In Defense of Google
By Pierre Lemieux
“The price Google charges to its search-engine customers is zero, which is not exactly a monopoly price.”
On April 15, 2015, the European Commission (EC), which is the European Union executive, accused Google of “abusing a dominant position… by systematically favouring its own comparison-shopping product in its general search results pages.”1 The EC announcement followed five years of threats to, and negotiations with, Google. The EC also announced a formal investigation into the alleged market power that Google gets over companies that use its free Android operating system.2 The French government is also planning an action against Google.
The EC accusation illustrates how antitrust can be used as a protectionist instrument and a coercive tool by less-efficient competitors. More generally, it reveals the poverty of the standard antitrust doctrine, which ignores the fact that the pursuit or maintenance of a dominant market position gives firms a strong incentive to innovate. This doctrine is blind to the fragile and temporary character of any market dominance not protected by government regulation. It downplays the fact that market dominance crucially depends on how one defines the relevant market. The attack against Google ignores the huge value that Google has created by providing services that are essentially free for the individual consumer. And note the irony of the whole confrontation: the European Union, a large non-competitive organization, charges a private company with abusing an uncertain market position.
As is usual in the EC’s administrative antitrust proceedings, the burden of proof is on the accused. “I am concerned,” declared the EC commissioner in charge of competition policy, “that the company has given an unfair advantage to its own comparison-shopping service, in breach of EU antitrust rules. Google now has the opportunity to convince the Commission to the contrary.”3 The Commission is, in such matters, both prosecutor and judge—although a defendant can always appeal its decisions to European courts.
In 2013, the U.S. Federal Trade Commission ended an antitrust investigation against Google after the company agreed to change some of its business practices, but none of the changes related to the ranking and display of search results. Although, in this case, the FTC has been more reasonable than the EC, it is worth remembering that antitrust legislation is a late-19th-century American invention that European and other governments have copied lately, sometimes with a vengeance.
One important lesson of the antitrust attacks against Google is a Public Choice lesson. The action of the EC follows complaints by Google competitors on the European market, including Foundem (a British price comparison website), Expedia, and Microsoft. These complainants obviously called for government action because they could not compete against Google by simply persuading customers to patronize them instead. They sought protection from the state, which amounts to what Public Choice analysts call rent-seeking.
Protectionist interests may also lurk behind the EC’s attack against Google, a company whose headquarters are located in Silicon Valley. The day before the charges against Google were announced, Günther Oettinger, the EC’s so-called “digital commissioner,” publicly complained that “our online businesses are today dependent on a few non-EU players,” warning that “this must not be the case again in the future.”4 Because governments are clubs of producers more than associations of consumers, a Public Choice analyst would expect the European authorities to cater to European businesses’ dissatisfaction with a large American company taking away some of their digital business.
Is Dominance Detrimental?
The European charges remind us of the poverty of the old antitrust doctrine. Any “market power” or “dominant position” is deemed detrimental to the consumer, just as a literal monopoly is: less is produced and consumers have to pay higher prices. This argument neglects the benefits that dominant firms produce. One benefit is that the prospect of dominance or the desire to maintain it creates an incentive to innovate. Indeed, Google has been and is an innovator in many fields. The dominance argument also neglects the fact that dominant firms have to behave more or less like competitive ones if they don’t want competitors to enter the market and push them aside. As for the argument that a monopoly can keep out more-efficient producers with artificially low prices, it neglects the simple fact that this sort of price war will cost more to the least efficient producer.5
The price Google charges to its search-engine customers is zero, which is not exactly a monopoly price. As a business model, this is similar to the businesses that offer free or nearly-free goods or services, such as TV programs, software or newspapers, in order to earn advertising revenues. The fundamental reason that Google’s search engine occupies such a dominant position is that, in the opinion of most consumers, nobody—not even Apple or Microsoft—offers as convenient a search engine.
Furthermore, whether a “dominant position” even exists depends crucially on what the relevant market is. According to the EC, Google’s market share in search engines is “above 90% in most EEA [European Economic Area] countries.” We could add that it has a 100% share of the Google search market. But this translates into a much smaller market share in the whole advertising market, in e-commerce, or in the consumer tech market. Peter Thiel, one of the founders of PayPal, notes that Google accounts for only 3.4% of the global advertising market and only 0.24% of the consumer tech market.6
A related antitrust argument focuses on the cost of entry in the industry, which supposedly protects existing monopolies or dominant firms. Any business venture involves costs, including cost of entry, but these are financeable if the expected profits are high enough. If they are not, it must be that incumbent firms are offering good products at not much more than the lowest price. Mathias Döpner, head of a German publishing firm and one of the anti-Google complainants, writes:
The statement “if you don’t like Google, you can remove yourself from their listings and go elsewhere” is about as realistic as recommending to an opponent of nuclear power that he just stop using electricity. He simply cannot do this in real life—unless he wants to join the Amish.7
This analogy is an exaggeration. Certainly, it is less costly for most people to have nothing to do with Google than to stop using electricity. Similarly, it is less difficult and costly to stop providing data to Google than to, for example, the National Security Agency or the IRS.
The highest costs of entry are typically generated by government regulations and protectionist measures. Cost of entry is, of course, a matter of degree, but one can argue that only government-protected companies are real monopolies because the cost of violating laws is typically prohibitive. Government-imposed costs of entry are high because they involve legal fees, fines or criminal penalties, and enforcement actions.
