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Foundem Has Lost It

· May 23, 2013

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In the ongoing saga of governmental antitrust investigations of Google, recent weeks have witnessed a new level of rhetoric and disingenuous use of the regulatory process to handicap, rather than promote, competition and innovation. The current case in point relates once again to search neutrality, but this time complaining rivals remarkably object to getting exactly what they’ve asked for over many years.

Just a little less than four months after the U.S. Federal Trade Commission (FTC) closed its monopolization investigation into alleged “search bias” by Google, the European Commission (EC) — the pan-European competition authority for the 30-nation European Economic Area (EEA) — released a set of proposed commitments by Google designed to resolve the competition “concerns” preliminarily outlined by EC competition chief Joaquin Almunia. That set off a firestorm of criticism from so-called “vertical” competitors (e.g., travel booking or consumer shopping sites), led by UK firm Foundem, a plaintiff against Google in its own antitrust lawsuit in England.

The first and most basic competition concern asserted by the EC was that Google gives preference to its own services, like travel search, by placing those “specialised” (in European spelling) search results above “organic” or “natural” search results. Google proposes to label these specialized results as paid placements and to add equally prominent links to vertical rivals alongside. Under the commitments Google would auction links for commercial services to qualifying rivals using a lengthy set of rules for transparent and equal treatment. It is precisely the paid link insertion remedy that Google critic and long-time legal adversary Gary Reback called for at an April 2013 FairSearch.org event in Washington, DC.

Foundem opposes that solution. But making heads or tails of Foundem’s rather incoherent response to Google’s EC settlement proposal is difficult. In part that’s because the response is a hodge-podge of discredited claims, incorrect assumptions and fuzzy reasoning. In part it’s because Foundem’s use of over-the-top language and Chicken Little predictions makes it impossible to decipher facts and reality from mere opinions and sour grapes. For instance:

If the Commission were to adopt Google’s proposals in anything like their present form, it would be unwittingly playing into Google’s hands — aiding and abetting Google in its long running strategy to transition commercial searches away from its natural search results and into its paid advertisements. Under these proposals, Google would not only continue to profit from the traffic it hijacks from rivals, but it would now also profit from the traffic it sends to rivals…. Any vertical search companies that survive the transition to such a radically altered and unfavourable marketplace would be left eking out a living on the slimmest of margins from the scraps left over from the traffic, and now revenues, that Google would be diverting to its own services.

If one separates the adjectives from Foundem’s substantive criticisms, there are four principal contentions it makes.

1. “Universal Search” labeling does not fix organic search manipulation. Foundem says the EC proposal addresses only the “preference” of Google’s own links in a prominent area of its redesigned Universal Search results pages, not the use of search algorithms allegedly to demote links to vertical rivals. “Instead, with a flourish of misdirection, they focus exclusively on its [sic] Universal Search inserts.” Because the commitments “ignore Google’s natural search results, they are misdirected in their application and fall far short of their target.”

2. Paid Rival Links would benefit Google financially. Foundem complains that Google’s proposal to insert paid links to vertical rivals for commercial searches will allow it to “monetise” (again in European spelling) rivals’ Web traffic. The proposal, Foundem claims, would allow Google to become “the main beneficiary of its rivals’ vertical search services as well as its own,” which would “extend Google’s existing monopoly powers and could eventually leave it in sole possession of the efficient, low-overhead, business model that has characterised and fuelled the internet revolution.”

3. Google should be prohibited from applying site quality algorithms. Foundem asserts that the use of website quality metrics designed to weed out malware, spam and search-manipulated sites that lack content is inherently anticompetitive, but that Google’s corresponding commitment to include all vertical rivals absent “some clearly defined Harmful Practices (such as illegal content and consumer deception)” or with “prior individual approval from the [European] Commission” is inadequate.

4. The Google commitments do not extend to non-search services. Foundem complains that “vertical search was simply the natural first target for Google. Google can (and will, if it isn’t stopped) extend the same abusive practices into other sectors, including e-commerce, auctions, and social networks.” It opposes the proposed commitments because they do not cover these other Internet-based services.

