Why Google is a Monopoly — Presenting the Case before the Federalist Society

December 9, 2009 | Filed Under Budget, Business, Capitalism, Democrats/Leftists, Economy/Finances, Free Trade, Freedom, Government, Corruption, Liberals, Scott Cleland, Society/Culture, Taxes | Comments Off

-By Scott Cleland

Federalist Society Forum:

“Is Google Monopolizing Something and If So What?”

National Press Club, Washington D.C., December 7, 2009
Remarks of Scott Cleland, President of Precursor LLC

Thank you for the opportunity to make the case that Google is: A monopoly and a digital information distribution bottleneck; andiIs engaged in pervasive, predatory, anti-competitive behavior that is seriously harming competition, the quality and choice of information, and consumers.

I believe it is not if, but when, the DOJ will be compelled by the facts and the harms to competition to file a Sherman Section 2 monopolization case against Google.

I will make four points in my opening remarks.

Google is a monopoly.
Google is a digital information distribution bottleneck.
Google’s antitrust defense is specious.
Google’s behavior is broadly predatory and anti-competitive.

1. Google is a monopoly

Google commands:

Over 70% share of U.S. searches per Hitwise;
Over 90% share of U.S. search advertising revenues per company reports; and
Over 95% share of U.S. search advertising profits per company reports.

Google also has unprecedented network effects compounding its monopoly power. In my Googleopoly II analysis that can be found at www.googleopoly.net, I documented an unprecedented 26 network effects Google enjoys.

What is Google monopolizing?

The DOJ believes Google is a search advertising and search advertising syndication monopoly.

Per Sandy Litvack, DOJ’s Special Counsel for the Google-Yahoo ad agreement, in AmlawDaily, the DOJ was fully prepared to file a Sherman Section 1 and 2 case against Google, if Google did not drop its proposed ad agreement with its #2 competitor Yahoo.

The DOJ’s Statement of Interest in the Google Book Settlement indicates that the DOJ believes Google ill-gotten digital database of orphan works should be treated as an essential facility for competition and that competitors must have access to it.

In addition, Google’s proposed acquisition of AdMob is a naked attempt to extend Google’s search advertising monopoly into the nascent and potentially huge mobile advertising market. I believe the facts will show that the Google acquisition of AdMob would “substantially lessen competition.” This acquisition deserves the closest scrutiny by the DOJ, state AGs, and Congressional oversight subcommittees.

2. Google is a digital information distribution bottleneck.

Google’s Senior VP Jonathan Rosenberg all but admitted in February that Google’s search engine is not neutral in declaring in a prominent Google blogpost:

“We won’t (and shouldn’t) try to stop the faceless scribes of drivel, but we can move them to the back row of the arena.”

As you can see from the chart, Google has the power to send most anyone “to the back of the arena.” Google has the bottleneck power between the supply of digital information and the demand from Internet consumers for digital information, and the result is that:

Users increasingly will only discover what Google prioritizes;
Advertisers increasingly will be without real competitive choice for reaching the Internet audience; and
Digital information producers will increasingly be forced to provide wholesale access to their content at prices that approach zero.

Increasingly Google has the market power to determine what most Internet users discover, read and view, including the power to direct you non-neutrally to their own Google content and away from their competitors’ content, products, or services.

3. Google’s antitrust defense is specious

First, Google assumes the average person does not understand how the Internet marketplace works or understand the “Internet Choice Paradox” — the pesky fact that advertisers, not consumers pay for Internet content.

As you can see from the Internet Paradox chart, just because the consumer side has many choices of content on the Internet does not mean the business side has many choices to get their content and advertising to consumers.

Second, and most famously, there is Google’s “We think you all are stupid defense,” where Google claims it is only “one-click away” from losing a “customer” to a competitor.

Google’s “one-click away” antitrust defense is specious.

It fails the dictionary test: a customer is “one that buys goods or services.”

Google’s products and services are free, not bought by consumers so they are not “customers.”
Google’s true customers are advertisers, who pay virtually all of Google’s $22b in annual revenues.

It fails the real world evidence test; if Google’s users were indeed “customers,” why does Google:

Have no customer service support for users?
Not advertise to them like other consumer companies do?

It fails the government law enforcement test.

Neither the FTC in its review of Google-DoubleClick, nor the DOJ or the EU in their review of the Google-Yahoo ad agreement, concluded that Google’s customers were users; they unequivocally know advertisers are Google’s customers, not users.