Dominance Tends to be Temporary
Antitrust arguments are especially unpersuasive in fluid and innovative high-tech markets. Google did not even exist 20 years ago. In the late 1990s, the dominant search engine was Alta Vista. Veronica, another major Internet search engine, had just recently gone out of fashion. The U.S. Department of Justice sued Microsoft for antitrust violations in 1998, the very year Google was founded. Before that, IBM spent 13 years fighting antitrust action by the U.S. government; the case was dropped in 1982, about the time personal computers were starting to challenge Big Blue’s dominant position. The antitrust authorities are usually one battle behind. Today, many competitors, such as social networks—most notably Facebook—challenge Google’s position. (Google tried to compete against Facebook with Google+, but obviously failed.)
There is some irony in Google being attacked by governments, which are not exactly competitive sorts of enterprises. The danger of the concentration of power lies in government, not in private businesses, which can always be challenged on the market and gain entrenched power only through government protection and privilege. Moreover, large private organizations provide a barrier to state power.
The EC’s antitrust attack on Google is suspicious for another reason. The EC says that it “is concerned that users do not necessarily see the most relevant results in response to queries” because Google Shopping is shown “more prominently on the screen.”8
In other words, the consumer is too stupid to look at less-prominent results or to check on another comparison-shopping site or on Amazon or eBay; or simply use another search engine. All these options are only a couple of clicks away. If consumers are so gullible and easily manipulated, how can they, in their capacity as electors, be discerning enough to elect the politicians who hire antitrust bureaucrats? Public Choice theory suggests that consumers are more rational than voters: an individual voter remains rationally ignorant of political issues, on which his vote has no noticeable impact, while he has an incentive to make good consumer choices, on which he will pay all the costs and reap all the benefits.
The Huge Benefits of Google
In less than two decades, Google’s search technology has dramatically reduced the cost of information and research. Small questions that used to take hours or days of research can now be answered with a few clicks on Google’s search engine. Google Books has digitized more than 15% of the 129 million books ever published, and the project has only started.9 It is barely an exaggeration to say that Google has done more for knowledge and culture than all European governments combined. And I have not mentioned Google Maps and many other Google innovations.
If one models the state as Leviathan, one may hypothesize that it is this indirect challenge to the governments’ dominant position in knowledge and culture that is bothering politicians and bureaucrats.
The provision of free knowledge by Google—which can be seen as the private production of a public good—has been financed through Google’s capacity to collect masses of data and to sell advertising. To limit or micro-manage this capacity also limits Google’s ability to offer free services that create a large consumer surplus.
The expansion of “free” goods and services offered in the digital economy is a fascinating phenomenon of our times. Of course, there is no such thing as a free lunch, and what appears free to consumers is, in fact, paid for by the advertisers who want to reach them or by the data that consumers are willing to provide. In a similar manner, the “free” Android OS is not a charity offering, but a means for Google to meet two objectives: interest device makers and the ultimate individual consumers in the other goods and services it is offering or advertising; and gather the mass of data on which its production and marketing are based.
Thus, we have many economic and philosophical reasons to defend Google against the perverse antitrust system. The system is perverse because once in place, it is an open call for rent-seeking and retaliation. Google itself used it to complain against Nokia and Microsoft before the EC. Google is not known as a staunch defender of free markets.
Businessmen are generally inept at defending capitalism and seem to try hard to cut the branch on which they are sitting. As Adam Smith taught us, we should not trust “merchants and master manufacturers,” whose thoughts “are commonly exercised rather about the interest of their own particular branch of business, than about that the society,” and whose “judgement… is much more to be depended upon with regard to the former of these two objects, than with regard to the latter.”10 We should be as suspicious of Google’s public policy advocacy as we are of its government bashers in Brussels, Paris, or Washington D.C.
But this should not deter us from defending Google’s freedom of contract against the European Leviathan or any other Leviathan.
European Commission, “Antitrust: Commission Sends Statement of Objections to Google on Comparison Shopping Service,” Fact Sheet, April 15, 105, at http://europa.eu/rapid/press-release_MEMO-15-4781_en.htm.
European Commission, “Antitrust: Commission Opens Formal Investigation Against Google in Relation to Android Mobile Operating System,” Press Release, April 15, 2015, at http://europa.eu/rapid/press-release_MEMO-15-4782_en.htm.
European Commission, “Antitrust: Commission Sends Statement of Objections to Google on Comparison Shopping Service; Opens Separate Formal Investigation on Android,” Press Release, April 15, 2015, at http://europa.eu/rapid/press-release_IP-15-4780_en.htm.
“Europe v Google: Nothing to Stand On,” The Economist, April 18, 2015, at http://www.economist.com/news/business-and-finance/21648606-google.
On this, and monopoly theory in general, see David Friedman, Hidden Order: The Economics of Everyday Life (New York: HarperBusiness, 1996), Chapter 10.
Peter Thiel, Zero to One: Notes on Startups, or How to Build the Future (New York: Crown Business, 2014), pp. 26-27.
“How Google Found Itself ‘on the Wrong Side of History’,” Financial Times, April 17, 2015, at http://www.ft.com/intl/cms/s/2/b3fdc364-e4e7-11e4-bb4b-00144feab7de.html#axzz3Y0FlYXXG.
European Commission, op. cit., Fact Sheet.
“So Far Google Books Has Scanned 20 Million Volumes,” SFGate, November 16, 2013. Joab Jackson, “Google: 129 Million Different Books Have Been Published,” PCWorld, August 6, 2010, at http://www.pcworld.com/article/202803/google_129_million_different_books_have_been_published.html.
*Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His latest book is Who Needs Jobs? Spreading Poverty or Increasing Welfare (New York: Palgrave Macmillan, 2014). E-mail: PL@pierrelemieux.com.
For more articles by Pierre Lemieux, see the Archive.