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FTC Declares War on Google

Steven Titch
June 23, 2011, 2:18pm

The Federal Trade Commission is about to launch its long-expected antitrust probe of Google, with the Wall Street Journal reporting that the commission is set to begin serving subpoenas on the search engine giant.

At heart is the question as to whether Google is using its heft in search—it accounts for two-thirds of Internet searches in the U.S.—to direct users to other commercial services, such as on-line travel agencies, local listings, even streaming TV, into which it has begun to expand its business activities. For example, Expedia.com, TripAdvisor and Yelp have complained that Google intentionally ranks their sites below Google’s own.

Further, and this is the nub, will the FTC be able to show there is actual consumer harm in Google’s doing so?

Unfortunately, the FTC seems intent on following the playbook the Clinton Justice Department used in the Microsoft antitrust case, using the amount of harm a business model presents to competitors, as opposed to consumers, as the indictment. It was Microsoft’s bundling of Internet Explorer browser in its Windows operating system which the DoJ saw as unfair to Netscape, that motivated that case. Netscape which had been selling its browser a la carte. Essentially, the DoJ punished Microsoft for providing consumers with the same type of product for free.

There’s reason to believe that the FTC has the same inclination. Analysts such as Geoffrey Manne, founder and executive director of the International Center for Law and Economics, has been concerned with recent statements from FTC Chairman Jon Leibowitz and Commissioner J. Thomas Rosch about how the FTC will apply Section Five of the FTC Act to its Google investigation. In an op-ed at MainJustice.com (and referenced on Technology Liberation Front), Manne wrote:

“Section Five” refers to Section Five of the Federal Trade Commission Act. Exercising its antitrust authority, the FTC can directly enforce the Clayton Act but can enforce the Sherman Act only via the FTC Act, challenging as “unfair methods of competition” conduct that would otherwise violate the Sherman Act. Following Sherman Act jurisprudence, traditionally the FTC has interpreted Section Five to require demonstrable consumer harm to apply.

But more recently the commission—and especially Commissioners Rosch and Leibowitz—has been pursuing an interpretation of Section Five that would give the agency unprecedented and largely-unchecked authority. In particular, the definition of “unfair” competition wouldn’t be confined to the traditional measures–reduction in output or increase in price–but could expand to, well, just about whatever the agency deems improper.

Commissioner Rosch has claimed that Section Five could address conduct that has the effect of “reducing consumer choice”—an effect that a very few commentators support without requiring any evidence that the conduct actually reduces consumer welfare. Troublingly, “reducing consumer choice” seems to be a euphemism for “harm to competitors, not competition,” where the reduction in choice is the reduction of choice of competitors who may be put out of business by competitive behavior.

The FTC did not comment in the Journal article, so we eagerly await statements as to its rationale once the investigation formally goes forward. I am hoping the agency can articulate a strong case that Google, as the search engine leader, is measurably harming consumers. The FTC needs to show concrete evidence that Google is limiting choices, raising prices, decreasing value, and otherwise diminishing the Internet experience for most users.

If, on the other hand, the FTC’s reasoning amounts to a bunch of antitrust platitudes you find in freshman’s first semester Econ 101 paper, we’ll know the investigation is another example of the Obama administration’s uncontrollable urge to inject government management into otherwise healthy markets, if not its overall hostility toward U.S. business.

Equally telling will be the outcome FTC seeks. Is it going to recommend breakup of the company (as DoJ sought from Microsoft)? Is it going to try to bar Google from entering different lines of business, even though its entry could make those services better, cheaper, or more user-customizable? There’s every reason to expect the “cure” to be worse than the perceived disease, particularly if it results in consumers paying for Web-based applications Google currently provides for free.

It’s a shame that the U.S. government feels it must punish Google for its success. While I wouldn’t say Google is the angelic corporate netizen it likes to portray itself as, it is undeniable that it has helped organize the vast amount of information available out on the Web, combining and transforming gigabytes of decentralized data into real knowledge for millions worldwide. Even academic critics such as Siva Vaidhyanathan admire how Google has tamed the ‘Net for ordinary users (although he frets that all this skill and creativity is in the hands of a for-profit company, but that’s another discussion). Whether Google has violated any antitrust laws is highly debatable. That FTC officials have been softening the forums for an antitrust argument based on competitor, not consumer, harm, suggests a weak case.



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