Steven Pearlstein at the Washington Post asks if it’s “Time to loosen Google’s grip.” The article is an analytical mess. Pearlstein is often a decent business reporter–I’m not sure what went wrong here, but this is a pretty shoddy piece of antitrust journalism.
Pearlstein is at least a decent writer, so the prose is nice and flowery. I don’t think he even uses the word “leverage.” Instead we get this:
The question now is how much bigger and more dominant we want this innovative and ambitious company to become. Google has already achieved a near-monopoly in Web search and search advertising, and has cleverly used that monopoly and the profits it generates to achieve dominant positions in adjacent or complementary markets. Success in those other markets, in turn, further strengthens Google’s Web search dominance and reduces the chance that any other competitor will be able to successfully challenge it.
It’s the same old line: ”Google is dominant (in a market we wave our hands and say is antitrust-relevant).* It uses its profits to ‘leverage’ its power to control other ‘adjacent’ markets. Said leveraging reinforces Google’s monopoly, making it nearly impossible for anyone to compete. Wash. Rinse. Repeat.”
Pearlstein claims not to be bothered by Google’s legitimate monopoly–it’s the crass buying of other companies that worries him ($6 billion for Groupon?!?! Talk about stimulus! Why isn’t the fed subsidizing this?–Oh, wait. I guess they are . . . ). And here’s where Pearlstein really flubs it.
Check out this paragraph:
In theory, antitrust laws were meant to restrict such acquisitions by a monopolist. In practice, however, it hasn’t worked out that way. Decades of cramped judicial opinions have so limited application of antitrust laws that each transaction can be considered only in terms of how it affects the narrowly defined niche market that an acquiring company hopes to enter.
By “such acquisitions,” Pearlstein means the ones he knows to be anticompetitive. OK, that’s not fair. They are the ones where a monopolist “buys its way into new markets and new technologies.” I must be reading different antitrust laws. I can’t recall the part where the Sherman Act makes it illegal for a monopolist to improve its product or its business processes, even if it does so by buying another company in a different (though “adjacent”) market in order to run it better. And could it really be ok for a monopolist to develop its own new technology to accomplish the same ends, but not ok for the company to just take the more efficient route and buy the technology from another company? I mean, it has to come from somewhere. Google is either paying its own employees to develop technology or it’s paying another company’s employees to do it. What’s the difference?
Actually, Pearlstein has an answer:
Moreover, by swooping in and buying these promising firms, Google forecloses on the possibility that they might be purchased by companies such as Microsoft or Facebook, which could use them to mount a serious challenge to Google’s dominant position. Such a motive is suggested by the extraordinary premiums that Google has been willing to pay for its purchases.
Well here’s Microsoft’s chance! Groupon seems to be on the block and the price is somewhere north of $6 billion. But Microsoft (and Facebook) can afford that and much more. It only looks like Google is “foreclosing” the possibility that these firms might be purchased by Microsoft until you realize that Microsoft certainly has the resources but seems to have made an affirmative decision not to purchase these companies. I do seem to recall that Google was in a bidding war with Microsoft for DoubleClick. If Microsoft could have mounted a serious challenge to Google by buying it, one has to wonder why that prospect resulted in a less-extraordinary premium than the one Google was willing to pay to keep the company out of Microsoft’s hands. Perhaps Pearlstein’s explanation is . . . incomplete?
What Pearlstein seems to want–and what he laments that the US antitrust authorities either can’t or won’t do–is to condemn efficient conglomerate mergers. Bill Kolasky succinctly decimated that argument in 2001 in a speech at George Mason. The whole thing is worth reading, but here’s a snippet:
As the Supreme Court explained in Spectrum Sports, Inc. v. McQuillan:
“The purpose of the [Sherman] Act is not to protect business from the working ofthe market; it is to protect the public from failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.”
Applying this principle to mergers, it is well established under U.S. law that the antitrust laws do not protect competitors from mergers that will make the merged firm more efficient, even if they fear they may as a result be forced from the market. This is because, as former Treasury Secretary Larry Summers reminded us at this year’s ABA Antitrust Section Spring Meeting, competition is a means to an end, and not an end in itself: “The goal is efficiency, not competition. The ultimate goal is that there be efficiency.” Production and transactional efficiencies benefit consumers by lowering the costs of goods and services or by increasing their value. . . .
