Is Google a Monopoly?

By JAMES B. STEWART

If there was any doubt about whether or not Google is under the antitrust microscope, it has been erased by news that antitrust regulators may try to break up interlocking directors at Google and Apple.

This is now the fourth real or threatened antitrust action against Google in just a year, suggesting that regulators are itching to pull the trigger. Last year, the Justice Department already had drafted a complaint and was minutes from filing suit when Google (wisely) dropped its plan to handle some of Yahoo's Internet ad placements. Google was finally allowed to acquire DoubleClick, the online-ad company, but only after extensive antitrust investigations both in the U.S. and Europe delayed the deal and allowed competitors to streak ahead. Today, Google remains a distant sixth in online display ads, behind Yahoo, Microsoft and even AOL, according to Internet-information provider ComScore. So much for market dominance.

Why would the U.S. government be so eager to punish the country's most successful and innovative start-up in recent memory?

Google is indisputably a victim of its own success. Its market share of Internet search has continued to rise steadily, encompassing roughly two-thirds of total searches. At 76%, its share of search advertising is even higher, thanks to Google's technological prowess at matching ads to people's search queries. Given the accompanying high profit margins on this lucrative business, Google displays the telltale characteristics of a monopolist: high, even dominant market share, with high profits and pricing power that are evidence of high barriers to entry for competitors.

Of course, this is exactly what makes Google so attractive to investors, and why I've been a shareholder since the public offering in 2004, when I participated successfully in the auction. I've continued to recommend it at times of weakness in its share price.

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Google's continued gains in market share bear out my contention that Google is that rare breed: the natural monopoly. By natural, I also mean lawful, since the monopoly derives from Google's skill and qualities inherent in the business, not from anticompetitive behavior.

I sometimes get the sense that antitrust regulators, in their single-minded zeal to promote competition, ignore the fact that monopolies, in and of themselves, aren't illegal, or even necessarily bad. To quote jurist Learned Hand in the oft-cited Alcoa case, "A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight, and industry. ... The successful competitor, having been urged to compete, must not be turned upon when he wins."

To me this fits Google precisely. Its search-market dominance is a function of its prowess in search and ad placement. I'm not an advertiser, so I can't speak to its effectiveness there, but as a frequent user of Google search, I continue to find it the most effective search engine by far. Google likes to say that its competition is "just a click away," so periodically I try the same search on some of those competitors. So far, none comes close to the effectiveness of Google (which isn't to say there isn't plenty of room for improvement). Apparently that's because Google created better algorithms, which it derived from a vastly larger database of search activity than its competitors. If that isn't the result of skill, foresight and industry, what is?

Google has been arguing that it isn't a monopolist because the market is much broader than search, or search advertising. (Pointing to a report by Cowen & Co. that says Google has just 3% of the global advertising market if you count things like billboards and radio, Google says it is only a bit player.) That strikes me as a stretch, but the government's apparent threat to separate two directors who sit on the boards of both Google and Apple seems to play right into Google's argument. If Google and Apple, which doesn't even have a search business, are competitors, then the relevant market is far bigger than even Google has argued.

I don't even need to make that argument. Given Google's original idealistic manifesto and subsequent innovations (many of which are losing money), Google strikes me as highly unlikely to abuse its market power. It knows as well as we do that its every move will be scrutinized. That doesn't mean antitrust regulators shouldn't be vigilant, but they should be just as careful not to punish competitive success. Given all the wrongdoing we have just witnessed in the financial crisis, I would think there would be plenty of more-pressing enforcement opportunities for regulators.

James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see:www.smartmoney.com/commonsense.

Source: http://online.wsj.com/article/SB124156244115989189.html

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