Antitrust Enforcement in the Age of Free

by on July 8, 2009 · 30 comments

Wired Magazine editor Chris Anderson has an important new book out, “Free: The Future of a Radical Price.” He focuses on the economics of free services, building on the excellent analysis of thinkers like Mike Masnick (whose 2007 essay, “The Grand Unified Theory on The Economics of Free,” succinctly sums up the concept).free-chris-anderson

Following up on his book, Anderson has a new op-ed up on CNN.com in which he explores how the emergence of free services in the digital age has raised new challenges for antitrust regulators:

Now Google has Microsoft-like dominance in search and search advertising. What should it not be allowed to do? That question may come to define this era of antitrust law. When [Christine] Varney was confirmed, she withdrew the Bush administration’s report setting relatively conservative standards of antitrust enforcement and declared, “The Antitrust Division will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers…

Varney and her team of economists and lawyers are no doubt tangling with the question of how to enforce antitrust laws in a way that ensures an “even” playing field for competition without causing consumers to lose access to free services that are growing more abundant by the day.

But there’s a more important question that Varney should be asking: what actually constitutes market dominance in the age of free? Is the fact that a firm has a substantial share of a distinct marketplace a reliable indicator of dominance? And if the result of firms achieving high market share is an explosion of free goods and services, is it even in consumers’ interests for government to go after “dominant” firms?

Recent happenings in the tech world suggest that even markets often considered to be dominated by a single firm may be a lot more contestable than we think. Today’s hottest tech news item is that Google is “planning a direct attack” on Microsoft’s venerable Windows operating system. And just a few weeks ago, Microsoft launched its new search engine Bing, accompanied by a massive $100 million dollar advertising blitz.

Hold on a minute. Doesn’t Microsoft have a stranglehold of the operating system market? And isn’t Google in control of the search engine market? Antitrust regulators on both sides of the Atlantic certainly seem to think so, if recent investigations are any indicator.

Yet the top brass at Microsoft and Google must think otherwise, or else neither firm would be devoting such resources to breaking into the search and operating system markets, respectively. Rather than resting on their laurels, Microsoft and Google are competing aggressively, rolling out new and improved services all the time. Consumers are benefiting along the way — even from actions that are allegedly “anti-competitive,” such as Microsoft’s inclusion of bundled software with Windows or Google’s plan to digitize volumes of orphan works.

This dynamic is exactly the opposite of what one would expect from a market in need of “saving” by government trust-busters. In fact, despite Google’s 65% share of search and Microsoft’s 88% share of operating systems, both markets appear to be highly contestable.

  • http://bennett.com/blog Richard Bennett

    Maybe somebody can explain something to me. Masnick's essay (linked above) says free stuff increases the value of non-free stuff, so he advises bands as follows:

    “Charge for the scarce components: Concert tickets are more valuable. Access to the band is more valuable. Getting the band to write a special song (sponsorship?) is more valuable. Merchandise is more valuable.”

    How does that work? It's not obvious to me that by giving downloads away for free the value of concert tickets goes up, goes down, or stays neutral. Isn't this connection just wishful thinking?

    I can see an argument that giving the downloads away for free contributes to creating a larger following, but he seems to be saying something different.

    Re: Anderson's op-ed, he mischaracterizes the market: the person who uses Google search “for free” isn't Google's customer, the advertiser is. Google spends something like $4 billion/yr on infrastructure, so the cost of providing search isn't anywhere close to nil. The real dynamic is that web businesses like Google's ad sales platform operate on very low revenue per transaction, and therefore depend on increasing the number of transactions as much as possible.

    Google is actually running a business that's very much a response to scarcity: there's very little money to be made per-click on the web. Anderson is simply looking through the wrong end of the telescope.

    Re: Chrome OS, it looks like Microsoft was right all along, the browser really is a part of the OS. I hope the EU regulators are paying attention.

  • Ryan Radia

    As I understand Masnick's 'theory,' you got it right: giving away music in the form of downloadable files, which has practically zero unit cost, is an effective means of gaining a following (that is, if your music is actually good). Rather than exclude those who aren't willing to pay for your music, you give it away, exposing your work to a far greater audience. The more people hear your music, the more people will attend your concerts, and the more money you can make in the long run.

