Google: Friend or Foe?

“We don’t want to be a digital colony of the U.S. Internet giants, what’s at stake is our sovereignty itself”. – French Economy Minister Arnaud Montebourg[i]

The tide has shifted – Montebourg is no longer alone. Google has maintained a high market share in the EU since its inception, but a growing movement against its dominance has been catalyzed by Edward Snowden’s NSA revelations and a more unified European Union.[ii] These trends have caused political hostility against Google and other US tech firms to reach a tipping point. This hostility has most recently taken the form of an anti-trust complaint filed against Google in April of 2015 by the European Economic Commission. Unfortunately, the debate surrounding this allegation against Google has been distracted by rhetoric such as Montebourg’s. The dispute must be realigned with a greater degree of objectivity by studying how Google uses its algorithms to benefit its native services and analyzing whether or not these actions benefit consumers and preserve competition. This approach yields that although Google unfairly leverages its market control to drive adoption of its native services, EEC prosecutors should not find the company guilty because its actions increase consumer welfare and operate within the fundamental objective of search engine operations.

Google’s native services function outside the rules and regulations that guide all other potential search results, giving them an unfair advantage in certain verticals. There are a variety of metrics that Google uses to index the web and ensure that users are presented with results that are most relevant to them. For example, when a given website is cross-referenced among others, it receives a higher relevance and resulting prominence in search results.[iii] On the other hand, if a website lacks quality content or infrastructure development Google penalizes its search ranking. In this electronic universe created by Google, all participants (i.e. all content on the web) are handled using the same system of rules and penalties that Google enforces, with one glaring exception. Google gives preferential treatment to its own content services so as to promote their growth and adoption. These services, such as Google Shopping, are ranked high in search results regardless of their rule-determined relevance. EU regulators cite the example of Froogle, Google’s first attempt at a comparison shopping service, as evidence of the significant effect this bias can cause.[iv] In 2003, Froogle was released by Google and was met with slow to stagnant user adoption and traffic. However, when this service was rebranded as “Google Shopping” and systematically favored, it experienced higher rates of growth. Google’s favoring of native services is in and of itself without significant cause for concern – merely a business tactic to gain customers – however, its effect on competition and innovation calls into question the wider impact of such prioritizations.

Google’s unbalanced prioritization of its native applications has the net effect of decreasing competition and impairing innovation. In a strictly economic sense, website developers will produce products that seek to satisfy consumer needs. When needs are met, adoption and usage grow. However, in the verticals where Google develops native services, producers have a significantly decreased incentive to compete. Many web applications receive 90% or more of their traffic from search engine referrals.[v] Since 90% of consumers in the EU depend on Google to search the web, the success or failure of certain products depends considerably on how a platform can achieve relevance in Google’s algorithms.[vi] Producers understand that any attempt to innovate their product or increase their value proposition to users is limited by the lower bounds of Google’s services. Put simply, even if a company develops a product that is more valuable to a user than one of Google’s services, that product will always have a lower search priority. Thus, the incentive to innovate and create marginally improved products is diminished.

Despite these adverse consequences, Google is in fact exhibiting standard economic principles related to comparative advantage. Applied in this setting, the theory of comparative advantage predicts that a company like Google will focus on the production of services that benefit the most from Google’s factor endowment. In this sense, Google’s factor endowment is its search engine platform. Google, therefore, will develop services that can be naturally integrated into its search engine and make use of its vast array of information. When Google displays its native services more prominently than other results, it is simply leveraging its collection of data from its search engine platform to provide greater value in other verticals. To this rationale, EU regulators would argue that while Google’s development of native services is within acceptable behaviors, its prioritization of those products above competitors is an abuse of its market position. However, this reasoning is short sided. It argues for an egalitarian state of neutrality without considering how consumers would be affected by such a paradigm shift. Consumer welfare theory sheds light on how this scenario would ultimately affect the consumers in the market.

Looking further into economic theory, it is clear consumer welfare is in fact maximized when Google favors its own content. Over time, Google has created many native applications including Google Shopping, Maps, Gmail, Google Finance, etc. Each of these services has a unique relationship to Google Search in that it relies on search for discovery. If Google is able to increase the profitability of a given service, say Shopping, by elevating its search ranking, then Google has an incentive to make its search platform at large more attractive to customers. Synergies emerge whereby an increase in search customers for Google results in a greater number of native application users. This cycle incentivizes Google to invest in its successful native applications so that they add a maximum value for users. The more value consumers realize in native services, the more they engage with the search platform, and the more Google profits. Taking a step back, this result is beneficial to consumer welfare. While Google may indeed have a significant market share, it still has a powerful incentive to innovate and provide superior services. If this incentive were taken away (one potential effect of a guilty verdict) the net result would in fact be less innovation and valuable services for consumers. Google has a singular ability to leverage synergies to power a superior integrative platform experience. However, under EU anti-trust regulations Google’s actions must also be judged by how they affect competition.

EEC prosecutors would be misguided to punish Google for how its operations affect competition. Instead, they must put greater weight on the platform’s overall affect on consumers and recognize that the search engine market tends towards a natural monopoly. There is a valid argument that Google’s actions, whether intentional or not, impair competition in verticals that compete with Google’s native products. While this assessment must be considered, preserving competition would come at the expense of a massive loss in consumer welfare. Forcing Google to change its business practices, tinkering with its algorithms, or otherwise intervening in the search engine marketplace would all result in a more unfavorable environment for consumers. EU prosecutors would be rash to make a judgment on the state of the competition in the search engine market without careful considerations of how the market is affecting consumers. The search engine market is noteworthy in that it tends towards a natural monopoly.[vii] The most efficient number of search engines in a competitive market is one. Consumers have no need for alternatives because their cost of consumption is zero and their maximum demand will be consistently fulfilled with one supplier. Finding Google guilty under the premise of preserving competition would represent a severe misunderstanding of the context of Google’s operations and would harm consumers.

