The Big Question For Google: Is Success Illegal?

There was an interesting guest seated at the Google table at the American Antitrust Institute meeting in Washington yesterday, an attendee tells us: Ralph Nader. What’s the old saying about keeping your enemies close?

The search-engine giant may need all the friends it can get as it battles state and federal antitrust investigations. (It confirmed a Federal Trade Commission probe today, saying “It’s still unclear exactly what the FTC’s concerns are.”) Like Microsoft, AT&T, IBM and Standard Oil before it, Google has obtained such dominance over the business of finding information and selling ads on the Internet that it has drawn the attention of regulators who worry it might be stifling competition.

The complaints seem to be coming mostly from Google’s competitors and might just reflect sour grapes. The purpose of antitrust law, after all, isn’t to protect competitors but to make sure consumers have the best selection of goods at the lowest price. Only if Google is using its roughly 65% control over Internet searches to drive competitors out of other markets and deprive consumers of a choice there, will the government have a legitimate case.

“Google has legitimately obtained a monopoly in the search-engine market,” said Melissa H. Maxman, an antitrust lawyer with Cozen O’Connor in Washington who led the foreign plaintiffs’ committee in the big antitrust case against Microsoft in the 1990s. She said there are “substrata of search,” however, such as airline flights and mortgages, where competitors might fear Google is manipulating its search algorithms to their disadvantage.

To understand what Google executives will be facing next, I spoke with Robert Lande, a professor at the University of Baltimore Law School and former attorney both for the Federal Trade Commission and the large corporate law firm Jones Day. He said the process will be expensive, time-consuming and involve terrabytes of data as regulators try to determine whether Google is providing efficiency and ease of use to consumers or hurting competition by serving up biased search results.

The government took a pretty good look at Google’s business when it considered whether to block its $700 million purchase of ITA, a Cambridge, Mass. company that provides flight-information software used by many airlines. The Justice Department approved that takeover in April with a few conditions including requiring Google to license the travel software to competitors and banning it from entering into agreements that would prevent airlines from offering services like seat selection to rivals.

Any investigation will likely be similar to the one Microsoft faced when competitors including Netscape argued it used its control over PC operating systems — a legitimate monopoly that reflected the usefulness of having most computers run on the same OS — to dominate other markets such as Web browsers and applications. Microsoft complained the suit was mostly about it bundling Microsoft Explorer with Windows, a move that killed Netscape but which was the equivalent of shipping cars with radios installed, which killed the independent car-radio merchants. But that’ wasn’t the problem, Lande said. The government was suing over allegations of threats and tactical maneuvers Microsoft made with its customers to discourage them from installing rival browsers on PCs.

The question surrounding Google’s dominance of search is whether it helps consumers get more information faster and cheaper or somehow hurts them.

“If I can plug into Google search `Washington to Tahiti’ and easily get what I want, that would be great for consumers,” Lande said. The fact that Google dominates the search business just reflects the economies of scale that come from processing billions of consumer information requests a day and using those queries to better refine search results.

If Google tinkers with the software to bias results toward its own businesses, however, or refuses to make its software available to rivals, that could hurt consumers. Antitrust in the Internet era, therefore, is similar to when John D. Rockefeller was accused of “sweating” smaller refiners by cutting prices until they went bankrupt and domineering railroads into subsidizing the transport of his oil, Lande said. “It’s just much more complicated and changes more quickly,” he said.

Not everyone thinks the government needs to keep such a close eye on the fast-changing technology industry. Joshua Wright of George Mason University School of Law has written that the government’s investigations of Intel, Google and Apple, among others, may have hurt consumers by putting a financial drag on the companies and discouraging innovation. Wright examined the “loyalty discounts” Intel offered PC manufacturers, which drew a government suit in 2009. The government’s theory was by offering the discounts for installing its chips, Intel prevented rival chip makers like AMD from selling enough of their own products to achieve economies of scale.

That argument ignores the fact that AMD’s market share actually rose during much of the period, while consumers got the benefit of the lower chip prices that PC makers passed through to buyers.

One thing is certain: Any antitrust investigation is going to be long and extremely costly. According to this Corporate Counsel magazine article, Google’s 214-attorney in-house legal team’s antitrust efforts are led by Dana Wagner, a former DOJ trial lawyer. But the company has also hired antitrust boutique Axinn Veltrop & Harkrider and will probably have many more lawyers on the payroll if the probe ramps up.

Lande recalls hiring law students at $50 an hour just to plow through documents in a big antitrust case, overseeing their work from 6 p.m. to midnight, night after night. When IBM was sued for antitrust in the 1980s, he said, the company had a 14-story building just to house the lawyers and documents for the case.

How can consumers win from such an investigation? Lande says consumers and investors benefited from the breakup in AT&T in 1984, which ironically came at the same time as the DOJ dropped its long-running antitrust case against IBM. In the following years the stock values of the AT&T progeny rose, while IBM languished.

“Rather than one fat, bloated whale, you had eight sharks,” Lande said. “Arguably you wuldn’t have had the cellphone revolution nearly as fast if AT&T hadn’t been broken up.”

“Monopolies become fat, bloated whales after a while.”

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