The FTC’s Threat to Web Consumers

Sun, Aug 19, 2012 at 11:17 am

    The agency’s vague new antitrust rule will discourage companies from innovation and vigorous competition.

    Last week Google acquired Frommer’s travel guide, which by any normal measure was a modest acquisition. The tech giant reportedly agreed to pay about $25 million, which hardly registers against the $38 billion Google earned last year in revenues or the $2 trillion size of the global travel industry.

    Yet groups such as Consumer Watchdog have called on government regulators to block the sale. The consortium of competitors to Google—which includes Microsoft—issued a statement that “encourages government officials to look closely” at how Google uses the acquisition.

    Thus continues the unholy Silicon Valley-Washington alliance to substitute lobbying for competition.

    For all the advances in how people access information, the digital revolution is still in its early days. Providing millions of relevant responses within a few milliseconds after a query is a wondrous feat of digital technology, but what people really want are answers. The next goal for search engines is to infer what people are interested in and deliver them answers directly, saving them the time and effort of digging through the search results.

    This is one reason Google bought Frommer’s and, before that, restaurant and hotel guide Zagat, and flight-data publisher ITA Software. These acquisitions let Google deliver answers directly instead of sending people off to sites listed in the search results. A search for a particular hotel, for example, might yield a results page with the usual links but also a Frommer’s review of the hotel. Acquiring Frommer’s, Google said, serves its new goal of providing “a review for every relevant place in the world.”

    Google understands that search results are better if they come with information from trusted brands such as Frommer’s and Zagat. Since search engines must both deliver consumer-friendly answers quickly and earn revenue by displaying advertisements, it’s a strange world where companies are criticized for improving the consumer experience.

    Travel companies such as TripAdvisor and Kayak are worried that Google will now send them less traffic. In congressional testimony last year, Google Chairman Eric Schmidt reminded Washington, “We built search for users, not websites.” Still, there’s a limit to how far Google will go to deliver its own results, given the value of remaining a neutral search engine.

    As a regulatory matter, there is real risk that the current antitrust review by the Federal Trade Commission will block innovation in the search industry. The agency could freeze Google into its historic way of doing business by stopping it from delivering answers directly (removing the consumer benefit) and by banning acquisitions such as Frommer’s.

    There is a long history of government overreach in technology, which changes faster than regulators can keep up. Antitrust claims are often based on the size of the companies involved and not on antitrust’s true purpose: to maximize consumer benefit, not to protect competitors.

    Microsoft fell behind in innovation when its top managers were distracted for years by U.S. and European claims that it was a monopolist. Now it’s Google’s turn to deal with regulators even as it tries to compete with Facebook, Twitter and others that are reducing its digital dominance.

    The FTC last month made a giant move toward heavy-handed antitrust regulation by changing the rules on when it would seek disgorgement of profits as a remedy for alleged violations. It rescinded a unanimous, bipartisan 2003 decision that the agency would rarely if ever seek disgorgement. One reason for the earlier rule was that commissioners realized that their test for seeking disgorgement was overly vague. Last month’s change could be timed to the agency’s high-profile investigation of Google for potential anticompetitive practices.

    Commissioner Maureen Ohlhausen dissented from the FTC’s change in the rules, saying that the 2003 policy had worked well. She objected that a return to disgorgement under conditions that the agency refused to define “runs counter to the goal of transparency, which is an important factor in ensuring ongoing support for the agency’s mission and activities.”

    She warned: “In essence, we are moving from clear guidance on disgorgement to virtually no guidance on this important policy issue.” If the FTC accuses Google of violating antitrust in its approach to search and then

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    seeks disgorgement of profits, the damages could be huge.

    This FTC change got little attention (other than from Washington law firms that rushed out the news), which will further encourage companies to lobby regulators to go after competitors by raising the stakes. As government becomes more intrusive, crony capitalism follows.

    For the technology companies that are supposed to be the drivers of our economy, this kind of regulatory uncertainty is a growing burden. The response to innovation by one company should be more innovation by others, not competitors calling in lawyers and lobbyists.

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