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Google Under the Magnifying Glass Again

Judiciary Committee

Author: Terri Swiatek 10/5/2011

There’s been a lot of scrutiny over corporate giant Google and its business practices as of late. The internet search and search-advertising company has been under fire from a number of competitors, spurring a series of Federal Trade Commission and European Union investigations over the past year. The most recent hearing, held 2 weeks ago, covered ‘The Power of Google: Serving Consumers or Threatening Competition?’   (View the full live webcast of the hearing above).

Testimony came from Google and its competitors, as well as the Senate Judiciary Committee, including: Eric Schmidt, Executive Chairman of Google Inc.;  Jeff Katz , CEO of Nextag; Jeremy Stoppelman, Co-Founder and CEO of Yelp Inc.; Thomas Barnett, Partner of Covington & Burling LLP; and Susan A. Creighton, Partner of Wilson Sonsini Goodrich & Rosati, PC.

The basic argument against Google is that, as its business interests have diversified over time, its market dominance in the search and search-advertising industries presents a serious conflict of interest. Competitors claim it’s no longer in Google’s financial interests to simply present the most relevant results to a user’s search query but to first present results that favor other Google properties and partners-where Google benefits from ad revenue. Google counters this charge, saying their goal is to always present the best answer to a search query, and if possible, to calculate and present that answer even if that means the consumer doesn’t need to click through to another site. For example, if someone searches “Macy’s,” Google’s studies indicate that, in most cases, the user is looking for a map with the location of a brick-and-mortar store; so the results page immediately displays a Google Places map. This is interesting because Google has changed, over time, from being a “GPS of the web” to a destination site itself.

The example below, recreated from one presented by Jeffrey Katz, illustrates how the relationships Google has with other businesses get preference and dominate the first half of a search results page. Paid ads are highlighted in green and Google Places and “related searches” are highlighted in red.

Washing Machine Query

I did my own, similar search query for “wedding dresses” and while three results did manage to surface to the top, the search results are still pretty Google-dominated.

Wedding Dresses Query

Google’s detractors also claim that the company has practiced improper scraping of content (Yelp’s accusations) and is using its expanding scale and volume to create unfair and anti-competitive barriers for its rivals (Microsoft’s complaints).

Interestingly enough, Jeffrey Katz (PDF) stated that 65% of Nextag’s search referrals come from Google and Jeremy Stoppleman (PDF) stated 75% of Yelp’s overall traffic came from Google, in some way. These highly successful companies are clearly benefiting from Google’s free organic listings as well as paid placement relationships, so why are they being so highly critical of Google’s business practices?

I think it’s pretty obvious that these companies trusted Google to act in a specific manner and designed critical parts of their business around those practices and technologies. These companies placed an enormous amount of trust in a single customer acquisition channel they had no real control over and now, when Google has decided to change the rules, they find themselves at a severe disadvantage. But it should be obvious that an unbalanced customer acquisition strategy can be a hindrance to any company’s sustainable growth; you wouldn’t build a stock portfolio and invest 75% of your money in just one company, would you?

In fact, Google changes the game a lot and has been doing so for awhile. According to Eric Schmidt (PDF), Google’s Executive Chairman, they change their ‘proprietary’ search algorithm slightly every 12 hours and did so over 500 times last year. When you’re playing on the home field and you happen to pay the referee’s salary, the question of a fair game is certainly debatable. But when have free markets ever been fair?

I do believe Google moved ahead of its competition because it was innovative and had the best results in the marketplace. The consumer chose Google more than its competitors, so they rose above the others. But while Google is clearly in the business of ranking, it has aggressively expanded into many other competitive areas and, while there are certainly alternative search and search-advertising companies out there, the issue comes down to scale. While Bing is Google’s biggest competitor in the US its 30% market share doesn’t even come close to Google’s 65% (ComScore). In the mobile market Google has 97% share and in the EU, Google takes the cake with 80% of regular search. At that scale it’s understandable that competitors and government entities would be concerned about reduced consumer choice, control of information, and stifling innovation. Google sits on the cusp of becoming a monopoly (Susan Creighton argues it’s not there quite yet (PDF)), which would bring the Sherman Act and other anti-trust laws into play.

Furthermore, Google’s apparent “bigness” obscures the fact that it lacks anything resembling monopoly power. Monopoly power has long been defined in the courts as the power to exclude competition or to control price . . . Google has neither power. – Susan Creighton

So end game, what can Google and the industry do to avoid intrusive and costly regulation of the internet search industry?

Over the past few years we’ve seen a trend that has the government stepping in to fix broken industries like banking and healthcare-do we really want it to end up going down that path? The panels were clearly looking to Google, and to its competitors, for suggestions of changes that could be made to avoid government interference or additional legislation and only a handful were offered. Could Google self-regulate or should there be some type of collective committee? Or would that be unfair to Google, a company that’s worked so hard to become a success? Should the government instigate more in-depth, private investigations to determine if Google is unfairly favoring the search results that make it the most money?

I don’t know about you but I certainly don’t want my search engine to become a utility; paying for a free-to-consumers service that works so well as is definitely isn’t an attractive option!