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Peter Passell
Editor, The Milken Institute Review; Senior Fellow
California and Capital Markets and Europe and Finance and Global Economy and Labor and Public Policy and U.S. Economy
Peter Passell is editor of The Milken Institute Review, the Institute's economic quarterly. A senior fellow, Passell joined the Institute after eight years as economics columnist for the news department of The New York Times. He previously served on the Times' editorial board and was an assistant professor at Columbia...
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Is Google the next Microsoft?
By: Peter Passell
July 06, 2011
   
   
The antitrust enforcers at Federal Trade Commission have decided to take a long, hard look at Google's search/advertising business for evidence of bias in directing consumers to Google services. And why not? Google certainly is the Big Kahuna of search enterprises, and it certainly is the FTC's job to hold the company to its "don't be evil" motto.

If you've read my posts before, you've probably guessed that I wouldn't bother to write about the issue if I didn't have something contrarian to say. And you'd be right. It's not that I think Google should get a free pass on antitrust. But I worry that, when it comes to policing businesses that live and die by innovation rather than price competition, antitrust policy is ill-suited to the task. Indeed, I fear that the investigation could do to Google what the Justice Department did to Microsoft a decade earlier (and to IBM in the 1970s), transforming an idea factory into yet another cautious, politically sensitive American corporation.

Antitrust was designed for a time when big businesses were mostly capital-intensive manufacturers -- when market concentration signaled the likely ability of one producer to raise prices above competitive levels at the expense of consumers. But high-tech in general and information technology companies in particular are subject to a very different dynamic. Here, success typically means market dominance (think Kindle or iPod) and staggeringly high profit margins, while competition is largely driven by the prospect of new (rather than lower-cost) products.

In this new world, antitrust's major task ought to be preventing dominant companies from erecting barriers that block challengers with better technology/design/marketing. And one could imagine that the FTC will deal with Google in this spirit, but history suggests it won't work like that.

Consider the Microsoft antitrust cases in the U.S. and Europe, where Microsoft's dominance of Internet browsing software was presumed to be anti-competitive. The remedies ultimately imposed on the company were largely harmless (and ineffectual).

But the long ordeal helped to transform Microsoft from a politically aloof firm focused on conquering the next market to a lawyered-up, lobbied-up enterprise that spends way too much energy wondering where the next regulatory threat is coming from. Microsoft still gives away a lot of copies of Internet Explorer, but the years of distraction gave Mozilla (Firefox), Apple (Safari) and Google (Chrome) the running room to capture almost half the browser market. And, though Microsoft remains highly profitable, it has since recorded many more misses than hits in the innovation department.

The challenge, then, is to recognize when market dominance is anti-competitive and when it is simply the reward for being better than the competitors. I feel bad for the FTC, which must navigate largely unknown territory with an obsolete compass. I feel worse for Google - or, more precisely, for the rest of us who have reaped the benefits of Google's innovations and are hoping for more to come.