following.
 
First, is the Google antitrust case different, as some have asserted, because Google’s service is free? No.  In fact, Google services are not free; advertisers pay for them. If Google is really a monopolist, and actually exploits its monopoly power, advertisers and others businesses that pay Google directly are paying higher prices than they would under a more competitive environment. Those higher prices are then passed on to consumers – the very same consumers who use Google’s search services free of charge. The fact that you and I can search for information for free does not imply that Google is incapable of violating the antitrust laws.
 
Second, Google, unlike Microsoft in 1995, has been able to learn from Microsoft’s litigation mistakes. Whatever happens in this case, there will be no embarrassments at trial of the sort that bedeviled Microsoft during its litigation with the government – no “gotcha” moments in court, no hilarious missteps by defense lawyers, as the Microsoft trial seemed to toss up on a weekly basis. Microsoft did not seem to grasp the seriousness of the proceedings until the end of the trial, while the Google team is preparing for battle.
 
Third, unlike Microsoft during its trial, Google is simultaneously fighting an antitrust case against the European Commission. This is no small matter. The EC has so far had the complete backing of the European courts in monopolization cases. The European courts have not yet developed an independent framework of analysis for assessing the EC’s arguments in monopolization cases. In the absence of such a framework, the EU courts have deferred to the EC.
 
Because of this deference policy, the EC can order Google to changes its business practices with the security that its order will not be overturned by the EU courts. Although no one seems to talk about this much, this has to be a major source of pressure on Google to cave in and change its practices, even if the end result is quite bad for consumers.
 
Fourth, rather strangely, Google’s best friend, if the government lawsuit is filed, may be Microsoft, the very firm that many assert has funded complainants against Google. Microsoft’s Bing search engine is slowly gaining market share (in online search inquiries), though it is still way behind Google.
 
Still, if the trends continue, Google will soon be able to point to such significant competition that it can escape the label “monopolist” (requiring a market share of at least 65 percent), at least under U.S. law. But this may not matter under EU law, which is more liberal with the attribution of monopoly power. The best that Google can hope for is to divide the U.S. and EU antitrust authorities, and use that division as leverage in its negotiations with the EC. The U.S. antitrust authorities, on the other hand, have an incentive to “free ride” on the EC, as the FTC did in its Intel investigation, by pressing for changes in business practices that are similar to the changes demanded by the EC.
 
Lastly, Google’s biggest problem in this oncoming lawsuit is something that it shares, in stunning irony, with Microsoft of 1995. The Microsoft of 1995 had the luxury of sitting back and watching the market for software applications, and then incorporating successful and broadly-useful applications into its operating system, like a whale swallowing up other fish. That appears to be true of Google today with search. It can sit back and see what works in the market for search, and then replicate it, improve it, and place its new and improved version on a higher ranking in its own search results.
 
This is painful for firms that are innovating in the search market. But, by and large, it is good for consumers. The problem with antitrust law, at least in this setting, is that it does not operate with such precision that it can reduce the harms from this type of competition without also reducing the benefits to consumers.

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