FTC goes after Google under antitrust law

The antitrust staff at the Federal Trade Commission has latched onto Google’s November 2009 $750 million purchase of AdMob, a mobile advertising company, and according to some well-placed media leaks, the Commission could vote soon on whether to challenge the deal as a violation of the Federal Trade Commission Act. The staff claims a Google-AdMob combination illegally reduces competition for “mobile web advertising,” an industry that barely existed just two years ago (indeed, AdMob was founded in 2006). As a percentage of the overall demand for advertising, the type of advertising represented by AdMob — mobile devices, iPhones, etc. — isn’t even a drop in the bucket. It’s a still-developing market that nobody can predict or project with any accuracy, not even Google.

Not that ignorance has ever stopped the FTC before. Luckily, we have some documentation of that ignorance this time, courtesy of the folks at Wertago, a mobile app developer that was contacted by FTC staff as part of the Google-AdMob review. Wertago wasn’t exactly impressed with the staff’s grasp of hi-tech industry:

There is no way the FTC knows enough to support a decision to block the deal. The staff members we spoke to were not particularly knowledgeable about the mobile ad space they are considering interfering in, or about the technology sector more generally, or about mobile app development and monetization, or about the changes in the mobile advertising sector in the past year, or about the level of competition and pace of change and innovation in the market, however broadly or narrowly you define it. More generally, it seems obvious to us that the computer, web, and mobile technology sectors are so competitive and fast-moving that NO ONE has the knowledge, expertise, economic insight, or clairvoyance to say with much confidence precisely what effect the AdMob acquisition will have on competition in the market or on consumer welfare. We think a recommendation to block the acquisition would be a mistake. In fact, we think the investigation itself shows how presumptuous and biased toward action (and hubris?) regulators are, and how self-destructive it is for the technology sector to embrace the idea that government should have the power to approve or disapprove mergers, acquisitions, and other private economic transactions.

[ . . . ]

This relatively straightforward portion of the conversation, however, revealed a relative lack of circumspection, of economic knowledge, and of fluency concerning things you’d really want a powerful regulator to know comprehensively and understand deeply before making any sort of decision to interfere.

[ . . . ]

The FTC staff members we talked to asked some good questions, but not as many as you would want them to, and none that really showed a deep level of understanding of how competition works or a nuanced view of the competitive landscape. We were taken aback at how the fate of this transaction might hinge upon the views of people who clearly know much less than they think they know, about an industry they think they can surgically regulate. The more competitive an industry is, the more perfect a regulator’s knowledge must be to justify preempting a deal as anti-competitive. Here, the regulator’s knowledge seems rather, to be blunt, shallow, while the industry as a whole and the market itself (at pretty much every level of granularity) is very competitive.

Indeed, the internet and mobile technology sectors right now are perhaps the most (or among the most) competitive and fast-moving industries EVER TO EXIST. The web and mobile spaces have remarkably low barriers to entry. That’s why there are so many people making a living, or supplementing their income, with small-business websites and now apps, and why a college student could create five short years ago what has become the most important social network in the world. And that’s why so many apps have been developed on the iPhone and Android platforms in just two to three years of their existence.

All well and good, but at the end of the day, the FTC can’t allow a market to exist without depending on the FTC for its continued existence. That’s the issue here. The FTC staff doesn’t care about the impact of Google’s acquisition of AdMob on the mobile advertising market; even the staff would admit, after a couple of drinks, that they don’t know what the impact will be. This is simply an opportunity for the staff to assert, once and for all, that everything Google does will now require several layers of antitrust scrutiny — and that means Google, its customers, and its competitors will need to start spending more money on antitrust lawyers to lobby the FTC. Sure, it means less spent on product development and customer satisfaction, but as the FTC sees it, free markets can’t exist without “strong” antitrust enforcement.

The pending Google-AdMob war also represents the latest in a series of steps the FTC has taken to move away from the traditional antitrust concept of “market definition.” This has been a judicial albatross around the Commission’s neck for years. The courts — which still have some powers here — have long demanded the FTC define a market before it claims a merger will harm competition. The FTC doesn’t like this for obvious reasons; nobody likes having to show their work.

The FTC wants to define every market as narrowly as possible; that makes it easier to prove the existence of a hypothetical “monopolist.” And what’s happened in the past decade or so is the Commission has subtly moved from defining markets to defining distribution channels as if they were markets. The Clinton-era FTC’s victory over the Staples-Office Depot merger was one of the earliest successes on this front. By defining the antitrust-relevant market as office-product “superstores” rather then every store that sells office products, the FTC was able to change the focus from markets to methods of distribution.

This trend continued in merger cases like Nestle-Dreyers’s (“superpremium ice cream”) and Whole Foods-Wild Oats (“premium natural and organic supermarkets”), and those FTC victories paved the way for the looming Google-AdMob challenge. Ten years ago, antitrust regulators might not have bothered with such a small merger; now it’s the engine of antitrust growth and development.

Pursuing distribution channels isn’t just about defining smaller, niche markets. It’s about challenging markets that aren’t fully developed, like mobile web advertising. You don’t have to wait for the product or service to become popular or well-established before cracking the antitrust whip. All you have to do is identify a core of customers who’ve become loyal to the product — what Judge Janice Rogers Brown called “inframarginal” consumers in her deplorable decision reinstating the FTC’s case against Whole Foods — and you have a pretext for FTC intervention. It doesn’t matter how small a group of consumers there are; antitrust treats them like an endangered species that must be protected.

The problem, as the Wertago folks explained so eloquently, is that the FTC doesn’t understand the first thing about the distribution channels or consumers they think they’re “protecting” from the likes of Google. Antitrust presumes regulatory expertise as a matter of government fiat. It’s not even necessary for the FTC to demonstrate it knows what it’s talking about. That’s dangerous when you’re dealing with established industries, and triply so when dealing with still-developing industries, as Wertago noted:

Without a crystal ball, the FTC is simply in no position to predict with any confidence what the acquisition will do to app developers, advertisers, and potential ad network market entrants. That last group (potential market participants) is important because you can’t simply judge the competitiveness of an industry by looking at the (visible) existing market participants; you also have to look at the (invisible) *potential* market participants, those who’re sitting on the sidelines NOW, but could jump in at any time if an opportunity presents itself. Especially in a low-barriers-to-entry markets, every *potential* market participant is an important influence on existing market participants and the competitiveness of the market as a whole.

The FTC will deal with these problems the way it always does: Hire an outside academic economist (for a six-figure sum) to construct an artificial model of the marketplace that ignores any variable that the FTC can’t understand. Again, this is ultimately about the amount of resources devoted to antitrust “enforcement,” not trying to predict the future of mobile advertising.

Even if Google fights the FTC and wins, the damage may have already been done. Unless and until someone actually goes after the Commission itself and challenges its existence, the only message that other technology firms will receive is that they better skim some capital away from their products to retain an ex-FTC lawyer to advise them on how to deal with the FTC should they be the next target. Similarly, Google has to make a choice: Follow the Microsoft route of appeasement, guaranteeing a permanent antitrust infestation within your company, or publicly making a comprehensive case against the FTC. Wertago made a good start. Now let’s build on it, Google.

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