Notwithstanding this tradeoff between consumer welfare and preserving competition, the proposed remedy to Google’s actions, “platform neutrality,” would violate the fundamental purpose of search engines and is impossible to enforce. Search engines are structurally biased. When consumers enter a query they are searching not for all of the results that relate to the given topic, but rather the most relevant answers to their request. With trillions of indexed websites, the ability of search engines to provide relevant results to consumers differentiates them in the market.[viii] In theory, under “platform neutrality” Google would be mandated to change its algorithms in order to judge websites on a more unbiased basis. For example, whereas Google may currently give priority to websites that have certain key features, such as rich HTML5 content, under a more unbiased system all websites that meet certain “standard” criteria would have to be ranked equally.[ix] The main issue is there is no clear way to develop “standard,” unbiased metrics by which to judge results simply because there are so many potential metrics that no single set could be universally applied in an impartial fashion across the web.

Google’s algorithms may indeed favor certain websites over others, but at a minimum, this system provides an efficient way of organizing the web while avoiding regulatory micromanagement. Google employs a set of thousands of algorithms to determine the most relevant results for a given query. The sheer complexity of search means that there always going to be winners and losers in websites competing for a given user’s attention. However, there is no practical manner to make this system standard and more efficient. Furthermore, if EU regulators were able to craft an unbiased “standard” by which to judge websites, enforcement would require an unprecedented degree of micromanagement of Google’s proprietary algorithms to ensure compliance.[x] This scenario would necessitate a significant expansion of regulatory institutions and would set a dangerous precedent of intervention in to private business affairs. Having considered the positive effects on consumer welfare and the lack of a viable alternative to Google’s behaviors, it is important to return to Montebourg’s original grievance regarding sovereignty.

The assertion that Google is abusing its position in the marketplace is understandable but misguided. Google’s integrative search platform was built to provide a singular user experience. Any attempt to change this model would negatively impact consumers and represent a dangerous step towards manipulative intervention. Furthermore, the solution espoused by regulators is neither practically enforceable nor logically sound. Notwithstanding the strengths of these arguments, Google must still address European concerns with care. With public and political thought now on the side of antitrust enforcement, there is significant momentum driving a continued and expanding investigation. The key question Google executives must ask themselves is what do the regulators ultimately want? Is it to assert European competitiveness? To right past wrongs? Or to set an example of fair competition for the future? Unfortunately, this case has become more than a purely economic debate and has steered away from issues that the antitrust laws were originally penned to address. Google must understand this in order to adapt its response going forward. Only through a bold repositioning will Google be able to avoid years of litigation and continued hostilities. Taking a hint from its founding corporate slogan “Don’t be Evil,” Google would benefit immensely from reclaiming its altruism and benevolence from a world tainted by deception and manipulation.

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Selected Bibliography:

Ammori, Marvin. “‘Neutrality’ Argument Is a Ruse in European Commission’s Google Case.” National Law Journal (2015): n. pag. Web.

“Antitrust: Commission Sends Statement of Objections to Google on Comparison Shopping Service; Opens Separate Formal Investigation on Android.” European Commission. European Economic Commission, 15 Apr. 2015. Web. 28 Oct. 2015.

Clemons, Eric K., and Nehal Madhani. “Regulation of Digital Businesses with Natural Monopolies or Third-Party Payment Business Models: Antitrust Lessons from the Analysis of Google.” Journal of Management Information Systems 27.3 (2010): 43-80. Web.

Fairless, Tom. “EU Files Formal Antitrust Charges Against Google.” Wall Street Journal. N.p., 15 Apr. 2015. Web. 28 Oct. 2015.

Grimmelmann, James. “Speech Engines.” Minnesota Law Review (2013): n. pag. Web. 28 Oct. 2015.

Schechner, Sam. “Google Rebuffs European Union on Antitrust Charges.” Wall Street Journal. N.p., 27 Aug. 2015. Web. 28 Oct. 2015.

Stone, Brad. “Google’s $6 Billion Miscalculation on the EU.” Bloomberg. N.p., 6 Aug. 2015. Web. 28 Oct. 2015.

Wigger, Angela, and Andreas Nölke. “Enhanced Roles of Private Actors in EU Business Regulation and the Erosion of Rhenish Capitalism: The Case of Antitrust Enforcement.” JCMS: Journal of Common Market Studies JCMS: J Common Market Studies 45.2 (2007): 487-513. Web.

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[i] Stone (2015) [ii] Stone (2015) [iii] Grimmelmann (2015) [iv] “Antitrust” (2015) [v] Grimmelmann (2015) [vi] Stone (2015) [vii] Clemons (2015) [viii] Stone (2015) [ix] Stone (2015) [x] Stone (2015)

 

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I grew up in a small town called Orinda, about 20 minutes to the East of San Francisco. Naturally curious, eager to learn, intuitively organized and empathically geared – I strive to make conscious decisions to drive impact. My mind never stops working. Whether in the classroom, professional environments, volunteering capacities or personal hobbies, I enjoy thinking critically about my surroundings and problem solving to find solutions.

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