How Big Should We Let Google Get? Wrong Question

While Google is busy trying to compete with the growing power of Facebook, there are still those who believe the government needs to do something to blunt the growing power of Google (s goog). Washington Post (s wpo) business columnist Steven Pearlstein is the latest to join this crowd, with a piece entitled “Time to Loosen Google’s Grip?,” in which he argues the company needs to be prevented from buying its way into new markets and new technologies. Not surprisingly, Google disagrees; the company’s deputy general counsel, Don Harrison, has written a response to Pearlstein in which he argues that Google competes fair and square with lots of other companies, and that its acquisitions aren’t likely to cause any harm.

So who’s right? Obviously, the government has the authority to approve or deny acquisitions such as Google’s potential purchase of ITA, the travel-software firm Google agreed to acquire in July. Some have argued the purchase would give Google too much control over the online travel search-and-booking market, since ITA powers dozens of other sites and services in that market. But does Pearlstein’s argument hold water? Not really. More than anything, his complaint seems to be that Google is really big and has a lot of money, so we should stop it from buying things.

Pearlstein starts out by noting that Google isn’t just a web search company any longer, but is moving into “operating system and application software, mobile telephone software, e-mail, Web browsers, maps, and video aggregation.” Not to be unkind, but did Pearlstein just notice that Google has a mapping service and is doing video aggregation? Surely those wars are long over now. But no, the WaPo columnist suggests the company shouldn’t have been allowed to buy YouTube, because it had a “dominant position” in its market. This, of course, ignores the fact that there wasn’t even a market for what YouTube had when Google bought it, which is why many people thought the deal was a bad idea.

Pearlstein’s motivation becomes obvious when he says things like “The question now is how much bigger and more dominant we want this innovative and ambitious company to become,” or that he has a problem with “allowing Google to buy its way into new markets and new technologies.” Since when do we decide how big companies are allowed to become, or whether they should be able to enter new markets? Antitrust laws were designed to prevent companies from using their monopoly power to negative effect in specific markets, not simply to keep companies from becoming large. But Pearlstein seems to be arguing that they should be broadened to cover any big company that buys other big companies:

Decades of cramped judicial opinions have so limited application of antitrust laws that each transaction can be considered only in terms of how it affects the narrowly defined niche market that an acquiring company hopes to enter.

The Washington Post columnist also trots out the “network effect” argument, which he says results in a market where “a few companies get very big very fast, the others die away and new competitors rarely emerge.” So how then do we explain that Facebook arose out of nowhere and completely displaced massive existing networks like MySpace (s nws) and Friendster? And while Google may be dominant in search and search-related advertising, the company has so far failed to extend that dominance into any other major market, including operating systems (where it competes with a company you may have heard of called Microsoft (s msft)), mobile phone software and web-based application software. In fact, Google arguably has far more failed acquisitions and new market entries than it does successful ones, and is having increasing difficulty just getting things done.

Google’s deputy counsel also makes a fairly powerful point in his defence of the company’s acquisitions, which is that antitrust laws are meant to protect consumers, not other businesses or competitors, and — so far at least — there is virtually no compelling evidence that the company’s purchases have made the web or any of its features either harder to use or more expensive for consumers, or removed any choice. If anything, in fact, Google has been the single biggest force in making formerly paid services free (although along the way it has raised some troubling questions about privacy). That’s going to make an antitrust case pretty hard to argue, regardless of what Mr. Pearlstein thinks.

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Post and thumbnail photo courtesy of Flickr user Mark Strozier