Deals

Google's big, but is that bad?

Is Google getting too big?

Yes, argues Steven Pearlstein, a Washington Post business columnist — so big, he says, that the government should start reviewing every one of the company’s acquisitions on antitrust grounds.

But big doesn’t necessarily mean anticompetitive. With a cash hoard of $33 billion, a market cap of $189 billion, and a money-minting search franchise, Google is going to keep growing, whether critics such as Pearlstein like it or not. The only question is whether it will do so organically –- developing technologies and services in-house –- or whether it will buy its way into growth. It will likely continue doing both.

Though Pearlstein is content with Google’s “near-monopoly” in search and online advertising, he doesn’t believe that the company should be allowed 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.”

Google mounted its own defense on Wednesday, not long after the column appeared. All big companies routinely make “build vs. buy” decisions, noted deputy general counsel Don Harrison on Google’s Public Policy Blog. And he shot down Pearlstein’s argument that Google’s size squeezes out deal competitors by citing several deals on which other companies competed against Google.

On that second point, Harrison could have been much more scathing. Pearlstein argued that thanks to Google’s big cash pile, other companies can’t hope to offer the kinds of premiums that Google does. The deal competitors he cites: Microsoft and Facebook. Need I point you to Microsoft’s balance sheet, to the many reports about Facebook’s ever-soaring valuation, or to the recent history of either company’s acquisitions? Tellingly, he doesn’t mention Apple, which has tangled with Google on several deals (like AdMob). Maybe he left Apple out because it has $50 billion in cash — 50 percent more than Google — and a larger market cap besides. Or because Apple does tend to emphasize organic growth over acquisitions, a strategy which for whatever reason, Pearlstein seems to favor.

The main problem with Pearlstein’s argument is that he cites not a single case where Google’s dominance of a market has hurt anyone, either through price-gouging or through barriers to entry. He seems to simply be uncomfortable with Google’s size. And that alone is not enough to block a deal.

There are plenty of reasons to consider scrutinizing Google on antitrust grounds. In 2008, it struck a deal with Yahoo on advertising, later pulling the plug in the face of Justice Department scrutiny. Leaving aside the details of the proposed agreement, such deals generally should face close scrutiny because they are horizontal –- the pact would have strengthened Google’s already dominant position in online advertising through an agreement with a direct competitor.

But the deals Pearlstein cites are different. He bemoans the “recent acquisitions” of YouTube (four years ago) DoubleClick (three and a half years ago) and AdMob (last year). It was “certainly the case” that all three of these companies had dominant positions in their markets when Google snapped them up, he says. That’s true, although in AdMob’s case, it’s hard to say what “dominant” means in a fast-moving, fast-growing market like mobile advertising. And in YouTube’s case, it’s hard to say there was much of a market there, since YouTube had a large audience but not much of a business at the point Google bought it.

Pearlstein doesn’t even try to show who these deals have harmed. He cites not a single customer or competitor who suffered from these deals, even theoretically.

To take YouTube as an example: Which companies were doing what YouTube was doing before Google bought the company? Essentially, there were none. YouTube invented its market, so of course it dominated that market –- nobody else had thought of providing such a service. Even more to the point, how can you say Google’s acquisition hurt the market when the company spent the first several years of its ownership trying to figure out how to make money from the thing? What market was it dominating? The market for paying for bandwidth to allow people to post video for free?

There are other possible reasons to examine Google on antitrust grounds. Gary Reback, famous for mounting an antitrust case against Microsoft a decade ago, told the New York Times’ DealBook that Google is behaving much like Microsoft did back then -– leveraging its power in the search market to foist its content into the marketplace, and to squeeze out competitors. He says Google tweaks its search algorithm to emphasize its own content above that of competitors.

For instance, European officials are investigating whether Google lowered the rankings on competitors’ rankings in its search service. And Yelp has complained that Google not only took content from its pages without permission for use on Google Places, the local search directory, but also that Yelp’s reviews were pushed to the bottom in favor of content from partners licensed by Google.

And the Justice Department is probing Google’s proposed $700 million takeover of ITA Software, which would give Google access to airlines’ flight information. That could take advertising dollars out of the hands of sites like Orbitz and Kayak. Critics say that although Google would ultimately send travelers to such sites to buy their tickets, the actual searches would be run on Google.

None of this means, however, that every deal should be probed based on the vague notion that Google is “too big.”

“Since Google generally has little existing presence in the market segments of the companies it buys,” Pearlstein writes, “regulators fear that they will be unable to prove to skeptical judges that any one transaction will substantially lessen competition.” In other words, because regulators have little evidence to present, their ability to make cases is limited.

The closest Pearlstein comes to citing the harm done by Google’s acquisitions is when he writes that, taken in isolation, each deal “might appear to be relatively benign,” but “taken together, they allow Google to increase the scale and scope of its activities and to further enhance its controlling position across a range of sectors.”

But increasing scale and scope is what businesses do. If the increase reaches the point of being potentially anticompetitive, then regulators can deal with it. But there has to be evidence first.

Ultimately, Pearlstein does in his own argument. He notes how it is natural for economies of scale to occur in the technology business. The “companies with the most customers are able to use that advantage to lower prices, improve quality and increase their lead even further.”

Lower prices and improved quality — who in their right mind would ever want those?

He describes how network effects and high fixed and low variable costs lead naturally to a few big firms dominating certain markets (lowering prices, improving quality). But he wants the government to put a stop to these “economic realities.” He even notes that scale and dominance in the tech business usually doesn’t last because of the ever-shifting dynamics of innovation. He cites the shrinkage of both Microsoft and IBM in markets they once dominated, or potentially could have, but it doesn’t appear to dawn on him that the histories of both companies show that tech monopolies tend not to last.

Simply because he perceives Google as being “too big,” he’d rather have a bunch of small companies operating inefficiently and expensively, leaving customers far less satisfied — and, it should be noted, leaving many struggling startups without a profitable exit.

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