    Of course, this is just one business strategy, albeit one that works pretty well in many cases. To me, the advent of 'free' doesn't mean that charging a fee for access to intellectual works will go away. Rather, the traditional business tactic of selling access to music, videos, and writings will increasingly be augmented with giveaways.

    You are right that Google's real customers are advertisers, not people who do web searches. Competition policy, however, is designed to benefit consumers. Even if Google's practices are harming advertisers (which I would dispute) where is the consumer harm?

  • Ryan Radia

    As I understand Masnick's 'theory,' you got it right: giving away music in the form of downloadable files, which has practically zero unit cost, is an effective means of gaining a following (that is, if your music is actually good). Rather than exclude those who aren't willing to pay for your music, you give it away, exposing your work to a far greater audience. The more people hear your music, the more people will attend your concerts, and the more money you can make in the long run.

    Of course, this is just one business strategy, albeit one that works pretty well in many cases. To me, the advent of 'free' doesn't mean that charging a fee for access to intellectual works will go away. Rather, the traditional business tactic of selling access to music, videos, and writings will increasingly be augmented with giveaways.

    You are right that Google's real customers are advertisers, not people who do web searches. Competition policy, however, is designed to benefit consumers. Even if Google's practices are harming advertisers (which I would dispute) where is the consumer harm?

  • http://bennett.com/blog Richard Bennett

    The Masnick theory seems like wishful thinking. He says that giving away recorded music somehow *increases* the value of concert tickets, which is like saying that free samples of laundry soap makes the stuff in the store more valuable. I don't see how that works, because assuming I like the free sample of Tide, when I go to buy some I forget about the free sample and compare the Tide on the shelf to all the other stuff on the shelf. The concert tickets are bought and sold in a different market than the free stuff, and on a somewhat different basis. I my very well like to listen to the Chicago Symphony at home, but when I go to a concert I may prefer to see something with explosions and a screaming audience, for example. That argument is simply saying recorded music should be re-purposed as advertising for something else, where the “something else” is the real product so there's nothing free anyhow.

    Regarding Google, I'm not particularly concerned about the competitive harms and all that as much as I'm offended by the notion that Google is giving anything away for free. All of their services are predicated on using content created by others to entice eyeballs toward the ads they sell, so there's no “free” in the picture except in the seduction. Google is unique in the ad sales market in their refusal to pay for the content that seduces the eyeballs. Their argument is that it costs so much to run their servers that they can't afford to pay for content even if they were inclined to do so, so there seems to be a lot more scarcity in the Google business model than anyone is generally willing to acknowledge.

  • http://www.cs.princeton.edu/~tblee Tim Lee

    To take Google's search engine as an example, Google respects robots.txt files. So any website that feels Google ought to be paying for the privilege of linking to their site is free to block Google from doing so until it pays up. But interestingly, hardly anyone does that–website operators seem to feel that having Google index them is a net benefit. Why would you expect Google to pay when they're already doing them a favor by sending them traffic.

  • http://www.cs.princeton.edu/~tblee Tim Lee

    The advent of free news and commentary online is rapidly destroying the market for paid news and commentary. There are a few niche products like National Journal that cater to narrow audiences, but for mass-market news and commentary it seems like free is here to stay. Think about how hopeless it would be for someone who wasn't already famous to launch a subscription-based blog.

    Obviously it's hard to predict how other markets will evolve, but it seems totally plausible to me that we'll see the same trend in the music market: younger musicians increasingly decide they'd rather be famous than rich, so they give their music away. Once that trend reaches a critical mass, fans will start expecting free music, and musicians that try to charge for copies of their songs will be at an increasingly large disadvantage. My hunch is that 20 years from now paying for music will seem as quaint as paying for blog posts would today.

  • MikeRT

    That may be so, but that means that there will be no effective audience for bands which prefer to work more in the studio than perform live. If the market evolves in that direction, then that's just how it has to be, but let's not kid ourselves that it won't have a deleterious impact on certain kinds of music that we enjoy today.

  • http://www.cs.princeton.edu/~tblee Tim Lee

    The issue is income, not audience. Bands will still be free to record in studios, and the audience will be as big as it's ever been. It'll just be harder to make a living recording in a studio. Musicians may have to make their livings in other ways–by touring, doing private shows, selling merchandise, teaching lessons, signing marketing deals, or–gasp–having a day job.

