FTC and Google – no market, no foul

By Doug Miller

In reading the coverage of the FTC announcement that it was not going to pursue any real action against Google for favoritism of its own products in the web search market, I was surprised to see how few commentators have raised the point that there can’t be a search “market” when no one pays for that service. And that the users of web search are, in fact, the product that Google sells to the consumers of the market it does monopolize – online advertising. Or the fact that by using its advertising revenues to provide services to users for free or greatly discounted it can collapse those markets and own them as well.

For over a year and a half, many experts who follow the Internet economy have wisely pointed out that the real consumers in the online search business are advertisers, not the users who interact with the search engine. One of the most profound “aha” moments for me came when I read Nathan Newman’s article “You’re Not Google’s Customer — You’re the Product: Antitrust in a Web 2.0 World” back in March 2011. He correctly argued that web browser users who interact with Google search are in fact the product that gets sold to the real customer – the online advertiser. Given that no money changes hands between a web user and Google or any other web search engine provider, there is no search engine market. The information provided by the user is collected by Google and used to match the user with paid ads. The revenue event takes place when the user clicks on a link to an advertiser’s website and at that point, the monetary transaction takes place – between Google and the advertiser. In Nathan Newman’s most recent article (FTC “Brought Forth a Couple of Mice” in Slapping Google on the Wrist), he makes many of the same points again.

So for the FTC to consider the users of search engines as consumers, when these users do not pay for the web search session, seems incredibly misguided. It is not surprising that the FTC had a tough time determining harm to the consumer when they have been looking at the wrong consumer all this time.

Yet, there are at least two areas where there is a clear consumer-provider relationship, where there is evidence of harm and yet the FTC has completely ignored the markets.

Advertisers are harmed by Google’s search monopoly

While web search engine users pay nothing to conduct an online search, advertisers pay dearly for premier ad placement beside the search results in the hope that the user will click on their link, go to their site and buy their product or service. This is a great model since end users are matched up with relevant ads based on the keywords that are used in the search. Yet there is a dark side to this model. Given that Google has a monopoly position in online search, advertisers really have no other choice when it comes to buying effective online ads. As more advertisers use Google AdWords, the cost per click for each keyword goes up as more companies vie for user eyeballs. This scramble for placement “above the fold” drives the price for keywords ever higher in a land grab for attention. With no other viable alternative for search engine advertising, the prices spiral upwards at alarming rates. The result is that advertisers pay more and more for advertising while getting no improvement in the quality of click-throughs. And Google sits back and simply collects the cash.

I know for my own business, the cost per click for Google AdWords has gone up substantially over the last 6 years. I spend more on AdWords now than I do for healthcare plans (and we all know how expensive healthcare plans are).

The New York Times ran a very interesting series on this phenomenon. In the words of Sharon Geltner, an analyst at the Small Business Development Center, “AdWords can bleed many a small business dry.”

Plus you now have a situation where Google is entering new markets and is able to give its new offerings free prime advertising placement while its competitors have to pay substantial fees for similar placement. Just try doing a Google search for “smartphone” or “cloud computing” or “web apps” and see where Google’s ads appear. Note that this is subtly different than the search bias that the FTC looked into. In my opinion, this is much worse.

So for advertisers, you could definitely build a case that Google is harming consumers (i.e. businesses placing ads) by exploiting its monopoly in the web search space to drive up the price of advertising. But it appears the FTC does not care about this type of “consumer.”

Google Apps customers will ultimately be harmed

While advertising makes up 96% of Google’s revenue, Google does generate some revenue selling Google Apps to business, education and government customers. Many customers have welcomed the extremely low (or even free as is the case in education) per-user prices that Google charges for Google Apps which includes Gmail, Drive and other cloud-based services. Yet again, there is a dark side to this model. Google is running a well-known tactic of using profits from a monopoly business (online advertising) to subsidize a low-priced offering in an adjacent market (cloud-based productivity applications such as email and document management) with the goal of driving out competitors who are not able to cross-subsidize their offerings. At the moment, consumers only see the short-term positive side which is lower pricing. But once the other competitors are driven out of the new market, Google will be left as the only competitor and will be free to raise prices, dictate the features or reduce investment – all of which will ultimately harm consumers.

There are other areas of potential harm to these consumers related to privacy and the use of personal user or business information in order to enhance Google’s advertising business. This is particularly an issue for government customers who are storing sensitive government and taxpayer data in these services. Many, including myself, have written about these data protection issues and this has been an area of focus for regulators around the world.

Again, the FTC has passed up the opportunity to investigate these Google consumer relationships and the potential long-term harm of Google’s business practices.

With the FTC case closed, the ball is now in the court of European regulators and many state attorneys general. It will be interesting to see if these regulators “get it” and will focus on the harm to the real consumers of Google’s offerings: advertisers and Google Apps customers.

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