Maybe Google Is Popular Because It's Good?
The Department of Justice undervalues consumer preference in its latest antitrust efforts.
In July 2001, a dozen Google techies pondered their mission mantra. In essence, they aimed "to organize the world's information and make it universally accessible and useful." However, their ambition was celestial. They grasped for a moniker.
The network of networks was expanding exponentially in every direction, with websites stacking up data everywhere. The informational jumble was messier than a teenager's bedroom floor.
AltaVista, AskJeeves, Excite, Overture, InfoSpace, Lycos, Inktomi, and other websites were using keyword search tools. But the scammers, hackers, and porn hubs were sending masses of these keywords into their databases, hijacking innocent web surfers. The question then arose: How to create a navigational app that separates the wheat from the chaff?
Don't be evil.
These were computer science nerds, of course. Philosophers, preachers, or landscape architecture majors might have dug deeper. Yet, off these merry programmers marched into Cyberspace, brimming with idealism and armed with code.
Damned if they didn't tidy up that packet-switched thicket. Keyword searches once again became great with Google Search. Billions of people began googling their every thought, and the business model achieved miracles. Google created over one thousand five-millionaires when it went public in 2004— each lucky individual (if leaving their stake unsold since) now holds $370 million, minimum. Company founders Larry Page and Sergei Brin are each 100-billionaires.
The innovation was simple in design, complex in execution, and radical in result. The business achieved a rare triple play: First, a robust new web crawler devised a superior method for finding and tagging the world's digital content, deploying cheap PCs linked in formations to achieve momentous computing power (Brin's genius). Second, this more prolific database of global digital content was better cataloged. A clever "Page Rank" score evaluated keyword matches, countering the influence of scammers by scrutinizing the quality of their web page links (Page's inspiration). Third, "intention-based advertising" displayed commercial messages to searchers self-identified as ready to buy. For instance, the internet user wondering about "coho salmon, Ketchikan, kids'' gave Hank's Family Fishing B&B in Alaska a digital target for its 10 percent off coupon, while signaling to Olay not to bother advertising its skin care products. This solved the famous marketing dilemma: "I know I'm wasting half my ad budget, I just don't know which half." Businesses loved these tiny slices of digital real estate, and Google mined gold.
The bountiful cash flow funded vast computer overhead and an elite army of software programmers, enabling Google to deliver truly extraordinary benefits to the mass market—all for free. According to Stanford University economist Eric Brynjolfsson's conservative empirical estimate, each Google user in the U.S. enjoys an astounding $750 a year in consumer surplus, amounting to around $184 billion annually for the 246 million daily Google users— the equivalent to 1 percent of GDP.
Such boffo success for a capitalist start-up, ingeniously solving the needs of the World Wide Web—well, that's your American Dream scene, just as Norman Rockwell sketched it for the brochure. It's a generational blockbuster, with 200,000 Google professionals living large and enjoying a median 2022 compensation equal to $279,802. Naturally, all of this leaves public policy experts with just one option:
Sue the bastards!
Is Google Search the greatest product since sliced bagels, or is it monopoly extraction? The query is getting its day in antitrust court, presided over by Judge Amit Mehta, a Georgetown University law graduate nominated to the Washington D.C. federal court by President Barack Obama. Mehta is hearing U.S. v. Google, a case filed in October 2020 by Donald Trump's Department of Justice (DOJ). Then-Attorney General William Barr signed the complaint, attacking "Google's grip over the internet for millions of American consumers… and entrepreneurs beholden to an unlawful monopolist."
For convenience, Mehta relocated the proceedings to a facility in Northern Virginia—a wry sense of topographical irony! The prosecutors argue that one of the core issues in the case against Google revolves around having a search engine conveniently placed in the right spot. Google pays browser developers, device makers, and mobile operators for preferred (if non-exclusive) placement of its prized app. Of particular interest is Apple, which receives $10 billion a year to integrate Google's search engine into Safari, a web browser that comes pre-installed in all of Apple's iPhones, iPads, MacBooks, and iMacs. According to the DOJ, this arrangement means that Apple is giving preference to Google over its competitors, hindering newcomers like the fledgling Microsoft and its software, Microsoft Bing, from gaining users.
