France Calls Google a Monopoly
It is fun to run a monopoly. But in the long run, it can be a lot less enjoyable to own one.
Companies change as they grow larger and more profitable. Bureaucracy and success slow innovation. Will this new product hurt an old one? If so, should we delay, or price it very high? Old monopolists find themselves outrun by newer companies with no stake in the old ways.
Bosses of monopolies are highly unlikely to view themselves as lucky rather than brilliant. Being better than everyone else, they act haughtily toward competitors and customers alike. People start looking for a way to even the playing field.
Eventually, the antitrust lawyers arrive. With them comes the threat of management sclerosis, because the lawyers’ presence affects corporate behavior. Once a company comes to understand that being too successful may be bad for its future, it is really hard to stay on the cutting edge.
This week, the French Competition Authority officially declared Googlea monopoly. That conclusion is hardly novel, but the decision appears to go beyond any previous official ruling in the United States or elsewhere.
“Google holds a dominant position on the advertising market related to online searches,” the French authority concluded. “Its search engine enjoys a wide popularity and currently totals around 90 percent of the Web searches made in France. Moreover, there are strong barriers to entry for this activity.”
Having determined Google has a monopoly, the agency ordered the company to resume offering its services to a French company called Navx, which sells a database to let drivers know where the French police are likely to have radar traps in operation.
Google found Navx’s business distasteful — it is arguable that Navx’s customers use the product to help them act illegally with impunity — so last November, Google stopped doing business with Navx. As a result, those using search terms like “radar trap” in French could no longer learn of the company’s product and, a few clicks later, buy it.
Navx complained to the French government, saying its sales had plunged and that as a result it was facing problems raising capital. On Wednesday, the authority ordered Google to resume selling ads to Navx and to produce clear policies on when advertisers would be turned down.
“Discriminatory practices may harm competition,” the authority said, “when customers of a company holding a dominant position find themselves disadvantaged in the competition on their own market.”
In other words, it does not matter that Navx is not a competitor to Google. Because Google is dominant in its market — Internet search word advertising — it must act almost as a government agency, with clear rules that can be understood in advance and are fair to all.
Google points out that the ruling is an interim order and forecasts that it will prevail after it provides more detailed rules to the French agency. “We remain confident of a positive outcome,” said Adam Kovacevich, a Google spokesman. “The French authorities acknowledge Google’s rights to set clear content policies to guarantee that ads are appropriate.”
Setting acceptable guarantees may not be easy. The French ruling cited what it called discrimination by Google in not taking ads from Navx while accepting ads from makers of global positioning system devices, like Garmin, whose Web sites promote similar products.
But even if Google is able to kick out Navx again, the ruling could have a lasting effect. “Now that there is a preliminary finding that they have a dominant position, they will have to be careful,” said Ron Soffer, whose law firm in Paris represented Navx. “The rules and procedures regarding ad words will have to pass the scrutiny of the authorities.”
If so, Google will have a staff dealing with writing, revising and defending its policies on whether it will take money from would-be customers. That is not an expense that your average company must bear.
Google’s position, rejected by the French, is that the relevant market is all of advertising, in which Google has a tiny share, rather than online search ads, in which it is dominant. It appears that if the French authorities do not reverse that conclusion in their final ruling, it will be the first official precedent rejecting Google’s argument.
In the United States, the Federal Trade Commission said in 2007 that it was possible that search ads could be a defined market for antitrust purposes. But it did not reach a conclusion on the issue as it approved Google’s acquisition of DoubleClick, an Internet advertising agency.
In 2008, the Justice Department threatened to sue if Google went through with a proposed alliance with Yahoo in online advertising. The company backed down, so no precedent was set. (Read "Google: Sure It's Big. But Is That Bad?")
In the short run, the French decision could be good for Google. It will resume getting revenue from Navx. The amount is probably not that high, but every euro helps, even if you are running a monopoly.
But consider the history — from an investment perspective — of companies that grew to be so dominant that antitrust regulators felt compelled to pay attention to complaints that their market power was being abused.
There are some horror stories. Can you recall General Motors in the 1950s? Would it have done a better job of battling imports in the 1960s and 1970s if it had not been aware that regulators were monitoring its market share numbers? Would it have eventually gone bankrupt without such worries?
Or think about AT&T, which a quarter-century ago was broken up into a group of companies that, in due course, found that the technology had changed enough that they were all but irrelevant, forcing a new merger wave.
The more recent technology monopolists — in public imagination and government concern, whether or not in legal reality — continue to be profitable and successful. But their stocks have not been wonderful investments.
Remember “Wintel,” the dual monopoly supposedly held by Microsoftand Intel? Each of those stocks now trades for less than it did when the Justice Department antitrust suit against Microsoft went to trial in October 1998.
The Justice Department sued to break up I.B.M. in 1969 and dropped the case in 1982. By then, I.B.M.’s competitive position had eroded, although the company dismissed the notion that the lawsuit had affected its behavior.
“You certainly sit down and ask yourself whether you should be more conservative,” Thomas Barr of Cravath, Swaine & Moore, I.B.M.’s lead lawyer in the case, said in 1982. “But in an industry like this, you can’t decide what to do on that basis. I know of no example where the suit affected a business decision.”
No one can prove otherwise, of course. But I.B.M.’s competitors were not asking antitrust lawyers for advice. For whatever reasons, I.B.M. underperformed the American stock market while the suit was pending and has about matched it since then.
Google’s power remains vast, and this week’s ruling is certainly not going to destroy it. But I suspect that it will be a long time before another senior Google executive describes the company, as one did a few weeks ago, as “the biggest kingmaker on this earth.”