Why Google’s Antitrust Problems Are Far from Over

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Eric K. Clemons on Google's Antitrust Problems

Google may have thus far escaped U.S. regulatory action over alleged antitrust violations with its search-engine business. However, fresh trouble it faces in Europe over similar complaints could pressure U.S. regulators to reopen investigations into the company’s practices. The U.S. legal system will eventually catch up to protect users’ privacy, although it will take time and changes in perceptions of how benign the company is, according to Eric K. Clemons, Wharton professor of operations and information management.

Nobody actually believed that an organization that looks so benign could actually be so abusive Twitter ,” said Clemons on why complaints against Google’s search-engine practices did not get as much traction as he would have liked. He is, however, hopeful. “Bit by bit, there will be change. But the change cannot occur until the population views Google as less than fully benign, and that’s going to take time [and] that’s going to be difficult.”

Clemons spoke about Google on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Recent media reports have revealed how Google was spared in 2012 following a U.S. Federal Trade Commission (FTC) investigation into alleged antitrust violations with its search-engine business. An FTC staff critique at the time had concluded that Google’s “conduct has resulted — and will result — in real harm to consumers and to innovation in the online search and advertising markets,” The Wall Street Journal reported last month. The FTC staff believed Google could potentially be sued, but higher-ups decided otherwise.

Now, similar complaints against the company in Europe could lead European Commission antitrust officials to file formal charges against Google over its search practices in coming weeks, the Journal article said. The European Commission’s actions could bring about “some profound changes in Google’s behavior and possibly similar effects in Japan, Australia and New Zealand, and similar effects [in the U.S.],” said Clemons.

“Nobody actually believed that an organization that looks so benign could actually be so abusive.”–Eric K. Clemons

In the U.S., too, early signs of new trouble for Google are visible. On Monday, another Wall Street Journal report said that Senator Mike Lee, a Utah Republican and chair of the Senate’s antitrust panel, would conduct a preliminary inquiry into the conversations between the FTC and Google during the 2012 probe. That could later expand to include conversations between White House personnel, the FTC and Google, the report said.

In a blog post titled, “Really, Rupert?” in reference to Rupert Murdoch, chairman of WSJ parent company News Corp., Google officials said the Journal’s reports were misleading and that Google has “strong pro-competitive arguments on our side.”

‘Freer than Free’

Clemons said the FTC made a mistake in overriding the staff note and not suing Google. “There were subsequent occasions when [the FTC] could have investigated [Google] and chose not to,” he said. “Google looks like it is freer than free, because nobody has to pay to search. All of the harm — and there is harm — is indirect. The argument that Google is free and consumers love it has a great deal of resonance with the members of the FTC.”

For long, Google has been seen in favorable light by its users, said Clemons. Figuring out what exactly is wrong with Google’s practices “is complicated,” he added. He referred to a category of business called a “third-party payer two-sided market.” He explained that a search on Google is free for users, but if a seller of products or services searches Google to reach a customer, it has to pay. “Since it is free for me, I don’t care what the cost is,” he said. “And since [the seller] has to pay, he or she pays almost regardless of what the cost is.”

Alongside, privacy could be a casualty. Clemons recalled the case of a friend — a former U.S. secretary of homeland security — who had emailed a former secretary of state on a private email account. “[He] immediately got targeted ads about hotels in Kabul,” Clemons said. “That is incredible and even unsafe. But it looks like Gmail is free; it doesn’t look like it can hurt you.” Clemons’s friend subsequently got rid of his Gmail account.

Fresh Deal in Europe?

How difficult could it get for Google in Europe? Clemons recalled that in 2012, Google was close to reaching an agreement with the European Commission. “[That agreement] basically said, ‘Stop stealing content. Other than that, do whatever you want,’” he said. “The agreement was unfortunately very harmful to competitors and consumers, and we still haven’t begun to discuss things like violation of privacy or intellectual property rights.” Joaquin Almunia, vice president of the European Commission responsible for competition policy, had offered Google a deal at the time, “but at the last moment … decided not to sign the deal so everything is still up in the air,” Clemons added.

“Google looks like it is freer than free, because nobody has to pay to search. All of the harm — and there is harm — is indirect.” –Eric K. Clemons

Clemons said that in the U.S., the Sherman Antitrust Act does not prohibit monopolies gained “as a consequence of a superior product, business acumen or historic accident.” But the act explicitly prohibits actions to defend or extend a monopoly, he added. “Europe is a little less generous on monopolies you already have, but equally strict on extending and defending [those],” he said. “And Google has taken actions to extend and defend its monopoly both in search and in mobile search.”

Even if Google reworks its agreement in Europe, Clemons predicted a difficult process in how that could change the way the company operates in the U.S. Google is politically very well connected [and it] spends more on lobbying than any company in history,” he said.

Different Ecosystems

In some senses, Google appears to be alone in the antitrust violations controversy. Unlike Google, other search engine companies like Microsoft with its Bing and Apple are working toward “an ecosystem built on safety,” said Clemons. “It is a valid capitalist decision. It happens to be one I endorse, and one that seems to be morally superior, but it is a business decision.” It just so happens that Microsoft and Apple earn their revenues in other ways than Google, he added.

Here, Clemons did not think it would help for Google to find new ways to earn revenues in order to move away from its current business model. “Google is massively diversified in the way that it profits from being unsafe,” he said. “It has already found dozens of ways to profit from the information it gets — everything from selling you out to merchants to couponing you for merchants who have paid for access to you.”

Clemons is optimistic that the law will eventually change to protect search-engine users. “Inevitably the legal system will catch up, but it’s going to take a while.” He recalled how regulators dealt with monopolistic behavior in the past, such as with the railroads, telecommunications, radio and so forth. “We’ve gone through periods of profound regulatory catch-up,” he said. “And mostly we’ve gotten them right, eventually.”

 

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