I say that Google is the better search engine, but don't trust me—only 3 percent of U.S. web searches take place on Microsoft Bing, while a whopping 93 percent use Google. Is it possible that that is simply because Bing is being suppressed by the all-powerful Google? Not likely. Google's lawyers argue that not even the greater share of browsers distributed by Microsoft (which come pre-installed on the majority of computers sold globally) significantly boost Bing's popularity. This prompts a word of caution: try not to get between a happy new owner of an HP, Dell, or Acer laptop and her keyboard, as her fingers pound with zeal in a race to replace the default Bing app with her preferred choice.
If Mehta were to use Bing, he would discover two things: First, it is a snap to launch Bing even when Google is the default search engine; assuming a standard broadband connection, it pops up in a flash. (Google engineered noticeable speed increases in its searches, and they became a trademark innovation.) Second, it wouldn't take long to notice how the score in this game ran up to where the DOJ is attempting to administer its own form of a mercy rule.
No smart pundit ever risks making a bold prediction about an antitrust trial, where differences in lawyering, mood swings by the judge's irritable adolescent son, unpredictable courtroom testimony, and facts yet to be discovered influence outcomes. Hey, there could even be jury tampering! So, rejecting all wisdom, here's mine:
JK.
This case, brought mainly by the DOJ (although 35 state attorneys general have joined), largely falls under Section II of the Sherman Antitrust Act of 1890 (although Section IV and the Clayton Act have received mention). Section II makes it illegal to "monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations." A long list of Supreme Court cases, however, shows that having a high market share, even if it resembles a monopoly, is not per se unlawful. Instead, the law targets those abusing market power to damage the market: reducing consumer choices, raising output prices, and slowing benefits to the public that would otherwise result from robust competition.
The government will attempt to prove that Google's deals with Apple, Mozilla, Samsung, T-Mobile, and Verizon for favorable screen placement provided an advantage by suppressing competition. Google Search won in the marketplace, but not "on the merits," hindering innovation and, more importantly and broadly, consumers, who lost options, the argument goes. The government claims the case parallels the 1998 action by the DOJ against Microsoft in the "browser wars" case. Microsoft, once the perp, is now the victim.
Indeed, the DOJ wants to believe it is on something of a roll. Twenty-five years ago, it beat Microsoft's lawyers, obtaining a judgment against the Beast of Redmond and even a divestiture order that split the firm into two separate companies. Alas, that order was overturned on appeal. Ultimately, a 2001 settlement mandated Microsoft to open their Windows operating system interfaces to allow other companies a fair chance to offer computer users their software innovations on Windows-run machines, fostering competition with those written by Microsoft.
This 10-year probation was the DOJ's answer to the browser "jihad" waged by Microsoft. When Netscape's Navigator took the world by storm in late 1994, it jumped onto over 38 million Windows computers in just 18 months. The innovation was groundbreaking, triggering mass market adoption of tools to access the World Wide Web. In response, Microsoft developed its rival, Internet Explorer, in 1995. Microsoft gave the browser away for free, while Netscape began charging $50 a unit, and spent $100 million a year on a team of programmers to improve their product. By the release of Internet Explorer 3.0 in August 1996, independent reviews reached a consensus that Microsoft's product was superior, the price of the browser was $0.00, and the Internet-connected world was exploding.
But that was bad. The government's theory was that low prices and better browsers were suppressing competition—not in browsers but in operating systems. Navigator was itself increasing demand for Windows, as the added ability to surf the web was a huge plus. The trick was that Microsoft feared that its Windows software could be—not immediately, but down the road—replaced by rival software that snuck onto its operating platform and hosted other third-party apps, as well. Indeed, Netscape's strategy had stoked this vision by embedding a programming language, JAVA, within Navigator. This did allow software developers to write programs that interacted directly with JAVA, not Windows, and created the thought (and fear, harbored by Microsoft) that just such a transition might one day undercut Microsoft's ultra-profitable core product.
Smoking gun!
