Friday, July 10, 2009

Is free an antitrust issue?



Just after Chris Anderson spoke at our D.C. office this week about the power of free, I came across this interesting piece he wrote for CNN.com raising some provocative questions about whether providing Internet services to users for free could pose an antitrust issue. So provocative, in fact, that I thought it was worth a reply.

Chris wrote:
But companies still have to make money, so there are limits to how much they can provide free. Not a problem for Google. Its core advertising business is so powerful, dominant and profitable that it can subsidize almost everything else the company does, using Free to get customers in new markets. Is that fair, when so many of its competitors don't have a similar golden goose at the core of their operations?
Setting aside the fact Google accounts for 3% of all U.S. advertising revenue, cross-subsidization is of course quite common in many companies (as Chris details in his new book), with certain products subsidizing others (sometimes known as "loss leaders"). No matter how successful or profitable the subsidizing product is, the fact remains that cross-subsidization itself has never been viewed as an antitrust problem. If a company chooses to use its profits from one product to help provide another product to consumers at low cost, that's generally a good thing.
The analogy is something like the semiconductor battles of the 1980s, when Japanese companies were accused of "dumping" (selling for under cost) memory chips in the U.S. market to drive out U.S. competitors.
Unfortunately, this analogy is flawed, as anti-dumping cases can only take place between countries and under trade laws. They have nothing to do with antitrust and don't apply to private companies. And even if anti-dumping laws did apply to private companies, the standard remedy in dumping cases is to have the companies involved charge more for their products. Does Chris -- who of course is an advocate for free -- really think that Google should start charging users to perform searches?

There have been claims made against private companies for so-called "predatory pricing" tactics, where the concern is that companies will use cheap goods to drive out competitors and then jack up the prices once the competition is gone. But again, even if you think this is a valid antitrust issue (and many commentators don't), almost no one believes that Google would or could start charging exorbitant prices for products like search and Gmail.
Could Free be OK for little companies, but not really big ones? How much market share would you have to have in one market to disallow you from using Free in another?
It is true that if a company has a dominant product, it may run afoul of antitrust laws if it "ties" that product to another -- for instance, by requiring customers who buy that product to buy another product as well. When a company provides products for free on a stand-alone basis, however, it's not requiring anyone to buy anything. It may take business away from other companies trying to charge users for similar products, but that's hardly an antitrust issue.

Keep in mind that competition laws are concerned with what's best for consumers, not for competing companies, and there's little doubt that from a consumer perspective, free products are usually a great thing.
As entrepreneur Alex Iskold has pointed out, Google is using the profits from its search advertising dominance to fund its competition with Microsoft in word processors and spreadsheets (Google Docs).

Microsoft, meanwhile, is doing just the opposite: using the profits from its dominance of word processors and spreadsheets (Microsoft Office) to subsidize its competition with Google in search (Microsoft Bing). In each case, the companies are using a highly profitable paid product to make another product free, on the hopes of gaining market share by taking price off the table.
Rather than exemplifying a competitive problem, Chris's example makes the point that in fact there is robust competition, between two companies pursuing similar strategies to win over users from each other. That's competition in action!

8 comments:

myronw said...

Perhaps... the answer is that nothing is free. Everything has a cost (i.e. "There Ain't No Such Thing As A Free Lunch" - Milton Friedman).

Google's free products capture mind share and entice folks to the Google search sponsored links. Is this cost an antitrust issue? From a user's perspective my answer is no.

Just wondering: Does the Chrome OS allow installation of the IE browser?

http://googcomments.blogspot.com

Joseph said...

I don't see how the Chrome OS would allow the install of IE since it is linux-based and I don't think that Microsoft makes a linix version of Internet Explorer. Do they?

Scott Cleland said...

Mr. Wagner,

The more appropriate question for your post would have been, "Can Free be an antitrust issue?" rather than the straw man title: "Is free an antitrust issue?"

