Battle of the internet giants
Survival of the biggest
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