Unfortunately, Pearlstein may have soulmates at the European Commission, where protection of competitors is indeed a goal. But at any rate, one suspects that the concern is less the buying of other companies and more Google’s expanding scope, no matter the means:
One at a time, these deals might appear to be relatively benign. But taken together, they allow Google to increase the scale and scope of its activities and to further enhance its controlling position across a range of sectors.
Hmmm. Seems amiss. Let me take a stab at it:
One at a time, these deals might appear uninteresting. But taken together, they demonstrate that Google is risking enormous capital to innovate–continuously challenging the boundaries of its core business and expanding the scale and scope of its activities across a creative range of sectors.
Remarkably, the whole problem with antitrust is that conduct is ambiguous–it can be pro-competitive or anti-competitive, and ex ante there’s rarely any easy way to know. One man’s enhanced dominance is another man’s entrepreneurship. It’s all about the error costs. Pearlstein does not reflect sensitivity to this, and his certainty regarding the ill effects of Google’s various mergers seems absolute–and rooted in that new classic, network effects.
Here’s his analysis:
The ease with which Google has been able to extend its dominance reflects, in large part, the inability to adapt century-old antitrust laws to the quite-different economics of a high-tech economy that is susceptible to winner-take-all competition
Some of this has to do with the fact that in high-tech industries, most of the costs are upfront, fixed expenses, such as developing the software program or writing the original algorithms. Once those are paid for, the “incremental” or “variable” cost of producing another copy of the software or doing an extra Web search is almost nothing. In such markets, economies of scale loom large and companies with the most customers are able to use that advantage to lower prices, improve quality and increase their lead even further.
These are also markets where customers tend to prefer the company that has the most other customers – what economist call a “network effect.” If you’re looking for a social-networking site, for example, you’ll probably prefer the one that most of your friends and acquaintances also use. Or if you’re looking to sell your used piano, you probably want to use the online auction site where the most buyers tend to congregate. As a result, a few companies get very big very fast, the others die away and new competitors rarely emerge.
I’m not sure if he’s complaining or rejoicing. Lower prices??? Improved quality??? It’s a travesty! And I’m not sure what it has to do with buying other companies, either.
Moreover, I think Tim Wu already wrote this article (Not that Josh and I are buying it).
Now, on the one hand, no one cares if their friends and acquaintances or anyone else, really, is using Google–there is no direct network effect among users (nor is there among advertisers, for that matter, all of whom would rather there be fewer other advertisers bidding on the same keywords). On the other, there could be some indirect network effects at work, but, as Josh and I explain at great length in our article on the Case Against the Antitrust Case Against Google, these really shouldn’t be seen as an antitrust problem (any more than should increased efficiency, economies of scale and the like–which is to say not at all). To confidently state “network effects!,” waive your hands, and assume antitrust injury is simply not sufficient.
To sum up, Pearlstein delivers this gem:
But it is worth remembering that aggressive enforcement of the antitrust laws has been a crucial part of the history of technological innovation in this country, enforcement that allowed AT&T to be supplanted by IBM, IBM by Microsoft and Microsoft by Google.
I’d like to know how antitrust enforcement against Microsoft “allowed” Microsoft to be “supplanted” by Google. For that matter I’m curious how IBM supplanted AT&T. I do believe that the massively-wasteful antitrust persecution of IBM probably helped Microsoft somewhat, but not in the way Pearlstein thinks.
It is seriously doubtful that antitrust enforcement has been a “crucial part of the history of technological innovation in this country,” except perhaps as a suppressor of innovation. While governments around the world were beating up on Microsoft, Google was forging ahead in markets at best “adjacent” to the ones of such concern to the enforcers. There can be no doubt that technological innovation worked perfectly well on its own, thank you very much, and that antitrust enforcers and scolds like Pearlstein are more likely to muck it up than to pave the way for a Microsoft ascendent in Internet search.
*Apparently the French Autorite de la concurrence agrees with Pearlstein’s market definition: “TheAutorité considers that Google holds a dominant position on the advertising market linked to search engines Search-related advertising represents a specific market that cannot be replaced (not substitutable) by other forms of communication, notably because it allows for very fine-tuned targeting, and because no other equivalent alternative offer exists in the eyes of advertisers.” I happen not to agree, but neither the French authority (as far as I know) nor I has done an econometric analysis. However, casually, these are differences of degree, and substitution between included and excluded markets is certainly taking place. Is the “very fine-tuned targeting” market different than the “super-premium fine tuned targeting” market?