International Policy Digest

Business /18 Feb 2018

Is Google a Monopoly?

Google is famous for the phrase — “Don’t be evil.” Accordingly, it is somewhat ironic that it is the subject of numerous investigations for the evil act of being a monopoly. This includes antitrust (competition law) investigations by the EU, Missouri and now my home country of Australia.

In Australian Competition and Consumer Commission v Metcash Trading Limited [2011] FCA 967, Justice Emmett provides a summary of the traditional understanding of monopoly: “In a classic monopoly market, there is only one seller, usually with significant discretion over price. A firm that has no significant competitive constraints on its pricing discretion will be regarded as having monopoly power or significant or substantial market power.”

Is Google a monopoly under this definition? Google controls approximately 74% of global search results as of (December 2017) and along with Facebook received 70% of all advertising dollars spent online. However, this does not necessarily mean Google has discretion over price. In 2017, Google had revenues of approximately $110 billion.

The bulk of this revenue came from its advertising activities, in particular AdWords.

AdWords functions on an auction basis, with ad space awarded to advertisers with the highest bid (with content relevance also factoring in). This means the cost of advertising is determined by auction participants. The consequence of this auction arrangement is the cost-per-click of advertising via Google has been dropping.

Thus, you do not need to be a High Court judge to work out what Google’s argument will be in its antitrust cases: Google does not determine the price, the market does. Google only facilitates competition between market participants. But Google determines what is “relevant.”

Google establishes the rules of the auction and if Google raised prices indiscriminately, I doubt most advertisers would walk away.

To consider an alternative understanding of what is a monopoly we turn to Friedrich Hayek. In The Constitution of Liberty he states the following: “One could conceive of a few other instances where a monopolist might control an essential commodity on which people were completely dependent, but unless a monopolist is in a position to withhold an indispensable supply, he cannot exercise coercion, however unpleasant his demands may be for those who rely on his services.”

I interpret Hayek to be saying that a monopoly is only “bad” when the monopolist is in a position to exercise coercive power over an essential commodity. Hayek’s logic raises an interesting question: Is Google’s search engine an essential commodity?

If you consider an essential commodity as a resource necessary for human existence (e.g. water, food, shelter), then Google is not an essential commodity. But if you consider the situation from the perspective of a business, then things get more complex.

Since 2011, Google has made a number of changes to its algorithms in order to strengthen the “quality” of its search results. These updates, with code names ranging from Panda to Possum, have had devastating effects on some businesses.

The story of Demand Media (the business behind eHow) is one example. After Google’s Panda update in 2011, Demand Media’s web traffic collapsed. The Panda update penalized eHow on the basis it was a low-quality “content farm.”

What was once a $2 billion business is now down to $165 million… From Demand Media’s perspective, Google’s search engine was an essential commodity and Panda took this commodity away, in an exercise of coercion.

I consider there is a significant risk that, based on a traditionalist and an Austrian economics perspective, Google is a monopoly. If you can come to the conclusion that Google is a monopoly, under both a traditional interpretation and based on a reading of Friedrich Hayek, future government intervention is certainly a risk for Google and its investors.