Is free an antitrust issue?

Friday, July 10, 2009 at 6:37 PM ET

Posted by Dana Wagner, Senior Competition Counsel

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!