Pearlstein Takes On Google’s Threat to Competition

The Washington Post’s Steven Pearlstein takes up the Google monopoly case today with an excellent column in The Washington Post. If you want to know why there’s a problem with what Google’s doing, this is about the best place to start.

This is a critical point: Organic growth=good. Growth by deal=bad, at least for a company the size of Google and with its market dominance.

There is nothing improper or illegal about Google’s monopoly - like Microsoft and IBM before it, it earned that dominance fair and square. And given the dynamic nature of the technology sector, it would probably be counterproductive to prevent Google from using its money and talent to expand into new areas.

Where I have a problem, however, is in allowing Google to buy its way into new markets and new technologies, particularly when the firms being bought already have a dominant position in their respective market niches.

Pearlstein goes astray in that first paragraph. The current dispute isn’t about preventing Google from “using its money and talent to expand into new areas.” The problem is when it expands into new businesses and then uses its monopoly search position to give them an unfair boost.

And the rapid nature of technological change is often used as an excuse for market manipulation, but it’s a poor one. Yes, Microsoft doesn’t look so mighty today, ten years after the Justice Department won its case (although that’s surely in no small part due to the aggressiveness of the antitrust prosecution, which stung Microsoft and made it wary of continuing its monopolistic ways), but it’s impossible to know what the software market would look like if not for its abuses. What innovations—and more important for justice, innovators—has it squelched? Who knows?

But Pearlstein is dead on about the problem of a behemoth snapping up companies to dominate market niches. The Post reported the other day that Google has bought more than forty companies so far this year for some $1.6 billion.

It’s what I was getting at when I asked a couple of weeks ago why Google should even be allowed to buy Groupon.

It’s unclear to me why it’s a good thing for market competition when a $191 billion company like Google buys a $6 billion startup like Groupon or any other major company now, really. Especially since it’s increasingly taking advantage of its market dominance to push its own businesses.

Pearlstein also brings up some very good points about antitrust in the digital age. We heard a lot about this kind of stuff more than a decade ago during the Microsft trustbusting, but not as much in the Google age:

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…

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.

Antitrust regulators are well aware of these new economic realities. They hold conferences on them, cite them in speeches and use them to justify modest changes in merger guidelines. They were broadly cited in the groundbreaking antitrust case against Microsoft brought during the Clinton administration. But so far, neither the Justice Department nor the Federal Trade Commission has been willing to use them to mount a broad challenge to Google and its strategy of using acquisitions to expand and protect its existing monopoly.

You can’t exactly split up Facebook, say. The network effect is the whole point. But that company surely deserves much more press and regulatory scrutiny because of its powerful network effect.

Snapping up competitors and potential competitors, on the other hand, as Google is doing, and using your might to unfairly boost them, is pretty old-school anticompetitive behavior. Here’s how Pearlstein puts it:

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.

Nicely done.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , ,