Whether Google is a monopoly isn’t the point

Much has been made of Google (s goog) chairman Eric Schmidt’s admission on Wednesday that the web giant might be a monopoly, during his testimony before a Senate hearing into Google’s market dominance and its effect on consumers and the marketplace. But despite the howls of outrage at Google’s size and dominance in the search market, the fact remains that — for the purposes of U.S. antitrust law at least — being a monopoly isn’t illegal. What is illegal is either acquiring that monopoly by nefarious or anticompetitive means, or using that dominant position in a way that harms the market for those services. The problem with applying that to Google is that even if you assume it has a monopoly and is being anticompetitive, it’s not at all clear how that is bad for consumers.

As Stacey described in her post on the hearing — which was convened by the members of the Senate Judiciary Committee on Antitrust, Competition Policy and Consumer Rights and entitled “The Power of Google: Serving Consumers or Threatening Competition?“– heard from Schmidt as well as a number of Google critics, including the co-founder and CEO of Yelp, who said the search company took user reviews from his service without his permission and then threatened to remove Yelp from the Google index altogether.

Is Google’s behavior harming consumers?

The committee also heard from antitrust experts such as Thomas Barnett, the former Assistant Attorney-General and the head of the Justice Department’s antitrust division for several years. Barnett, who is now an advisor to Expedia (s expd) — one of the companies that has been most critical of Google’s entrance into new markets such as the travel-information market. In a statement filed with the committee, which is available on Scribd and also embedded below, Barnett laid out the case against Google in some detail, but summed it up with these four points:

  • Search is the critical gateway by which users navigate the web: As one Google executive has noted, “[S]earch is critical. If you are not found, the rest cannot follow.”
  • Google dominates search and search advertising
  • Google is expanding its dominance into a broadening range of search-dependent products and services (which also protects and reinforces its search dominance)
  • As one company gains control over access to more and more products and services on the Internet, consumers can expect to face higher prices and reduced innovation

The first three of Barnett’s points are fairly obvious: Search is definitely the main interface for many people when it comes to the web (although social networks and social media are growing rapidly as a source of traffic). And while Barnett doesn’t come out and say that the company is a monopoly, he notes that Google clearly has a “dominant position” in search and search advertising — which is true, given a market share that is estimated at 65 percent for search and 80 percent for search advertising. It’s also true that Google is expanding into new products and services, although how “search dependent” they are is debatable.

Having a large market share is not illegal

The hard part comes when Barnett says that Google’s dominance in these areas affects consumers because they will face higher prices and reduced innovation. This is the core of an antitrust case (which the Senate hearing isn’t technically part of, but which is currently underway at the Federal Trade Commission and possibly the Justice Department as well, since both share responsibility for antitrust). It’s not enough that a company like Google has a dominant or even monopolistic market position — as judge Learned Hand has written: “The successful competitor, having been urged to compete, must not be turned on when he wins.”

And it’s not even enough to argue that a company with a monopoly is using that position unfairly. It has to be proven that consumers or the marketplace as a whole are being harmed by that behavior, either through higher prices or reduced choice, or both.

The problem with a company like Google — as opposed to a company like Microsoft(s msft), the last major antitrust investigation in the technology sphere — is that users don’t actually pay for the vast majority of its products and services. Microsoft’s behavior arguably affected physical goods like computers and software, which people had to pay for. What does Google’s behavior affect? I’m not paying any more to use Google Maps than I would to use some other service, nor am I paying more to use Yelp because it has somehow been disadvantaged by Google’s attempts to “scrape” its content for local recommendations.

So how does Barnett try to answer this point? He uses Google’s dominance in the search-related advertising market as a side door into the pricing argument. In other words, since Google controls a majority of the market for search advertising, Barnett argues that it influences prices in that market, causing advertisers to pay more — and these higher prices are then passed on to consumers.

How do higher search advertising prices affect me?

That’s an interesting argument, but it’s going to be a very tough case to make. For one thing, Google’s ad prices are set by an open auction, so how are Barnett or antitrust officials going to prove they are somehow higher than they should be? What’s the actual market value of a click on an ad? And even if a court accepts the argument that prices are higher because Google controls the market, it’s not at all clear that the end user or consumer will have to pay more for a particular product or service simply because the cost of advertising it on Google searches is a penny or two higher.

Even arguing that innovation is being reduced is a tough sell. Rich Skrenta, the founder of one of Google’s most innovative competitors — a search engine called Blekko — has said that he doesn’t support an antitrust investigation into Google, and even a former antitrust attorney who worked on the Microsoft case has argued that attacking Google is a mistake. Has Google’s move into mobile with Android or into local recommendations or travel, or any other new market, caused innovation in that market to decline and thus affected consumers or choice? If so, there are very few tangible signs of it. And as I’ve pointed out before, innovation has disrupted more monopolies than any government.

Everyone likes to beat up on large companies — including the New York Times, (s nyt) which has written editorials about the dangers of Google becoming too large — but being big is not illegal, and no one (or at least no one credible) seems to be arguing that Google achieved its market size through nefarious means. And simply being unfair to competitors isn’t against the law either.

That leaves it to the government to prove that the company is somehow harming consumers by its behavior, and that is going to be a very difficult case to make.

Post and thumbnail photos courtesy of Flickr users Mark Strozier and bloomsberries