Annual Privatization Report 2013

ANALYSIS: Google, Facebook, Antitrust and the “Public Good”

Subsection of Annual Privatization Report 2013: Federal Government Privatization

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Google, Facebook, Antitrust and the "Public Good"

By Steven Titch

In the culmination of the biggest high-tech antitrust investigation since the mid-1990s Microsoft case, the Federal Trade Commission declined to pursue legal action against search engine giant Google, despite a staff recommendation to proceed with a case. As of mid-December, the FTC was reportedly pursuing a settlement agreement with the company.

The staff investigation focused on Google’s practice of giving precedence to search results that favored its other Web-based platforms, services and applications, such as Google Maps and YouTube, at the expense of competitors such as Yelp and Nextag. A 100-page memo from the FTC staff urged the five commissioners to vote to bring a case. The commissioners, however, found that, despite Google’s dominance as a search engine, there was not enough evidence of outright consumer harm to support a case under the Sherman Act, agreeing in the end with many critics of the initial inquiry.

Consumer activists and Google competitors remain undeterred, and ended 2012 urging the Department of Justice to take up the case.

The antitrust effort against Google is part of a larger push for greater government regulation of a handful of high-tech companies that have grown large and powerful within the space of a few years. In addition to Google, they include:

  • Facebook, the social networking company founded in 2004, which recently attained 1 billion members worldwide.
  • Apple, which since 2009, has become a leader in wireless smartphones, as well as the platform for smartphone apps, two business lines that bolstered its strength in online music and entertainment distribution.
  • Twitter, founded in 2006, which created and cornered its now-ubiquitous service that ties together social networking, media sharing and messaging, and recently attracted arguably its most illustrious user, then-Pope Benedict XVI.

Perhaps the most radical regulatory idea this year came from University of Washington professor Phillip N. Howard, who in an August column for Slate proposed the nationalization of Facebook. While Howard admitted that his idea was a mere “thought-experiment” with little likelihood of realization, it represents the logical conclusion of a type of thinking that has been coalescing in policy circles for the past several years. Noted technology authors such Tim Wu (The Master Switch), Jonathan Zittrain (The Future of the Internet–And How to Stop It), and Siva Viadhyanathan, (The Googlization of Everything) have argued that a small group of companies, Google, Facebook and Apple among them, have become so influential and important in the Internet ecosystem that their status as for-profit businesses threatens the public interest in Internet openness, neutrality and unfettered access to information.

While that idea has gained some traction within the Obama administration (Wu himself is senior advisor to the FTC), there also has been significant pushback. Furthermore, resistance has not been limited to conservative and libertarian policymakers.

No Consumer Harm

The FTC’s decision against antitrust prosecution of Google, in fact, continued a pattern of relative agency restraint toward the tech industry. In 2011, in separate actions, consumer advocacy groups brought sweeping complaints against Google and Facebook, alleging they violated user privacy agreements, improperly used consumer data for commercial purposes and used their dominance to harm competitors. The FTC resolved both complaints by requiring each company to develop a comprehensive privacy program and submit to biennial independent privacy audits for the next 20 years. Otherwise, the FTC stopped short of punitive sanctions, assessing no fines and setting no business restrictions, suggesting that it concluded that no serious harm was done to consumers.

As 2013 plays out, consumer and privacy activists can be expected to continue their push for greater regulation of the technology sector. Attacks are likely to be two-pronged. First will be the assertion that illegal monopolies are emerging, using dominance of their respective spaces to block entry of competitors in other areas of their business. Second is the notion that these monopolies have become so large and instrumental to everyday Internet use that they should be considered the equivalent of public utilities or “public goods” and regulated as such. Hence, Howard’s justification for Facebook nationalization.

Proponents of free market policy can be expected to exploit the main weakness in the antitrust argument: that any market distortion created by the dominance of Google, Facebook and Apple is extremely hard to quantify and, even if it exists, may yet prove ephemeral. This has proved the case with other technology companies that were antitrust targets in the past, such as IBM, AT&T and Microsoft.

