AT& T, IBM, Intel, Microsoft . . . Google?

By Steven Pearlstein
Wednesday, October 24, 2007


My first visit to Google came on the day after the company had announced a 57 percent increase in quarterly sales, the day its share price had broken through $650, rumors swirled that its executives were mulling a multibillion-dollar investment in and an ad deal with Facebook, its political troubles in China were splashed across the front page of the Wall Street Journal, and the company cafeteria was featuring fresh oysters and a scrumptious seafood concoction in a puff pastry shell.

In other words, just another day at the world's hottest company, the company everyone, it seems, now wants to own, work for, collaborate with and advertise through.

These days, Google conjures equal doses of respect and fear, not just at technology firms but at advertising agencies, movie companies, record labels, cable and telephone companies, libraries, book publishers, newspapers, television networks, travel agencies and real estate brokers.

Through the ad revenue it has generated, it has financed tens of thousands of Web-based start-ups. And by putting the power of information in the hands of consumers, it has busted up monopolies, driven down costs and threatened governments.

Here in Silicon Valley, Google's success and the wealth that it has created have almost single-handedly pulled the region out of the dot-com doldrums. Its management style and philosophy are widely imitated. When it comes to employee loyalty, corporate transparency, social responsibility -- or simply the ability to spur innovation -- Google has become the gold standard.

You can't visit the Googleplex without getting caught up in the energy and excitement, the sense that something special is happening. But while it is special, it is not unique.

We have seen this story before. We saw it at AT&T in the 1950s, IBM in the 1960s, Intel in the 1970s and Microsoft in the 1980s. They were the hot technology companies of their eras, the darlings of Wall Street and the very models of modern corporate management. And, in time, their success was so overwhelming that each, in turn, became targets for antitrust enforcement.

With its proposed purchase of DoubleClick, Google has followed suit in drawing the scrutiny of the competition police, both at home and in Europe. The reason is simple: Like its predecessors, Google shows every sign of pulling away from the pack in a market that naturally tends toward a single, dominant firm.

In just about every industry, the biggest companies enjoy powerful competitive advantages. This is particularly true in industries with high upfront costs, which takes in most of the technology sector.

In Google's case, for example, after it has set up its servers and devised its famous algorithms, the cost of conducting one more search or displaying one more search ad is close to zero. So once the fixed costs have been covered, every new customer represents almost pure profit.

But there is another reason for the winner-take-all quality of technology markets, sometimes referred to as a "network effect." Simply, a networked market is one in which customers are better off doing business with the company that already has the most customers.

For example, if you're looking for an Internet social network, you probably want the one that has the largest number of your friends and colleagues. If you're shopping for computers or software or computer chips, you'll probably prefer the ones compatible with everyone else's or with those you already have. Because of these tendencies, the companies with a head start in developing the biggest network of users usually win, even if competitors come along offering superior products or slightly lower prices.

Google has all of these advantages.

Because it jumped into the lead in the Internet search business, largely because it had the better product, Google has the biggest bank of search history to use to constantly improve the quality of its algorithms. Better quality, in turn, generates even larger market share. As a result, Google accounts for about two-thirds of Internet searches done in the United States, with its market share increasing daily.

Internet searches, of course, are free. But Google's other genius has been in its ability to turn its search dominance into cash. The logic goes like this:

Because it has the most searches, Google can direct the largest number of consumers to the ads on its search pages or those its automated advertising exchange puts on other Web sites.

Because its ads generate more sales than any others, Google has been able to attract the most advertisers.

And because its advertising exchange has the most advertisers, it is able to attract the most Web site publishers.

Note that there is nothing illegal going on here. Google has become the dominant player in search and Internet advertising because it had the best product to offer to advertisers, publishers and Internet users. Just as AT&T, IBM, Intel and Microsoft did, it has won its near-monopoly fair and square.

Here's where the antitrust law comes in.

At its heart, the aim of antitrust law is to ensure consumers the benefits of lower prices and greater choice that come with competition. In most markets, that means ensuring that there are enough competitors. But in markets that tend naturally toward a dominant firm, competition comes not from a business offering the same product or service but from a new technology or way of doing business that comes along and upsets the terms of competition.

This is how MCI unseated AT&T in long-distance telephony and how Microsoft and Intel used the personal computer to challenge IBM's mainframe dominance. Today, it is how Google has used the Internet and open software to break Microsoft's hold on personal computing. And someday, a new idea will come along to supplant Google as Internet kingpin.

Nobody knows what that idea will be -- not you, not me, not Google and certainly not the government. But it is the government's job to make sure the monopolist doesn't use its advantages to eliminate the emerging contenders, either by buying them up or leveraging its existing monopoly to gain a dominant position in the next new thing.

In this respect, the proposed $3.6 billion purchase of DoubleClick is not particularly troubling. The one area of Internet advertising that Google doesn't yet dominate is in the area of those often-annoying display ads, and its purchase of DoubleClick would give Google an instant lead in that fast-growing market. More significantly, it would allow Google to leverage its lead in search advertising by bundling it with DoubleClick's display advertising services, just as Yahoo and Microsoft intend to do with their recent display-advertising purchases.

There's no reason for the government to block the DoubleClick purchase outright. But as a condition of approval, the Federal Trade Commission should get binding assurances from Google that it won't require advertisers or publishers to buy the bundled product or enter into exclusive contracts with publishers or advertisers to prevent them from using other services as well.

On the other hand, there would be a serious antitrust problem if Google were to strike some sort of deal with Facebook, the social-networking site. In the space of three years, Facebook has attracted 40 million users, proved itself as a powerful advertising medium and attracted the attention of hundreds of companies designing applications to run on its platform.

For many of those users, Facebook is their first point of call on the Internet, or the place they hang out. That success suggests the possibility that it might one day challenge Google's dominance by changing the way people use the Internet and offering advertisers an even better mechanism for targeting their messages. It would be folly for the Federal Trade Commission to allow Google to foreclose that possibility before we see how things develop.

Google executives bristle at the idea that government intervention might be necessary. Their line is that a do-no-evil company such as Google would never, ever put the interests of its shareholders ahead of its users or society in general.

"We really do believe that stuff," said chief executive Eric Schmidt, who claims to have spent too many years at other companies fighting Microsoft's thuggish tactics to now engage in them himself.

I don't doubt the Google Guys' sincerity. But as the histories of Ma Bell and IBM remind, the path to monopoly profits is often paved with good intentions.

Steven Pearlstein will host a Web discussion today at noon athttp://washingtonpost.com. He can be reached atpearlsteins@washpost.com.

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