Each of these criticisms is misplaced, but none more so than the claim that the Google proposal should be rejected because it somehow misses the big problem in search. The EC’s principal competition concern was that Google gave undue preference to its own vertical services with the invention of Universal Search. Therefore, inserting links to rivals in that same “preferential,” prominently outlined space above organic search results provides obvious parity between Google’s shopping service, for instance, and Foundem’s consumer electronics listings. The second concern was that Universal Search deceives users into thinking results are something other than promotion of Google’s own commercial services because the lack of a clear distinction between a promoted link and normal search results “left some consumers less able to make an informed choice.” Hence, as I’ve addressed in detail before, a label remedy is precisely the right solution to what is, at heart, a contention of misleading trade practices.

The FTC notably concluded that Google’s switch to Universal Search was a bona fide search innovation that benefited consumers. Mr. Almunia has made essentially the same concession. To the extent Foundem believes the practice is inherently anticompetitive and should be banned, as it appears, its critique is inapposite to an evaluation of the effectiveness of Google’s proposed EC commitments. Even in Europe, competition authorities do not outlaw products developed by firms with market power, and EC competition law, like that in the US, is strongly disinclined to sanction an antitrust case based on allegations of “anticompetitive product design.”

The reason for this restraint is simple: competition officials and courts are not engineers or businessmen and thus have no objective basis on which to assess whether product designs are “good” or not. That is a decision left to the marketplace, with consumers literally voting with their clicks and wallets. Indeed, such reserve is essential in technology markets, where product innovation occurs at the speed of light in and in which user interface and consumer experience are so subtle and competitively important. It is the reason former FTC chairman Jon Leibowitz — on behalf of a unanimous, politically diverse five-commissioner agency — rejected calls that antitrust should be used to “regulate the intricacies of Google’s search algorithms.” Ditto Mr. Almunia, who likewise told the Financial Times back in January that his concern is “the way they present their own services” and that he was “not discussing the algorithm” used for Internet search.

Foundem’s other critiques are nonsensical. Including Paid Rival Links alongside Google’s own universal shopping and commercial links (themselves paid) requires someone to set a fair price. That is something bureaucrats and antitrust agencies again do not do well, if at all, but an auction does perfectly. There is plainly no room to include links for every commercial search site on every Google search results page, so an auction system allocates that scarce space to businesses based on their own financial calculus of the benefit of preferential placement. That’s not monetizing rivals’ traffic and does not require Foundem or any other Google competitor to participate. If these Paid Rival Links are as worthless as Foundem implies, then its prediction of Google using them as a way to usurp competitors’ revenues is especially silly, because the auction prices will be negligible. Indeed, to suggest that paid placement is for some reason invalid as a competitive search service represents the height of hubris for Foundem, whose business model is to sell all search results. If paid placement is OK for Foundem it is equally permissible for any other search firm, small or big or anywhere in between.

It’s hard to take seriously a company which contends that site quality algorithms are invalid, when we all know the entire SEO, pornography and content piracy industries try their damnedest to game search results and avoid content filters established by responsible search engines like Google. Foundem never explains why the objective criteria Google has committed to apply do not resolve its allegation that rival links were targeted for demotion unfairly. While I personally disagree with the need or justification for any such remedy, the fact is that Google’s proposed settlement directly addresses organic link results by precluding exactly the type of targeted “link demotion” that FairSearch.org, Mr. Reback and Foundem itself have long alleged Google engages in as a matter of ordinary course.

Lastly, consider for a brief moment Foundem’s odd criticism that Google has not offered proposals for “other sectors” like auctions and social networks. Foundem itself does not operate in those markets, which are obviously not Internet search. With the rather spectacular failure to date of Google+ to challenge Facebook and Twitter, or any Google service to take on eBay, no one has even claimed Google has any chance of monopolizing these very different markets. When and if there are problems of Google accumulating market power in new services against entrenched Web firms — an eventuality that is all but inconceivable today — antitrust authorities can intervene. To do so in a case about allegations of Web search dominance and abuse is unseemly by any standard, European or American.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.