Google, the whale to be harpooned

THE news that Google is in trouble in Europe for its data-gathering practices is a reminder of the global effect of this one company. It is an accomplished company, but also one the Justice Department needs to look at, and on an issue more central than data collection.

The issue is monopoly power.

Many people do not want to hear this. Google's free search engine is hugely useful. Most people touched by Google give it nothing. And yet Google reported a profit last year of $6.5 billion on sales of $23.7 billion.

That is a net income of 28 percent of sales — the kind of margin Microsoft had when it was being hammered by the Justice Department for violation of the Sherman Antitrust Act.

Eric Clemons, professor at the Wharton School, argues the 28-percent margin is "misleadingly low." Google has been pouring billions into YouTube and other products it gives away. "My guess," he says, "is that the real profit margin on search is about 70 percent."

Google makes most of its money by selling ads that appear on the top of your screen as "sponsored links" when you search with certain words. Advertisers set prices for these ads by bidding in an automated auction.

It may seem odd that a company could exercise monopoly power without setting its own prices. Clemons responds with an analogy. Suppose an airplane is going to crash, and there is only one parachute. The owner of that parachute, he says, can easily get a monopoly price by auctioning it. This is like what Google does.

To make such a case against Google, the Justice Department will have to establish several points. One, says Clemons, is that Internet search is an "essential facility" in the way the telephone was in 1913. That is when American Telephone & Telegraph was regulated.

Another point will be establishing what "relevant market" Google is in. The company will argue it is a mere minnow in the market for all advertising. The government will have to argue that in the market for Internet search advertising — the relevant market — Google is a whale.

Its case against Microsoft did not work out well. The Justice Department won in District Court and lost on appeal. But that was a decade ago. Times have changed. Google could be different.