From a narrow perspective, Google and Facebook indeed dominate their respective spaces. But more broadly, both compete for advertising from the same revenue pool. In addition, neither service is truly monopolistic. Google has competitors in the form of Bing, as well as in more specialized search engines such as Yelp, Nextag and Travelocity.

To be sure, Google accounts for some 67 percent of Internet searches, according to market research firm comScore’s November 2012 statistics, and the FTC staff report argues that the company can leverage this share to prevent not only other search engines, but other Web-based information brokers, from gaining traction in the market.

Yet U.S. antitrust law requires prosecutors to show demonstrable consumer harm, not simply that would-be competitors cannot succeed. For consumers, Google’s services are free, and the utility of its search results increase as Google links its platforms. For example, when the user searches “shoe stores,” not only does she get names and addresses of nearby stores, she sees them plotted on a neighborhood map, gets pricing information and pictures of items in stock. Unless it can be shown that Google’s monopoly is forcing consumers to pay artificially high prices or experience less-than-optimum quality, illegality is hard to claim.

Is Google a Public Good?

Critics use their second attack to compensate for weaknesses in the antitrust argument, contending that services provided by Google, Facebook, Apple and Twitter have become so critical to applications delivery that they need to be set apart from normal market forces.

The argument centers on control of algorithms and application protocol interfaces (API). Algorithms are software code that process and present information. An API, or application protocol interface, is the software “bridge” that allows different services to work together. For example, Rovio’s Angry Birds game uses the Apple iOS API to work on iPhones and iPads. Zynga uses Facebook’s API so Facebook users can access its many games through the Facebook site. Algorithms and APIs allow the entire expanse of Google’s services to integrate neatly.

But software code and APIs are proprietary, and as owners, Google, Facebook, Apple and Twitter have the right to share them with whom they choose. While the companies have done so on a fairly wide scale, there have been instances where they have denied use. Critics find this unfair, arguing that given the consumer share these companies have their respective spaces, their APIs and their other delivery platforms should be regulated as a necessity—a public good, as it were—to access the market.

The proposed remedy in Google’s case takes the form of “search neutrality.” Google would be prohibited from using algorithms favoring its own services and directed to present results in such a way that does not discriminate against competitors. When extended to Facebook, Apple and Twitter, the idea morphs to so-called “API neutrality,” a regulatory environment where no third party developer can be denied access to a popular delivery platform.

But a “public good” is not defined by popularity. In terms of public policy, a public good has two principal characteristics: it can be consumed or enjoyed without incrementally reducing the amount available for others, and it can be difficult or impossible to assign a price or cost. National defense and law enforcement may fit this definition; companies like Facebook, Google, Apple and Twitter do not. As analysts such as the Mercatus Center’s Adam Thierer have pointed out, companies like Google and Facebook can easily control who is part of the service, and although they do not charge a direct fee for services, they have been able to monetize them through advertising support.

That the argument in favor of regulation rests heavily on the enormous popularity of the companies that would be regulated also weakens its case. It begs the question of whether we’d be having the regulation debate at all if these companies did not meet consumer needs as well as they do.

Search engines existed before Google—Yahoo!, Alta Vista, Lycos to name three—but Google successfully developed the algorithms that gave users an unprecedented level of accuracy and relevance in search. Likewise, social networking predates Facebook—and it’s not just MySpace. Think of message-based services such as The Well, which was created in 1985 and is older than the World Wide Web. But Facebook is Facebook because it made social networking easy, fun and most importantly, emotionally resonant.

That’s why regulation of Google and Facebook risks putting a chill on any future innovation in Internet services and applications. What entrepreneur or developer is going to devote capital and resources to push for a better online product or service when, if it proves successful, the government will take it away? Although the idea of Facebook nationalization is a non-starter, policies such as search and API neutrality have a similar effect: they force private businesses to relinquish control of their own property and assets.

While proponents of regulation do have a strong voice in the Obama administration, the good news is that the FTC is proving more deliberative, tacitly acknowledging that the market for search, social networking and other Web-based applications is still in its formative years. For now the Commission seems willing to allow market dynamics to play out, and without evidence of consumer harm, appears loath to pre-empt exploration and experimentation.

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