Nice theory, but a quarter century on, it's been tested. The government's legal win against Microsoft did not perform as promised in the marketplace—bringing competitors to Windows via transparent protocols that promote innovation atop the Windows ecosystem. When the antitrust sanctions expired in 2011, Windows still claimed 92 percent of the global desktop PC operating system market—an increase from the 60 percent share it had at the time the DOJ filed the case. JAVA, conversely, claimed 0 percent, having failed to materialize as any sort of competitive threat, despite the DOJ's prediction and protections. Perhaps even more revealing was that Apple had arisen to grab 6 percent of the global computer operating system market, using a proprietary model that owed nothing to the Windows sharing protocols supervised by regulators. (Apple's share rose to 18 percent in 2020, as two rival behemoths, Microsoft and Apple, accounted for 95 percent.) Even a supporter of the government's case as stalwart as legal scholar and activist Lawrence Lessig—disqualified from his Special Master appointment by trial Judge Thomas Penfield Jackson by the D.C. Circuit due to his bias against Microsoft—conceded the long-run verdict in 2007: "I blew it on Microsoft."
Microsoft competitors have nonetheless flourished, bashing Microsoft in software apps (like search) and out-maneuvering the tech "monopolist" elsewhere. Note the remarkable history.
Microsoft's pointed effort to control the television market through the cable set-top box fizzled, despite Microsoft's $1 billion equity investment in the leading U.S. cable operator, Comcast. This took place just when a firm with no existing business, Netflix, was entering the mail-order video rental business, ultimately establishing supremacy via streaming. Then, driven by a hunger for new content to feed its burgeoning subscriber base, the firm became America's largest movie studio in less than a decade.
The rise of wireless eclipsed plain old telephone service. Apple's iPhone launched and revolutionized internet access, taking it mobile. This gave Apple's iOS (with Safari) and then Google's Android operating system (featuring Google Search as its prized application) massive markets to serve and multi-trillion-dollar valuations to enjoy.
Microsoft made every effort to conquer this domain. Early in digital cellular, Microsoft widely supplied its own wireless operating system, Windows Mobile, which was crushed by the rise of Apple's iPhone and the Google-sponsored Android ecosystem.. Microsoft then regrouped, partnering with Nokia, the world's leading smartphone maker pre-iPhone. Their Symbian platform continued to plummet, so Microsoft proceeded to buy Nokia's entire cellphone business in 2014, only to write-off that entire business for $8 billion in losses in 2015.
Sounding familiar yet?
Through these waves of creative destruction, Netflix emerged to make itself the king of internet video; Apple the leading money-maker of wireless; Samsung the top producer of $1,000 non-iPhone cellphones; Google the king of search; and Amazon the titan of the Cloud. Microsoft still reigns as the top dog in computer software.
And the DOJ's antitrust theories win in Washington. Announcing the Google case in October 2020, Attorney General Barr said:
Twenty-five years ago, the Department of Justice sued Microsoft, paving the way for a new wave of innovative tech companies—including Google. The increased competition following the Microsoft case enabled Google to grow from a small start-up to an Internet behemoth.
Let's Google that. The Microsoft antitrust sanctions were imposed years after Google's search engine burst on the scene and took Silicon Valley by storm; like numerous search apps before, it was easily accessed by millions using Windows. Today, Google Search continues to flourish even over the hurdles posed by Microsoft—which favors its Bing app in Windows, "foreclosing" Google Search now. U.S. regulators could not possibly miss the fact that European antitrust authorities have been investigating Google for competition law violations since 2010, filing antitrust suits since 2015, and fining the firm three times, dinging the hipsters from Sunnyvale over $9 billion between 2017 and 2019. Still, Europeans love Google. In April 2023, it held 92.5 percent of Europe's market share, exactly where it was in January 2015.
It is curious that Barr would state the antitrust claim so succinctly. In fact, we know where the next Google is likely to come from—whence the current one emerged. Wonderfully, the most important single strategic business event in the history of this storied innovator is thought by company biographers to have occurred in May 2002. At the time, the firm was still a start-up looking for a path to stardom. The company's big break came when it had the opportunity to cut a deal with the world's largest Internet Service Provider, AOL.
