Based on some novel ideas and the application of new and powerful technologies, a company is formed which, within a relatively short period, achieves a dominant position in the markets in which it operates. Many of these markets did not exist prior to the company’s creation.
It achieves this dominance by relentless innovation and passing along the bulk of the benefits of its discoveries to customers. And although competitors are ubiquitous and themselves formidable, the government alleges that the company’s dominance was obtained illegally and represents an attempt to monopolize what would otherwise be a competitive environment. The government seeks, among other things, to break up the company, advantage its competitors and restore the palliative effects of textbook competition.
United States of America (plus eleven states) v. Google LLC? Perhaps. But another example comes to mind.
In 1870, John D. Rockefeller established the Standard Oil Company to take advantage of recent discoveries in oil drilling and innovations in petroleum refining to produce kerosene, which at the time was used principally for illumination. Shortly after starting, Standard Oil had a four percent market share selling kerosene for 26 cents per gallon. Over the next ten years Standard Oil went on an innovation binge in which it increased the sale of byproducts it obtained from kerosene production, for example, tars, gasoline, lubricating oils, petroleum jelly, and paraffin, ultimately creating over 300 products from each barrel of oil.
Standard Oil also pursued dramatic cost cutting by, for example, hiring its own fitters, producing its own pipes, barrels, and plumbing materials and increasing its volume to achieve economies of scale. The costs of refining a gallon of kerosene fell by nearly 85 percent for Standard Oil from 1870 to 1885 while its share of the kerosene market grew to nearly 90 percent. In 1897 the price of a gallon of kerosene had dropped to less than six cents a gallon.
Standard Oil’s dominant position was obtained through relentless innovation that resulted in tremendous efficiencies and the creation of new markets that benefitted a multitude of consumers. Nonetheless, and after years of litigation, in 1911 the government succeeded in breaking up Standard Oil into 34 separate companies by claiming that Standard Oil’s low prices were predatory and intended to monopolize the market.
There is little evidence that the government’s remedy benefited consumers by, for example, further reducing prices of refined petroleum products or enhancing innovation. It is important to note that many of the companies created by the breakup later reconstituted within ExxonMobil.
And interestingly, owing to its failure to take advantage of the Texas oil boom and its reluctance to switch from kerosene to gasoline production, Standard Oil’s market share of refined petroleum products had dropped to approximately 65 percent by the eve of the Supreme Court’s decision. Someone forgot to tell its competitors that Standard Oil had monopolized the market.
Google finds itself in much the same position as Standard Oil at the turn of the twentieth century. A remarkably creative and innovative company, Google invented the modern search engine. Google processes roughly 90 percent of search inquiries in the U.S. and around the world. Its Chrome product constitutes roughly 70 percent of the global online browser market while it’s Android operating system is found on about 85 percent of all smartphones.
Google earns about a third of all money spent on digital advertising as well as substantial revenues from user search queries. Google claims that its dominance of this part of the digital landscape is based on its overall excellence and user-friendly approach to search queries, and that this lowers ad prices and allows it to offer free services to consumers. It also notes how easy it is to use competitive browsers and search engines as well as that it faces rather formidable competitors such as Microsoft and Facebook.
As in the case against Standard Oil, the government argues that Google’s dominance was created and is sustained not so much through business acumen and comparative excellence, but rather by behaviors and practices that serve to thwart competitors and real competition. For example, Google pays mobile phone makers, wireless carriers and web browsers to make Google their default search engine. Google’s search algorithms favor its other businesses and properties, such as travel services and local business reviews.
These practices, it is argued, keep competitors from gaining a foothold in the search business. It is further argued that Google has vertically integrated into brokering online advertising and tied its products together in ways that give it an unfair and anti-competitive advantage in online auctions. It seems certain that more allegations will be added as this process evolves.
And somehow the outcome of U.S. v. Google seems predictable and familiar. The legal battle will continue for years under the shadow of a more general discussion of how best to further regulate the communications and technology industries. Google will lose and have to change some of its behaviors and spin off some of the ancillary properties it has acquired or developed to support its digital advertising commerce.
Google will continue to be a vibrant but less dominant player. And the antitrust treatment of innovative and dominant firms will continue to be ambiguous and only discernable after the fact. Such is the price of success.
Thomas W. Gilligan is a senior fellow at the Hoover Institution.