Google Is a Monopoly -- That's Why Its CEO Dares Not Testify to Congress

The FTC and Congress's simultaneous investigations of Google (GOOG) raise one of the more fascinating questions of the digital age for corporate strategy buffs: Is Google an illegal monopoly? The answer is complicated and nuanced -- which is what makes it so fascinating -- and reveals that whether Google survives the FTC probe intact is both a political issue and a legal one. It also explains why Google CEO Larry Page and chairman Eric Schmidt are refusing to testify to Congress.

Microsoft (MSFT) faced a similar investigation in the 1990s, which most observers regard as the point at which the company entered a decline. Google doesn't want to repeat that history -- this isn't just about management's selective deafness, as BNET's Erik Sherman points out.

More specifically, the FTC subpoenas, as reported by the WSJ, are focused on whether Google has abused its dominance in search advertising to direct users toward its own properties and advertisers, such as Google Places. Expedia, TripAdvisor, Microsoft and Yelp have publicly accused the company of discriminating against their sites in search results that trigger ad dollars for Google.

The European Commission began its own investigation in 2010 after two companies, price-comparison site Foundem and legal search engine ejustice, accused Google of artificially holding down their search rankings.

Google has market dominance, duh
The general principles behind monopoly and antitrust law are easy to understand but complex to apply. Basically, companies cannot create monopolies through unfair means, for instance by colluding to undermine or restrict competitors from entering a market, or by using their dominance in a way that hurts customers. Companies can, however, maintain monopoly status if they gained it through their own superior competitiveness and not by unfair means.

Google, clearly, has market dominance in search advertising. It takes more than three of every four search dollars spent in the U.S. It gets 1 billion unique visitors per month.

Google does not per se restrict other companies from competing against it, however. If you want to build your own ad-funded search engine, there is nothing stopping you. Facebook has done just that. If Google CEO Page and chairman Schmidt are ever compelled to testify before the Senate antitrust subcommittee, they are likely to point out that Facebook is proving to be a strong competitor. Facebook serves more banner ads than Google, and has stabilized Bing's share of the search market. And Google is not dominant in some countries like Russia, where it struggles against Yandex.

Then there are the reasons why Google might be regarded as an illegal monopoly, which I outlined as a worst-case scenario in February.

Google discriminates against some companies
Google is discriminating between companies based on its own internal logic, and not the neutral logic of its search engine's algorythms. AshleyMadison.com cannot advertise on certain Google properties, but Match.com can. Google has biased its results against JCPenney, BMW and DecorMyEyes, all of whom used "black hat" links to goose their rankings.

And through its recent "Panda Farmer" algorithm update, Google made an editorial decision that what it calls "spam" web sites are to receive less search traffic than the ones it deems "quality" sites. The head of Google's web spam team, Matt Cutts, actually keeps a "whitelist" of companies he deems to be of high enough quality that search results for their material will ride above those he deems low quality. The adjustment hurt some of the companies it was expected to help* and helped some that it should have hurt.

Obviously, Cutts isn't deliberately hurting and helping companies based on his own malicious temper. Search results have to come in some order; not everyone can be top. I'm sure he's not playing favorites -- he just wants Google to return the best results possible. It's just that Google gets to define "best."

That's why Page and Schmidt cannot testify
The mere fact that Google employs an executive whose job it is to discriminate against some companies and maintain most-favored-nation status for others appears to be the kind of de facto proof that Google is using its dominance in search to affect supply and demand in the market for web content or news stories (or glasses or cars or clothing or dating web sites).

This is why Schmidt and Page are resisting testifying under oath before Congress. As soon as they admit in public that Google has the power to permit or deny potential customers to other businesses, and that executives make company-by-company decisions on that, then the monopoly case is 90 percent made.

*Disclosure: Some editors at BNET believe the site was likely hurt by the Panda Farmer adjustment even though, based on the way Google explained it, it should have improved our traffic.
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Images by Flickr users Rudy Herman, Charles Haynes, CC; and Page by Google