The Case Against the Case Against Google

The Department of Justice should take a hint from the Microsoft suit: no more antitrust actions against tech companies.

Google founders Sergey Brin (left) and Larry Page

Is Google too powerful? The Justice Department’s Christine Varney thinks so. As Fred Vogelstein reports in Wired, the attorney who represented Netscape during the federal government’s long-running Microsoft antitrust case sees the tech world’s newest giant as the latest threat to online innovation. “For me, Microsoft is so last century,” Varney told a conference last year. “They are not the problem. I think we are going to continually see a problem, potentially, with Google.” Ever since Barack Obama appointed her to head the DoJ’s antitrust division, Varney has been promising a tough line against firms that dominate their industries. The online-policy wonk doesn’t just think Google is getting too big. She might be ready to do something about it.

Before we get too excited about a potential antitrust action against Google, it’s worth noting that the rest of the Obama administration appears less enthusiastic than Varney about a potential trustbusting spree. I’m on the anti-Varney side as well: Prosecuting tech giants for getting too big is so last century. Google may well become the next Microsoft, acquiring enough industry power to hold its rivals hostage. But in the years since the Microsoft trial, we’ve learned that such power isn’t of great use. Google may be big now, but it’ll eventually find itself just as beaten down as Microsoft has become, and it’ll get there without any help from the government. How can I be so sure? Because we’ve seen this movie before.

I never thought I’d say this, but here goes: The antitrust prosecution against Microsoft was misguided. To be sure, the government had the facts right—in the late 1990s, the software giant looked unbeatable. Microsoft’s operating system came pre-installed on nearly every computer sold in the world; every business, whether large or small, considered its Office suite indispensible; its Web browser had become the dominant way most of the world got online; and it looked bent on becoming a powerhouse Internet company, too.

Every shred of evidence presented in the trial showed that Microsoft used its power ruthlessly. Microsoft strong-armed computer makers into leaving Netscape’s browser off their machines—it even threatened to cancel Office for the Mac if Apple didn’t make Internet Explorer the default Mac browser. Bill Gates was personally involved in keeping competitors at bay. When Gates learned that Intel was building a chip that would let programmers deploy enhanced graphics within non-Microsoft operating systems, he wrote to Intel CEO Andy Grove, “I don’t understand why Intel funds a group that is against Windows 95.” Intel stopped developing the chip.

But if the government was right on the facts, it was wrong on the big picture. The theory behind the prosecution was that Microsoft’s mobster tactics would raise the price of software and slow down innovation. But that didn’t happen. In 2002, Microsoft settled the antitrust case with the Bush administration; it faced no substantial penalties for its years of bad behavior. At that point, it still looked unbeatable—it had the same OS monopoly, office-software monopoly, and Web-browser monopoly. And you know what happened? It got beat anyway. Many of Microsoft’s assets turned out not to matter, because upstarts like Google and old foes like Apple found ways to innovate around them.

Indeed, in many ways Microsoft’s size was a liability, not an asset. This is the classic innovator’s dilemma; the company was so intent on protecting its cash cows—it derives most of its revenue from two products, Windows and Office—that it was blind to opportunities in new markets. Microsoft couldn’t make a Web e-mail system like Gmail, because that would have threatened Outlook. And why should Microsoft bother with free online word processing apps when Office was doing so well? When journalist Steven Levy showed Bill Gates the first iPod, Gates’ first reaction was, “It’s only for Macintosh?” Gates saw the iPod through the lens of desktop computers; if the iPod connected only to Macs, it didn’t pose a threat to Microsoft. What he didn’t figure out was that the iPod would herald the iTunes Store, allowing Apple to become not only the most influential entertainment company in the world, but also the dominant software maker for mobile devices. Yes, the first iPod didn’t work on Windows. In time, it would help render Windows irrelevant.

Google is not nearly as dominant as Microsoft once was, and it exercises its power far more judiciously. Last fall, for instance, it stepped away from a search deal with Yahoo once regulators raised concerns. Still, there are people clamoring for Google’s head. The most legitimate charge against Google is that it could use its market share and revenues from the search-engine game to carve out unfair advantages in other businesses. This is essentially the same argument the government marshaled against Microsoft, which spent hundreds of millions of dollars to build a free Web browser and then bundled it with every copy of Windows. Now Google is spending untold sums on a free Web browser (Chrome), two free operating systems (Chrome OS and Android), a free online office suite (Google Docs), and dozens of other goodies. Antitrust regulators argue that such largesse can discourage competition; Google can cross-promote all its software through its search engine and thus scare any potential rivals from taking up arms against it. In the end, trustbusters say, consumers will lose out.

But that theory doesn’t hold up. For one thing, Google doesn’t lack for rivals. It faces robust competitors in every one of its businesses. If Google is really discouraging competitors, Cuil, Wolfram Alpha, Topsy, and Bing apparently didn’t get the memo. Will any of these search engines outpace Google? Probably not—but it’s at least clear that rivals aren’t standing back and letting Google take the search business for itself. More importantly, Google has so far been unable to create any winning products in businesses outside of search. Google is losing the mobile OS war to Apple. It’s losing the e-book market to Amazon. It’s losing the social networking war to Facebook and Twitter. Sure, it’s possible this could change; Google has the resources to keep fighting these fights, and eventually it may win. But nothing in Google’s history guarantees success. As I argued a few weeks ago, if Google failed to make Google Video the dominant platform for online clips, and it failed to make Google Checkout the Web’s leading payments system, why should we believe that it’ll have any more success in the market for operating systems?

Varney has said that antitrust enforcement is a key tool for regulators to keep the economy running smoothly. But in the tech business, antitrust regulators are often too slow, fighting battles long after they’ve ceased to matter to consumers. Right now, regulators in Europe are sparring with Microsoft over whether the next version of Windows can ship with Internet Explorer. This is madness—everyone who buys a computer expects it to come pre-installed with a Web browser, and no one believes anymore that the company that makes the Web browser also controls the Web. That’s what Microsoft’s critics believed back in 1999. We were wrong.