A warn­ing to In­ter­net gi­ants

Los Angeles Times - - OPINION -

Al­pha­bet Inc.’s most suc­cess­ful prod­uct — the Google search engine — may now be its most prob­lem­atic. On Tues­day, the Euro­pean Com­mis­sion’s top an­titrust reg­u­la­tor levied a $2.7-bil­lion fine against Al­pha­bet and Google for the way the search engine han­dles re­quests for in­for­ma­tion about prod­ucts.

Specif­i­cally, Com­mis­sioner Mar­grethe Vestager said that Google skewed its re­sults to bury links to ri­val com­pa­nies’ com­par­i­son shop­ping sites while promi­nently fea­tur­ing its own ser­vice, Google Shop­ping. Google re­sponded that it’s sim­ply try­ing to give users what they want and de­nied “fa­vor­ing our­selves, or any par­tic­u­lar site or seller.” It has a lot at stake: Google has in­te­grated many dif­fer­ent of­fer­ings into its search engine, in­clud­ing its map­ping and travel ser­vices. The prin­ci­ple ad­vanced by Vestager, how­ever, is a good one: Gi­ant on­line com­pa­nies should not be able to take ad­van­tage of their dom­i­nance in one field to hurt com­peti­tors in an­other.

It’s a les­son that Mi­crosoft laid out — in­vol­un­tar­ily — for the tech com­pa­nies that would fol­low in its wake. The soft­ware com­pany built a near mo­nop­oly in the mar­ket for per­sonal com­puter op­er­at­ing sys­tems, then in­te­grated a se­ries of un­re­lated prod­ucts into its Win­dows op­er­at­ing sys­tem, in­clud­ing a Web browser and a dig­i­tal me­dia player. Those moves helped de­stroy what had un­til then been the lead­ing browser maker while drain­ing mar­ket share from the pi­o­neer­ing maker of stream­ing soft­ware, bring­ing down the wrath of the U.S. De­part­ment of Jus­tice in the late 1990s.

Google’s ar­gu­ment echoes the one Mi­crosoft made: It in­te­grated Google Shop­ping, which of­fers links to prod­ucts at sites that ad­ver­tise on Google, into its search engine be­cause that gave users quicker ac­cess to the in­for­ma­tion they were seek­ing. And in the United States, the key ques­tion in an­titrust law is whether a com­pany’s be­hav­ior hurts users, not whether it hurts the com­pany’s com­peti­tors.

Euro­pean reg­u­la­tors fo­cus more on com­peti­tors, but they re­ally are two sides of the same coin. If com­peti­tors are un­fairly closed out, the public can miss out on the very real ben­e­fits that vig­or­ous com­pe­ti­tion pro­vides.

At the same time, it’s un­de­ni­able that the public has wel­comed vir­tual mo­nop­o­lies in search, so­cial me­dia and other ser­vices in the In­ter­net era. A large part of the ap­peal of sites like Face­book, Twit­ter and Snapchat is that so many peo­ple use them. There’s a net­work ef­fect for so­cial me­dia apps in par­tic­u­lar — the more peo­ple who use the ser­vice, the more valu­able it be­comes to them.

Mean­while, start-ups come out of nowhere to cre­ate whole new cat­e­gories of must-have apps and prod­ucts on­line. That means dom­i­nant com­pa­nies have to in­no­vate too, or else they can eas­ily change from to­day’s thing to yes­ter­day’s (see: MyS­pace, Ya­hoo). And of­ten, that in­no­va­tion in­volves find­ing a bet­ter way to do some­thing that a com­peti­tor is do­ing.

The chal­lenge for reg­u­la­tors is to pro­vide the big com­pa­nies space to try new things with­out run­ning roughshod over the mar­ket, clos­ing out other com­pa­nies and re­duc­ing con­sumer choice, which will ul­ti­mately lead to less in­no­va­tion. A good place to start is with cases where there is ev­i­dence of in­ten­tional un­der­min­ing of com­peti­tors — where a dom­i­nant com­pany al­ters the plat­form it pro­vides not just to fea­ture its own ser­vices, but to make it harder to find or use its ri­vals’.

Euro­pean and U.S. reg­u­la­tors also need a com­mon ap­proach to pro­tect­ing com­pe­ti­tion and in­no­va­tion. Oth­er­wise, in­com­pat­i­ble reg­u­la­tory schemes could ef­fec­tively fence off parts of the In­ter­net, re­quir­ing com­pa­nies to of­fer dif­fer­ent prod­ucts and ser­vices in dif­fer­ent parts of the world.

If Al­pha­bet fails to com­ply with the com­mis­sion’s or­der, it could face a huge ad­di­tional penalty: daily fines of up to 5% of its aver­age global rev­enues. That’s a pow­er­ful warn­ing to In­ter­net gi­ants not to in­no­vate in ways that dis­crim­i­nate against com­peti­tors. Reg­u­la­tors must be care­ful, though, not to stop them from in­no­vat­ing at all.

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