    I can't get too worked up about this because this is the situation that has always been faced by 99 percent of the world's musicians. Only a tiny fraction of aspiring musicians over the last century have ever done well enough to quit their day jobs and record music full-time. And the talented or lucky few who are able to become professional recording artists are among the most envied people on the planet.

    So if the upshot is that the next generation's Michael Jackson has to spend a bit more time on tour and a bit less time in the studio, I can't say that concerns me very much. Becoming a popular musician will still be an extremely prestigious accomplishment, and there will be no shortage of aspiring rock stars.

  • MikeRT

    That is all well and good, and I am perfectly willing to let the market evolve as it naturally will, but we should still be under no illusions that there won't be negative consequences. One of the consequences will be that social expectations will result in more work for less money.

    On the software side of things, one of the reasons I am wary of efforts to move us from a product-driven industry to a service-driven one is that I work for a service company and see how little genuine innovation it actually does. We have the resources to do it, but not the incentive, because we have no products to develop and sell.

  • http://www.ronmossad.com/ ronmossad

    CNN linked to both of us from the same blog. Apparently you and I have a similar take on this:

    http://ronmossad.blogspot.com/2009/07/we-interr

    Nice site by the way!

  • http://bennett.com/blog Richard Bennett

    Regardless of what may or may not be happening with robots.txt files (a subject about which I have no data,) the fact remains that Google doesn't pay for content and doesn't produce content. So they only have a business if others are creating content for them to index and wrap with advertising.

    The value of some content is enhanced by indexing, and certainly in some cases at least, can be degraded by it, because summarizing is an essential part of indexing. Summarizing news articles probably reduces the desire for readers to click through, just as reading blogs in Google Reader reduces click-throughs; that's the whole point of aggregating, after all.

    Whether there's some side-effect of aggregation that makes up for the reduction in click-throughs remains to be seen, and certainly isn't the same for all sorts of content.

    But that's tangential to the issue, actually.

  • http://bennett.com/blog Richard Bennett

    There seems to be a cottage industry dedicated to paper-over the negative effects that Internet piracy has on creative artists and others who toil to produce content. We devalue creative work by characterizing it as simply “bits” but still count on the magic Internet bunny to make it all profitable for producers through some back door economy nobody ever heard about.

    If Masnick is right, it's easily provable: there should be a remarkable increase in concert revenues to performers in the post-Napster era. If there hasn't been, he's simply wrong.

    Surely somebody has some data on this vital question, don't they?

  • Ryan Radia

    Google may not provide monetary consideration to those who create the content that helps enable Google to generate revenue, but so what? The search engine-web publisher transaction is a purely voluntary exchange. And it's mutually beneficial; otherwise, it wouldn't take place. If summarizing news articles reduces their value, why do so few news organizations disallow Google News from excerpting their articles?

  • http://www.cs.princeton.edu/~tblee Tim Lee

    Exactly.

  • http://bennett.com/blog Richard Bennett

    I think the news people are in a “damned if you do, damned if you don't” bind over Google's indexing and summarizing of their work. Allowing it to be indexed gets them a little traffic, which is infinitely better than nothing, but the revenue split between Google and the producers of content isn't really favorable for a product like news.

    That's not say that I think Eric Schmidt should be doing prison time as much as to say the news people need to get a shiny new business model that allows them to profit from their work, and said business plan may indeed shut the door to Google.

  • http://bennett.com/blog Richard Bennett

    I think the news people are in a “damned if you do, damned if you don't” bind over Google's indexing and summarizing of their work. Allowing it to be indexed gets them a little traffic, which is infinitely better than nothing, but the revenue split between Google and the producers of content isn't really favorable for a product like news.

    That's not say that I think Eric Schmidt should be doing prison time as much as to say the news people need to get a shiny new business model that allows them to profit from their work, and said business plan may indeed shut the door to Google.

  • http://bennett.com/blog Richard Bennett

    I think the news people are in a “damned if you do, damned if you don't” bind over Google's indexing and summarizing of their work. Allowing it to be indexed gets them a little traffic, which is infinitely better than nothing, but the revenue split between Google and the producers of content isn't really favorable for a product like news.

    That's not say that I think Eric Schmidt should be doing prison time as much as to say the news people need to get a shiny new business model that allows them to profit from their work, and said business plan may indeed shut the door to Google.

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