The European Union leveled a $2.7 billion fine against Google this month for allegedly illegally disadvantaging several European e-commerce sites by algorithmically favoring Google Shopping results over their own.

The reasons for the fine are fairly tedious, even by the usual standards of EU bureaucratic action. The specific Google product at issue isn’t well-known or widely used and the specific companies involved aren’t well-known either. And while the cash stakes are nothing to sneer at, the amount of money involved is fairly trivial relative to Google’s overall scale.

Yet for all that, the ruling is arguably the most important development in business regulation on either side of the continent in this decade. The details of the case aren’t important, but the high-level view is. Europe has ruled that Google has monopoly power in the web search market and should be regulated as such. That’s a game-changer. The United States, so far, disagrees.

Google has a lot of power

If by some chance you discovered this article — or any other Vox article — through a web search on your mobile phone, you are probably looking at what’s known as an Accelerated Mobile Page. AMP is a Google initiative to make mobile web pages load at lightning speed through a combination of stripping them down and hosting the content directly on Google’s servers.

One reason publishers have adopted AMP is that the technical performance really is impressive. But as critics like Jon Gruber have long pointed out, it also has significant downsides.

Given the tradeoffs, the real answer to his question, “Can someone explain to me why a website would publish AMP versions of their articles?” is extremely simple. Publishers do it because Google wants them to do it. They perceive that AMP pages will be favored over non-AMP ones in Google’s search, and so if you want to maximize your search referral traffic you ought to do what Google wants and get on the AMP train.

Publishers, in short, perceive Google as possessing considerable power in the marketplace. Europe is now on record as seeing that as a potential problem. The United States thinks it basically isn’t.

The US thinks Google should do what it wants

From the standpoint of American antitrust authorities, Google is largely immune to scrutiny on two grounds.

One is the theory that despite its large market share, Google is no monopoly because competition is “just a click away.” A traditional monopoly would rely on control over some kind of physical asset to make competition literally impossible. By contrast, it’s genuinely quite easy to navigate over to Bing or Duck Duck Go if you decide you don’t want to use Google for web search.

If Google downgrading traditional web search results in favor of advertising display units or special boxes makes users like it better, then that’s a win-win. If users like it less, then they can go search somewhere else. The American view is that for the government to try to second-guess these kind of design calls would be counterproductive. As the FTC concluded in its 2013 letter closing investigations of Google:

Product design is an important dimension of competition and condemning legitimate product improvements risks harming consumers. Reasonable minds may differ as to the best way to design a search results page and the best way to allocate space among organic links, paid advertisements, and other features. And reasonable search algorithms may differ as to how best to rank any given website. Challenging Google’s product design decisions in this case would require the Commission – or a court – to second-guess a firm’s product design decisions where plausible procompetitive justifications have been offered, and where those justifications are supported by ample evidence.

The other is that US antitrust doctrine since the late-1970s has focused exclusively on consumer welfare, typically with a fairly narrow focus on consumer prices. Legally suspect monopoly behavior would raise prices. Google is free, so nothing it does raises prices, so nothing it does can be anti-consumer.

These doctrines sometimes lead American authorities to strange results. Back in 2012, a group of traditional book publishers banded together with Apple to break Amazon’s stranglehold over the e-book industry and force it to change its pricing policies. The Justice Department sued the hapless publishers who Amazon was crushing rather than helping them against the de facto e-book monopolist. After all, despite Amazon’s dominant market share competition (at the time from Barnes & Noble’s Nook) was just a click away. And Amazon was dedicated to keeping prices low.

By the same token, while antitrust authorities won’t stop Google from pressuring publishers into using AMP, they certainly would stop publishers from forming a cartel that bargained collectively over AMP and other relevant industry issues.

Network effects are a game-changer

One problem with “only a click away” analysis is network effects.

Facebook is good to use in part because it’s a good product, but in part because everyone is already on Facebook. Even if a rival social network product came along that was, all things considered, slightly better, nobody would use it because nobody else is using it.

Google, by the same token, has a nearly insurmountable lead over every rival in virtue of the fact that so many people are googling all the time. Each search is an input into Google’s ongoing iterative machine learning that aims to get better and better at surfacing the most relevant content. No rival can match Google’s user base, so no rival can match the speed at which Google is learning and getting better. That gives Google considerable latitude to mess around with how search works to promote its own products while still maintaining a dominant basic position in search.

During the landmark antitrust litigation against Microsoft in the 1990s, this was exactly the position the US government took.

At the time, people wanted to buy Windows computers in part because they were compatible with other Windows computers that were already ubiquitous. That gave Microsoft market power, even though it was certainly always possible to buy a non-Windows computer. And even though the government didn’t ultimately carry the day with all the claims it made in that litigation, the basic principle that Microsoft should be considered a monopoly whose actions come under scrutiny stood up. But American regulators haven’t taken a similar view of the new generation of network effect-driven technology giants.

Google thinks this is punishing success

From Google’s point of view, all of this is borderline ridiculous.

