Today’s Wall Street Journal has an opinion piece by Jeffrey Katz, the CEO of Nextag, accusing Google of engaging in monopolistic practices. These are serious charges… employing some seriously flawed analysis.
Two major problems exist with Mr. Katz’s analysis. To violate antitrust law you have to possess significant market power, and abuse that position in a way that is detrimental to consumers (not competitors).
Mr. Katz claims that Google is big (which it is), but fails to make any arguments demonstrating that Google actually possesses market power. Given that Internet competition is just a click away, even large market shares usually do not translate into high barriers to entry. In fact, low barriers to entry and network effects often lead to high, but fleeting market shares. (More on this later, but I want to focus on the “abuse” charges).
The crux of Mr. Katz’s abuse charges, and most antitrust complaints against Google, is that Google is updating its “search engine” to incorporate tools and features designed to answer users’ questions in different ways. When you break down the complaints against Google, what their competitors are frustrated with is that Google won’t stay still, as one of Mr. Katz’s complaints makes clear:
Google should provide consumers with access to the unbiased search results it was once known for—regardless of which company or organization owns the service.
Leaving aside the question of search “bias,” which is ridiculous in the first place (Um, search engines rank things… and what is the neutral starting point anyway), a fundamental misconception about the search market is that when analyzing it, we should view it as the traditional search market (“10 simple links”). Saying Google shouldn’t be allowed to evolve is ludicrous, especially as algorithms become more complex and online behavior becomes better known. Consumers win when all companies evolve and challenge the status quo, not just new or small companies.
People are not going to Google because they want links. People using Google do so because they believe it is the best place, at the moment, for them to get answers. A better way of examining the market, especially in the antitrust context, is to ask a simple question: What do consumers want? In this case, consumers want answers and relevant information, packaged in the easiest way to understand. So, you don’t have to be a traditional search engine to compete with Google. In fact, that best way to compete with them is probably think of a better way to get consumers the information they want. These days that is often an app, as Yelp’s CEO points out:
“Then of course on mobile, that represents a very new distribution channel for us, and one where we have a much more intimate relationship with consumer [sic] because they’ve chosen to download the app. They’re much more engaged, we’re now a button on their screen. That actually disintermediates search. We like that trend.”
(In economic parlance this concept is known as “substitutability.” The market boundaries exist where customers no longer see a particular product as an adequate replacement for the products “in the market.” In this case, the relevant market would seem to be for “answers,” not search engines.)
The thing is the “10 simple links” approach is not the best way to give most answers anymore. And for those that do just want “10 simple links,” DuckDuckGo might actually be doing a better job at providing that. (They actually base their strategy–and have attracted significant VC funding–on attracting the niche of consumers who do want just “10 simple links”… as well as easy API integration.)
When I am looking for a good mexican restaurant in Dupont Circle, I go to Yelp. If I want to know something about a movie, IMDB. Breaking news about something happening in the world, I search Twitter. When I want to buy something, I go to Amazon or eBay. In fact, even the traditional “search” market is evolving. As a NY Times article from last month makes clear, Facebook and Microsoft have teamed up on a search partnership because they see the “search” market as becoming more and more user-centric, and Google is actually lagging significantly in this arena.
Microsoft introduced a set of changes to Bing that it says will improve searches by tapping into the expertise of friends on Facebook and other social networks. The company hopes to mine people’s online social connections to provide more personal search results for everything from hotel searches in Hawaii to movie recommendations.
For example, if you are logged into your Facebook page through Bing, and you search for “best hotels in Maui,” you will get results with pictures of friends who have shared some affinity for Maui before on Facebook, whether by listing it as their hometown in their Facebook profile, liking the island on Facebook or posting photos from a previous Maui vacation.
“This is a fundamentally different way to look at search,” Qi Lu, president of Microsoft’s online services division, said in a recent interview in a high-rise building here, a few miles from its main campus, where its Internet operations are based.
Foursquare’s new app is also taking a fundamentally different approach to providing users the information they want, and it has unique advantages over Google in providing users a specific type of highly valuable information: personalized, location-specific information that incorporates their immediate surroundings with their social circles–arguably the two most highly relevant sets of data for any individual. As yesterday’s TheNextWeb article makes clear, Google should be worried:
This new version of foursquare is more about finding things around you based on where you are right now. Instead of loading up the app when you arrive at a restaurant or bar and checking in, foursquare wants to be the app that you use to find new places to go. The “All New foursquare” is all about discovery.
As we’ve noted before, the addition of “Explore” on foursquare was a huge step for the company. In one fell swoop, it became clear what the future of foursquare would be, and that’s displaying all of the cool data and information we’ve given it, as well as making it useful…. I have already started using Explore quite a bit instead of Google Places and Yelp, and it has helped me find some cool new spots.
The Explore tab has been revamped in the app to tell you where your friends are, where the best deals are and which places you might like going to. Our data is now being used to recommend new venues to check out and check into. The neat thing about Explore is that it knows if you’re in your own city or traveling in another.
This is an indication of why static market share analysis for Internet markets is a problem. Market share on the Internet tends to be more fleeting than in other more traditional markets. To break this down further, the low barriers of entry and network effects that characterize the economic underpinnings of the Internet, mean that the best product can be accessed very easily by anyone who has an Internet connection, so consumers can all flock to the same product almost instantaneously. This leads to high market share for the best product in the short run, but it also means that you can be dethroned very quickly. Static market share analysis leads to analysis like this: remember when Myspace was a “natural monopoly” and Facebook was doomed to fail?
Static market share does not reflect market power on the Internet because markets evolve rapidly and convergence is the rule, not the exception. This means that the big guys actually step on each others toes, and that is a great thing! (And this is certainly not the case in other markets.)
What is the current state of competition? Well, Facebook has partnered with Microsoft’s Bing and has been rumored to be building its own search engine. Google has built its own social network. Microsoft, Google and Apple all have browsers and mobile operating systems… and, once again, Facebook is rumored to be in the market for both. And this competition doesn’t take into account the Yelps, Foursquares, and Twitters of the world who have unique advantages over the big guys. And, unlike most other markets, competition in the Internet world can come from unexpected places. The undisputed king of the cloud, Amazon, has launched its own search engine, CloudSearch, that cloud developers can easily tap into.
Now, if Google is actually engaged in underhanded behavior that results in consumer harm that is a different thing, but no one has offered any proof of this yet. And, if you think about it, that would likely be a bad business move. With companies like Microsoft, Facebook, and Amazon nipping at your heels and new competitors such as Foursquare and Twitter with key strategic advantages over you, taking your customers for granted would seem like a huge mistake that the markets would deal with harshly.