You are right that free is generally pro-consumer, but not always as you undoubtedly appreciate. Since you blogged on the question, it is relevant to ask you if any of Google's free products could be an antitrust issue?
I think the answer could be yes, if they are determined to foreclose competition by neutralizing search complements that could represent significant potential competition to Google or have the potential to obsolete the boundaries of the search marketplace that the DOJ has found that Google dominates.
For those that would like to explore this question and related points more in depth, I did a white paper on the subject:
http://googleopoly.net/googleopoly_2.pdf see part D.1. page 8 for the part directly relevant to the question raised by Mr. Wagner's post.

Scott Cleland, Precursor LLC

Marcelo Camelo said...

"Just wondering: Does the Chrome OS allow installation of the IE browser?"

Chrome OS will be open source. So Microsoft could not only adapt IE to run on it but also replace Chrome for IE.

Pink said...

@myronw

Chrome OS is a browser...the whole idea behind it is related cloud computing, aka. everything you need is online.

@Wagner

While I understand that 'free' is superb for the consumer, 'free' is not desirable for competition and that's the main focus of anti-trust issues ('they' don't care about the consumer...). I feel like the end result of all this 10 years down the line will be A) removal of preferential search results for Google sponsored apps B) some concession to the competition with regards to the 'secret' search algorithms.

It's not pretty but anti-trust is about competition and the fact is 'free' is never really free. Someone has to pay the bills and someone else is losing a sale.

Marcelo Camelo said...

@pink

Chrome OS is not a browser, it's an OS (albeit with an Browser centric UI).

Tian said...

@Marcelo

Cloud computing revolves around a way to access your applications and personal files on the internet. Whether you wanna call it an OS or browser is a matter of semantics. But Google is in the business of redefining the norm so it's no doubt you'll have a more difficult time differentiating between the two.

Theodore said...

by charliechoosy December 21, 2009 5:12 PM PST
Cleave two issues that are related but distinct:

(1) Is Google violating antitrust laws/principles?

It's really hard to say. As their chief "competition" counsel has pointed out on a number of occasions, market power in itself is not actionable AND cross-subsidization is not contrary to antitrust law (at least not yet). Fair enough, boy wonder.

That said, Google dominates the online advertising world - which is increasingly the most important space for advertising products and services to a world that is increasingly dominated by wireless access and (for lack of a better turn of phrase) "digital existence." It's also clear from Google's recent products (Chrome), services/products (Book Search), and acquisitions that it intends to be everyone's one-stop-shop for information on the Internet.

What this means, essentially, is that Google, despite its relative youth, may be a company whose dominance may require antitrust law and doctrine to change radically to ensure that access to information is democratic, equitable, and provided in a competitive environment that is reasonably friendly to new entrants. Put another way: Why think that antitrust law has to be a time-bound relic, rather than an ever-changing and dynamic set of principles through which courts can help foster competition?

(There are more dots to connect in the argument I just made, but I haven't the time to connect them.)

(2) Does Google have good leadership on the antitrust front?

G has certainly made some smart moves. They removed ES from the Apple BOD, and made some important concessions in connection with the Book Search Deal.

However, those are simply decisions made ex post on the basis of political and legal considerations that were, at the time, easy to interpret. G, in other words, was forced to take those steps, so patting G on the back for making obviously correct choices would be a bit silly.

Here's the problem with G's approach to their antitrust woes: The competition team seems to be making some very large blunders in the way it is presenting G's case. Instead of really trying to work with regulators, they claim:

- that G is not that big;

- that G's size or success has nothing to do with a lack of healthy competition in a properly defined market; and

- that new incumbents could knock G out at any moment.

All of these claims are a bit of a stretch, if not false on their face. This reveals the arrogance of G and the inability of its internal legal team to see how the rest of the world views G (which is quite different from how G views its own role - or should I say mission - in the world). And it does G no good to make these dubious claims publicly, even though lawyers with a certain caste of mind are keen to grandstand in just this way.

But what's more, G's competition counsel has made a number of ludicrous public statements, drawing on absurd metaphors (competition is just a click away, G wants to be Santa Claus, etc.) in a way that hurts G's case and makes it seem like G does not really take the regulators (or the need for robust competition) seriously.

In the final analysis, G is a company that may not be violating existing antitrust law. But its arrogance and the narrow-mindedness of its internal legal team could lead regulators to expand antitrust law if they view G's mission as one that is inconsistent with the broad principles that underlie extant antitrust law and policy.