Face­book's threat to Google be­wil­ders EU minds

There are two big prob­lems. First, the EU's trust-busters don't seem to have much of a clue as to the dif­fer­ence be­tween a mo­nop­oly and a re­ally, re­ally suc­cess­ful com­pany.

The Pak Banker - - Editorial5 - Matthew Lynn

What ex­actly is the Euro­pean Union's beef with Amer­ica's best technology com­pa­nies? Last week, the EU opened an in­ves­ti­ga­tion into Google Inc. for al­legedly dis­crim­i­nat­ing against com­pet­ing ser­vices in its search re­sults. Last year, it hit In­tel Corp. with a 1.06 bil­lion euro ($1.33 bil­lion) fine. Ear­lier this decade, Mi­crosoft Corp. got socked with a fine by the EU of al­most 500 mil­lion eu­ros.

At this rate, the peo­ple at Face­book Inc. and Twit­ter Inc. must be feel­ing dis­tinctly ner­vous. Can the EU re­ally play po­lice­man to the global technology in­dus­try? Of course not.

There are two big prob­lems. First, the EU's trust-busters don't seem to have much of a clue as to the dif­fer­ence be­tween a mo­nop­oly and a re­ally, re­ally suc­cess­ful com­pany. Sec­ond, it looks like sour grapes, at best, and at worst, re­venge. Europe's reg­u­la­tors keep pick­ing on the most ac­com­plished U.S. com­pa­nies while fail­ing to do much to en­cour­age com­peti­tors from their own coun­tries. An­titrust pol­icy shouldn't be a way of lev­el­ing the in­dus­trial score be­tween con­ti­nents.

Google is only the lat­est in a long line of U.S. technology com­pa­nies to get into trou­ble with Europe's reg­u­la­tors. In­tel, the world's largest com­puter chip­maker, was fined for al­legedly im­ped­ing com­pe­ti­tion in the com­puter-chip mar­ket. In 2004, Mi­crosoft was fined af­ter the EU ruled that it was tak­ing ad­van­tage of its dom­i­nant po­si­tion in the com­puter-op­er­at­ing sys­tems used to run per­sonal com­put­ers.

In July, the EU started an in­ves­ti­ga­tion into In­ter­na­tional Busi­ness Ma­chines Corp. over whether it was abus­ing its po­si­tion as the dom­i­nant sup­plier of main­frame com­put­ers. Back in 2001, the EU blocked Gen­eral Elec­tric Co.'s $47 bil­lion pur­chase of Honey­well In­ter­na­tional Inc. on com­pe­ti­tion grounds, even though nei­ther com­pany was Euro­pean. The list goes on and on.

The rights and wrongs of all those par­tic­u­lar cases are for the lawyers to ar­gue over. But there are two big is­sues that de­serve a wider de­bate.

First, does the EU have a clue whether a technology com­pany is dom­i­nat­ing a mar­ket and abus­ing its power?

The one thing we have learned over the four decades dur­ing which the dig­i­tal econ­omy has emerged is that it has a nat­u­ral ten­dency to­ward mo­nop­oly. We also know that these mo­nop­o­lies of­ten are fleet­ing, with the time on top grow­ing ever shorter.

IBM looked like a mo­nop­oly for a long time, be­fore get­ting whacked by Mi­crosoft and a host of com­pa­nies that could make com­put­ers cheaper. Then Mi­crosoft looked all-pow­er­ful, un­til the ar­rival of Google and the re­vival of Ap­ple Inc. Google may seem dom­i­nant now, but Face­book is gain­ing ground fast. Will Google be as strong in a decade's time as it is to­day? You would hardly want to bet on it.

In fact, two forces are at work. In technology, there is a huge first-mover ad­van­tage. The com­pany that gets a prod­uct to the mar­ket first takes a mas­sive lead over ev­ery­one else. There also is a net­work ef­fect. Peo­ple use Mi­crosoft op­er­at­ing sys­tems be­cause ev­ery­one else does. It's the same for Face­book. We log on that so­cial net­work be­cause it's where our friends are. A nat­u­ral con­se­quence of both forces is very high mar­ket shares.

If a ce­ment maker con­trolled 90 per­cent of the mar­ket, you might well sus­pect there was some­thing murky go­ing on that squeezed ri­vals out of the in­dus­try. But when a technology com­pany has a 90 per­cent mar­ket share, that's of­ten just the re­sult of it get­ting there first and ev­ery­one want­ing to use the same web­site, search en­gine or soft­ware pro­gram.

It doesn't nec­es­sar­ily fol­low that the technology com­pany is abus­ing its po­si­tion, or bul­ly­ing ri­vals. It just hap­pened to come up with an idea first and be re­ally good at what it does.

And, of course, the mar­ket is fluid. Some­thing else gets in­vented re­ally quickly. Ri­val en­trepreneurs are likely to crack the mo­nop­oly, if that is what it is, far faster than any func­tionary in Brus­sels.

Next, is it re­ally the job of the EU to po­lice the global technology in­dus­try?

For starters, it looks like sour grapes for the EU to con­stantly at­tack the most suc­cess­ful U.S. com­pa­nies.

Europe has been very bad at pro­duc­ing new, high-tech cham­pi­ons. The mo­bile phone man­u­fac­turer Nokia Oyj is the only real win­ner, and it looks like it's on the re­treat af­ter fall­ing be­hind in smart­phones.

Euro­peans prob­a­bly wouldn't be too im­pressed if the U.S. kept launch­ing le­gal as­saults on, say, Europe's lux­ury au­to­mo­bile man­u­fac­tur­ers or its fashion houses.

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