The claim that the search giant is a nefarious monopoly worthy of heightened regulatory scrutiny amounts to arguing that they deserve to be punished for offering a superior product. Search engines aren’t like water utilities or railroads where limitations on physical space create a natural monopoly. And Google didn’t obtain a dominant market share by purchasing rivals or merging a bunch of separate search engines. Nothing is stopping anyone from using a rival search service if they want to, it’s simply that most people choose to use Google.

       

Even worse, barring them from vertically integrating search with other Google offerings doesn’t just cost them money (though of course it does that) it prevents them from improving their product. Relative to Google’s ambitions, the “classic Google” experience of displaying a list of links to search results is incredibly primitive.

As Farhad Manjoo reported in 2013, Google’s goal is to build something like the computer that powers the Enterprise in Star Trek, simply answering your questions. These days if you ask Google how tall John Wall is, Google simply tells you how tall John Wall is.

Internet content providers, of course, don’t like this trend and would prefer Google to serve up links to websites that would garner traffic and advertising revenue. Google, for selfish business reasons, would rather keep users on Google and continue gobbling up ad revenue for itself. But answering the question directly is also a genuinely superior user experience to the alternative.

From Google’s point of view, the truly anti-competitive move would be for regulators to prop up non-Google information services by preventing Google from outcompeting them by offering a superior seamless product.

Google is politically strong in the United States

A heavy theme in late-1990s coverage of the Microsoft anti-trust litigation was that the software giant had grown to become one of America’s most influential companies without bothering to make a proportionate investment in lobbying Washington. Once the lawsuit was underway, that changed, and Microsoft began to rapidly amp up its lobbying activity, but it was too late by then to stop Bill Clinton’s administration from charging forward.

George W. Bush’s victory in the 2000 election, however, proved beneficial to Microsoft and helped induced the government to agree to settle the case.

Bush, more broadly, inaugurated a general era of business-friendly policymaking and light-touch regulation. Then along came Barack Obama who campaigned on a promise to stiffen antitrust enforcement, and in many ways delivered on the promise. Obama was, however, closely politically aligned with Silicon Valley and was much more likely to deliver anti-monopoly regulation when the targets were stodgy telecom companies than sexy high-tech ones.

The Obama White House was particularly close to Google, which sent 31 executives to White House jobs and employed 22 White House officials after they left Washington, with others revolving to or from the State Department and the Pentagon. Google had a massive presence at the 2016 Democratic National Convention, and Google CEO Eric Schmidt is the sole investor in Civis Analytics, a major data and technology vendor to Democratic campaigns. The White House, sometimes including Obama personally, characterized European antitrust scrutiny of Google as a form of de facto protectionism — with the European Union cast as seeking to unfairly disadvantage American tech companies to prop up European ones.

This tight alignment with Democrats could theoretically mean political trouble for Google in a Trump-dominated Washington. In practice, however, Trump has made very conventional business-friendly Republican appointments to all the relevant agencies, including tapping Maureen Ohlhausen — a vocal critic of Obama-era antitrust enforcement as overly zealous — as acting chair of the Federal Trade Commission.

Two visions of antitrust enforcement

The result is that for now at least the United States and Europe appear to be headed down two very different paths with regard to the application of antitrust law to digital technology.

The American philosophy emphasizes the risk that overly zealous regulation could constrain innovation from some of the most dynamic companies on earth while the European one emphasizes the risk that those companies themselves have grown so large and powerful that they can choke off new players. They diverge in part on how they think about network effects as a moat in the modern economy, and in part on their specific assessment of Google’s business decisions.

But they also diverge in how they think about the purpose of competition policy.

American regulators take a relatively narrow view that the goal should be to prevent consumers from facing situations in which they have no choices, or in which lack of choices forces them to pay higher prices. European regulators take a broader view that the goal should be ensure the viability of a diverse ecosystem of firms. The American view is that excessive regulation is a clear threat to innovation, while the European view is that a corporate monoculture is a clear threat to innovation.

And not everyone in America is satisfied with the American approach. Hillary Clinton’s campaign called for more stringent anti-trust enforcement, though without specifically mentioning the technology platform giants as potential targets. But late in its lifespan, the Obama administration’s own Council of Economic Advisers released a report bemoaning declining competition in the American economy over the past generation and specifically singling out the Microsoft litigation as a worthwhile effort to push back. And in a spring 2016 speech, Elizabeth Warren called out Google, Apple, and Amazon by name as companies that “deliver enormously valuable products” but nonetheless require more scrutiny because “the opportunity to compete must remain open for new entrants and smaller competitors that want their chance to change the world again.” Bernie Sanders, too, is a proponent of a more regulation-friendly approach to competition policy.

For now, the main concrete consequence of the underlying shift is that technology CEOs are lavishing praise on Trump, recognizing that despite their workforce’s discomfort with his culture war politics and anti-immigrant demagoguery, their objective interests are aligned with his economic policy priority.

But European regulators have put on the table an intellectual framework for thinking about antitrust in the digital era that could drastically change how the economy works, and the rising progressive faction of the Democratic Party wants to adopt that approach. As the economic policy debate continues to shift away from how to promote recovery from a severe recession to how to promote broadly shared growth on a sustained basis, this question of whether American tech giants should be seen as favored national champions or threats to innovation is likely to become increasingly central.

Source