In case anyone thinks the European Union’s charges against Google
are really about antitrust, the EU’s digital commissioner recently made clear the real issue: “Our online businesses are today totally dependent on a few non-EU players,” Günther Oettinger said at a trade fair in Germany.
Eurocrats are on an impossible mission to undermine Silicon Valley because in the digital world, size matters. There is great value from the network effect of having many users. Americans can roll their eyes at Europe but should realize that even the U.S. could become subscale unless the country begins to grow more quickly.
Google’s European competitors have lobbied for years for a lawsuit to break the company’s dominance in the region. Google has a 90% share of the traditional Internet-search market in Europe—success it earned by serving consumers well. No matter. Whereas U.S. regulators operate under antitrust laws that protect consumers, European bureaucrats still try to protect local companies even at the expense of consumers.
Brussels has been investigating for five years how Google delivers answers directly in search results related to shopping, travel, hotels and maps. Google search has evolved since its early days of just delivering blue links to other websites. Search for a flight and Google will instantly show the estimated landing time. Search for a store and you’ll get a map and phone number.
“We do not wish to interfere with design choices, how things are presented, or how the algorithm works,” claims European antitrust regulator Margrethe Vestager. But that’s exactly what Eurocrats are doing. Brussels could fine Google 10% of its global revenues, or more than $6 billion.
In 2013 the U.S. Federal Trade Commission decided in a similar investigation that Google had done nothing wrong by delivering answers, not just links. FTC lawyers concluded there were “strong precompetitive justifications” for Google’s search improvements. “Google’s course of conduct was premised on its desire to innovate and to produce a high-quality search product in the face of competition, blended with its desire to direct users to its own vertical offerings.”
Today it makes even less sense to focus on Google as if it were the only way to search. Users spend more time on apps than browsers, so that their search results come directly from services like Amazon, Apple, eBay,
Expedia
and Yelp. They even look to Facebook
and Pinterest for friends’ buying advice.
There are more Europeans online—more than 400 million—than people in the U.S., but language and cultural differences, along with labor and tax regulations, make it difficult for European companies to operate across borders. By contrast, Google, Facebook and Twitter
started in their large U.S. domestic market, then benefited from network effects to improve their products continuously as they tracked consumer behavior and preferences. Having a large numbers of users in the U.S. helped establish them as market leaders, making it easier to expand around the world.
Investor Peter Thiel’s book on the economics of the Internet, “Zero to One,” explains how “creative monopolies” like Google launch new services for a large number of consumers, then use data from consumer behavior to attract more consumers, making life hard for competitors. Long before the Internet, the Austrian economist Joseph Schumpeter observed that “perfect competition is and always has been temporarily suspended whenever anything new is being introduced.”
Eurocrats think this is unfair, but consumers benefit and new innovators eventually find ways to compete. Thus a five-year bureaucratic investigation finishes up just as its target, a short-lived monopoly, gives way to new competitors like the apps now displacing Google.
Americans may smirk at benighted Europeans, but the U.S. is no longer the only domestic market capable of seeding global digital businesses. Four of the top 10 Internet businesses in terms of users are now Chinese. They’re growing quickly, benefiting from the enormous domestic market in China, whose population is some four times that of the U.S. Over time, this population gap combined with digital network effects could result in an innovation gap.
Instead of finding ways to keep the U.S. growing, Washington dithers on immigration reform, including for high-skilled workers hoping to work in Silicon Valley. A record 230,000 applicants applied for this year’s H-1B visa, with the legal limit of 85,000 met in a few days. Even Europe has joined Canada and Australia to compete for the skilled workers rejected by the U.S.