With 34 million subscribers, AOL was a most imposing presence on the burgeoning Internet. When its subscribers went to their start-up page, which tool would they use? The old search engine, produced by Inktomi, was good, as was Overture's companion service serving up Internet ads to monetize the searches. But the buzz about the hot new app was intense: The New York Times reported that Google's search results were "widely regarded as the best on the Web." AOL wanted in: it invited Google to bid for placement in their featured search slot.
Brin and Page could scarcely believe it. They saw the deal as an answer to their prayers. It was a shock to them that Eric Schmidt, the company's CEO brought in by investors as the adult supervision tempering the brash, brilliant young bucks, informed them it was a non-starter. The firm, still more than two years from its IPO, had only tiny cash reserves. Capturing the AOL business could easily turn into a winner's curse, delivering the Google vision into bankruptcy. "I was terrified," said Schmidt in an exchange captured in David Vise's 2005 The Google Story. "Larry and Sergey and I argued hard. I understood that if you ran out of cash, you were done. They were more willing to take risks than me. They turned out to be right."
No kidding.
The deal committed Google to pay AOL 85 percent of the revenues Google search would generate on AOL's site, and guaranteed at least $150 million per year—mind-boggling for a firm with a cash balance of $10 million at the time. The youngsters simply laughed at the old man, outvoted him, and bet the farm. With another 34 million Americans nudged their way, the world would soon be their oyster.
It is crucial to recall that it was not yet theirs in 2002. Google was a phenom, yes, and it attracted 16 percent of U.S. search traffic. But Yahoo still had 36 percent, and strong rivals such Overture, Excite, and—yes—Microsoft were all in the mix. Yet, once Google scraped together the coin to launch on the big stage, consumers flocked. In just two years, Google passed Yahoo. The better mousetrap broke into a market where the giants demanded pay-to-play. So the upstart paid. Soon, the little guy owned the world. It is unfortunate that the then-ISP monopoly (as per the Federal Trade Commission's official position), AOL, is not around to see it.
So that's where the last Google came from—a place that the DOJ now dubs anti-competitive.
The Google case takes the U.S. towards the European Union's model. It is an antitrust epiphany of not just Lina Khan, the FTC activist appointed by President Joe Biden, but also of Donald Trump, the former president who, like Microsoft, knows about being a defendant. Trump is caught flat-footed, however, embracing the European approach to zap American-made products. Referring to the E.U.'s top antitrust regulator, he exclaimed in 2019: "She's suing all our companies. We should be suing Google and Facebook…which perhaps we will."
And we are. Google is on trial now; the Trump-filed Facebook case is scheduled for next year. It's a bit of an irony. The European approach, while considered yet ineffective in halting American entrepreneurship, has been nearly airtight in suppressing European digital enterprise. The entire continent, with perhaps the best educational systems in the world, has not produced a single Top 30 Tech firm, as measured by market capitalization in tech guru Mary Meeker's annual "Internet Trends." In contrast, the U.S. has 18, China 7. The only E.U. entry is Sweden's Spotify at No. 30.
The policy switch apparent in U.S. v. Google represents a bizarre trade flow: Trump, an amateur protectionist, is stealing from professional anti-American protectionists in Brussels.
Fifteen years ago, when "neutrality" debates were all the rage in the internet policy world, I encountered a friend from Japan. He was an executive at one of the three mobile carriers. Japan, with its innovative iMode, launched the wireless web in 1999 and was long thought of as the premier Internet-connected market.
We chatted about competition. I asked about what apps—the search engine, in particular—were pre-loaded on the carrier's devices. The Japanese mobile sector has been routinely dubbed "strong vertical," meaning that the mobile networks exercise great control over what business models develop and services are supplied.
The exec evinced a pallor. With uncharacteristic emotion, he responded with staccato: "Google." I inquired, "But they are paying you for product placement, you're getting money to feature them, correct?"
To which my friend conceded: "Yes, but we don't like it. We have no choice. Our customers want Google!"