Third, I kid you not, is Google’s latest antitrust defense, from the mouth of Dana Wagner, Google’s lead antitrust lawyer:

“We want to be Santa Claus. We want to make lots of toys that people like playing with. But if you don’t want to play with our toys, you’ve got us.”

See the quote for yourself at the very end of a Globe and Mail article entitled: “Google: we’re not evil and we’re not a monopoly either.”

Fourth, Google also speciously tries to claim that Google is just a little slice of the very large overall advertising market pie.

However, if Google tries to claim in a court of law that their search advertising is no different from other forms of traditional advertising, TV, radio, print, etc., and that the appropriate market definition here is all advertising, they are directly contradicting years of copious public and official evidence where Google makes the persuasive case to advertisers and public investors why search advertising is more targeted, relevant, and measurable than all traditional analog forms of advertising.

4. Google’s behavior is broadly predatory and anti-competitive

I am not saying “big is bad,” I am saying “bad is bad.” For those who claim that Google has done nothing anti-competitive; with all due respect, they are uniformed.

When Google proposed to enter into an ad agreement with their #2 competitor Yahoo, in 2008, I prepared a white paper that I shared with the DOJ that documented “Google’s Predatory Playbook for Thwarting Competition.”

In it I identified five main anti-competitive strategies Google employs to foreclose competition:

Cartelize most search competitors into financially-dependent ‘partnerships’;
Pay website traffic leaders predatory supra-competitive fees to lock up traffic share;
Buy/co-opt any potential first-mover product/service that could obsolete the category’s boundaries;
Commoditize search complements to neutralize potential competition; and
Leverage information asymmetry to create entry barriers for competitive platforms.

For those asserting that Google has done nothing wrong competitively, let me offer my “top ten list of Google’s anti-competitive behavior.”

Google prevented a stronger competitor from emerging and solidified its monopoly by proactively thwarting the 2008 proposed Microsoft-Yahoo merger and delaying their effort to create a more competitive alternative by well over a year.
Google pays supra-competitive “limit” pricing of traffic acquisition costs with websites, Mozilla, Adobe, and others to prevent competitors from gaining search share.
Google opaquely structures its so-called ‘auctions’ to maximize revenue for Google, not award keywords to the highest bidder – the definition of an auction.
Google engages in price-fixing and auction-manipulation through an opaque “quality score” algorithm.
By forcing publishers to make their websites load faster in order to maintain a discoverable Google ranking, Google predatorily favors its dominant search advertising monopoly and undermines slower-loading display ads, because that weakens Yahoo and Microsoft’s stronger display businesses, and undermines the competitiveness of Google’s only real competitors Yahoo and Microsoft.
Google extensively abuses its surplus market power to indefinitely cross-subsidize entry of free products and services with no intent to monetize – the same strategy Microsoft used to undermine the viability of Netscape.
Google’s cross-subsidization of free web analytics/measurement prevents a competitive online advertising platform from emerging and lessens third-party competition from ComScore/Nielsen.
In the pending Book Settlement, Google seeks to exclude competitors from search access of the ill-gotten orphan works database, information the DOJ told the court that competitors need access to in order to compete.
Google has abused its monopoly power by dispatching competitors like TradeComet, Foundem, and StudioBriefing.net — to the “back of the arena.”
Finally, by seeking to acquire competitor AdMob, Google is illegally trying to extend its search advertising monopoly into the nascent and potentially huge mobile advertising market which illegally would “substantially lessen competition.”

In short, Google is a monopoly and a digital information distribution bottleneck and its antitrust defense is specious. There is also powerful and copious evidence of widespread anti-competitive behavior by Google.

One potential DOJ action-forcing event could be if Google continues to ignore the DOJ’s serious antitrust concerns enumerated in their letter of interest to the court in the Book Settlement.

Another potential DOJ action-forcing event could be Google’s proposed acquisition of direct competitor AdMob to substantially lessen competition in mobile online advertising.
_________________
Scott Cleland is one of nation’s foremost techcom analysts and experts at the nexus of: capital markets, public policy and techcom industry change. He is widely-respected in industry, government, media and capital markets as a forward thinker, free market proponent, and leading authority on the future of communications. Precursor LLC is an industry research and consulting firm, specializing in the techcom sector, whose mission is to help companies anticipate change for competitive advantage. Cleland is also Chairman of NetCompetition.org, a wholly-owned subsidiary of Precursor LLC and an e-forum on Net Neutrality funded by a wide range of broadband telecom, cable and wireless companies. He previously founded The Precursor Group Inc., which Institutional Investor magazine ranked as the #1 “Best Independent” research firm in communications for two years in a row. His latest op eds can be seen at www.precursorblog.com.

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