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Concern about the clout of the internet giants is growing. But antitrust
watchdogs should tread carefully
Dec 1st 2012 | from the print edition
THE four giants of the internet age Google, Apple, Facebook and Amazon are
extraordinary creatures. Never before has the world seen firms grow so fast or
spread their tentacles so widely. Apple has become a colossus of capitalism,
accounting for 4.3% of the value of the S&P 500 and 1.1% of the global equity
market. Some 425m people now use its iTunes online store, whose virtual shelves
are packed to the gills with music and other digital content. Google,
meanwhile, is the undisputed global leader in search and online advertising.
Its Android software powers three-quarters of the smartphones being shipped.
Amazon dominates the online-retail and e-book markets in many countries; less
well known is its behind-the-scenes power in cloud computing. As for Facebook,
if the social network s one billion users were a country, it would be the world
s third largest.
The digital revolution these giants have helped foment has brought huge
benefits to consumers and businesses, and promoted free speech and the spread
of democracy along the way. Yet they provoke fear as well as wonder. Their size
and speed can, if left unchecked, be used to choke off competition. That is why
they are attracting close scrutiny from regulators.
Google is the one most under threat. Both the European Commission and America s
Federal Trade Commission (FTC) have been investigating allegations that it has
unfairly manipulated its search results to favour its own services. The company
also stands accused of several other transgressions, including using patents to
stymie competition in the smartphone market. The regulators want Google, which
disputes the charges, to change its practices. If talks fail they were still
continuing as The Economist went to press the search firm could end up mired in
costly legal fights on both sides of the Atlantic. This could become the
defining antitrust battle of the internet age, just as Microsoft s epic fight a
decade ago over its bundling of its web-browser with its Windows operating
system defined the personal-computer era.
Why size matters
Three trends alarm those who think the digital giants are becoming too powerful
for consumers good. The first is the rise of winner-take-almost-all markets on
the internet. Although Microsoft has poured money into its rival search engine,
Bing, Google still accounts for over two-thirds of searches undertaken in
America and a whopping 90% or so of them in some European markets. Facebook,
too, enjoys a quasi-monopoly in the social-networking arena. Rivals fear that
the big four will exploit their dominant status in their main businesses to
gain an unfair advantage in other areas a charge that lies at the heart of the
antitrust case against Google.
Second, the giants want to get consumers hooked on their own platforms
combinations of online services and apps that run on smartphones and tablet
computers. These platforms can be very appealing. Apple mints money because its
hugely profitable iPhone has, in effect, become a remote control for many
people s digital lives. But there are worries that Apple and its peers are
creating walled gardens which make it hard for users to move content from one
platform to another.
The third concern is the internet behemoths habit of gobbling up promising
firms before they become a threat. Amazon, which raised $3 billion in a rare
bond issue this week, has splashed out on firms such as Zappos, an online shoe
retailer that had ambitions to rival it. Facebook and Google have made big
acquisitions too, such as Instagram and AdMob, some of which have drawn intense
scrutiny from regulators.
So far the watchdogs have focused on surgical strikes, in areas such as online
search and the e-book market (where Apple is under investigation for alleged
cartel-like behaviour with several publishers). Their goal has been to get
swift settlements with negotiated remedies that curtail bad behaviour.
Some critics think that is too weak. There have been calls for Google to be
chopped up into two independent firms, severing its search business from its
other activities. Tim Wu, a professor at Columbia Law School and consultant to
the FTC, has even argued that in the interests of promoting competition, big
information monopolies such as Apple and Google should be forced to choose
between being providers of digital content, producers of hardware or
information distributors (via such things as cloud-computing services).
The danger is that such corporate butchery would do more harm than good. The
fact that people have flocked to big web firms platforms suggests that
consumers are perfectly willing to trade some openness for convenience and
ease-of-use. And if they do want to change providers, the cost of doing so has
fallen dramatically in the broadband era. Switching to a new search engine or
music service takes a matter of seconds. And this time, rather than there being
one dominant player (as Microsoft was for a while), there is a war of all
against all (see article).
Smartphones powered by Google s Android operating system have come from nowhere
to dominate the market, eclipsing Apple s iPhone. Amazon s Kindle tablet is
going head-to-head with the iPad. In social networking Google+ is fighting
Facebook. And Facebook and Apple, along with Microsoft, now have designs on
Google s dominance in search. Smaller firms such as Twitter are also keen to
join the giants ranks, and have rebuffed marriage offers from them. Facebook
itself was a start-up just eight years ago.
Schumpeter 2.0
Indeed, the tech world is changing so fast that it brings to mind Joseph
Schumpeter s comment about the perennial gale of creative destruction that
sweeps through economies as innovative insurgents take on entrenched
incumbents. Microsoft s antitrust problems now seem less vital than the fact
that, even while it tangled with regulators, the giant squid failed to sense
that the commercial currents had shifted against it. The four big fish nowadays
also have a reputation for arrogance and plenty of enemies. If they really want
to keep the trustbusters at bay, they should not let their size go to their
heads.
from the print edition | Leaders