Part of the price that successful corporations pay for innovation is their exposure to increased calls for extensive government regulation. Those who call for such regulation claim that dominant firms, especially in modern high-tech industries, will be guilty of at least two forms of malfeasance. First, the firms will abuse their monopoly power—whose very existence is often in dispute—to extract huge profits from consumers. Second, the firms will acquire vast amounts of information that will then be used for improper purposes that pose a serious threat to both privacy and civil liberties.
Google becomes a natural focus point here for two reasons. First, it holds a commanding position in the search market; second, each user’s click adds to its treasure trove of valuable information about the consumer and the firms with which he interacts. These realities in part explain why Robert Epstein, a Harvard-based psychologist, recently wrote a four-part expose for the Huffington Post titled, “Regulate Google Now.”
It is, of course, impossible to insist that these claims, whether addressed to Google or anyone else, should be dismissed out of hand. There is nothing about the large size or great success of a firm that should insulate it from the general laws that routinely apply to their smaller and less powerful competitors. But, at the same time, it is important to note the unfairness of conjuring up a novel class of wrongs that subject large and prosperous firms to additional forms of civil or criminal liability.
One such alleged wrong is the use of standard-form contracts by large firms, which some believe should lead regulators to ban certain terms, or, failing that, to induce courts on their motion to strike down offensive terms on the grounds of public policy, thereby exposing these firms to extensive liability that their lesser competitors escape.
These concerns, which antedate the rise of the Internet, are today applied with renewed fury to Google, a corporate poster child of the modern age. But the champions of regulation should fear that their wishes might come true. Little more than a decade ago, similarly outraged proponents of regulation directed their fury to the software bundling practices of Microsoft and the 2000 merger between AOL and Time Warner. The opposition to these two firms was largely misplaced, wreaking far more harm than it prevented.
The Lessons of History
With respect to Microsoft, in January 1998, District Court Judge Thomas Johnson took it upon himself to order the break up of Microsoft into several “Babysofts”: one operating systems company and one for the rest Microsoft’s assets, including Internet Explorer and Office. This proposed reorganization, which would have reduced the total value of firm assets, was modeled on the break-up of the old AT&T, which itself turned out to be largely misguided.
This Microsoft ruling was then overturned in 2001 by a more careful decision in the Court of Appeals for the District of Columbia. The Court of Appeals rightly concentrated on the need for Microsoft, with the dominant position of its operating system, to assure access to its competitors in various application markets to the Windows platform, including the ill-fated Netscape, which enjoyed huge temporary success in the early 1990s, and which later morphed into Firefox.
Even that modest remedy, which was memorialized in a settlement between Microsoft and the Department of Justice in 2001, inflicted immense long-term damage on Microsoft, because it brought with it extensive judicial oversight of all new Microsoft innovations to make sure that they did not leverage the company’s dominant position. In addition, the settlement imposed very heavy compliance obligations on Microsoft that, on balance, resulted in a slower and less nimble company. Microsoft has never been able to regain its original bounce, which has been all the more needed with savvy competitors like Google and Apple in various segments of its market.
The AOL–Time Warner merger was equally problematic. At the time, progressive commentators feared the enormous threat posed by this merger of two companies, one of which supplied the pipes with the other supplying the content. The merger, we were told by an alliance of consumer groups, “would fuse the country’s largest on-line company with the world’s biggest media and entertainment conglomerate.” The thought was that AOL would emerge as the dominant party.
But the predictions were wrong on every count. AOL turned out to be the weak party to this transaction. The deal, which was misconceived from the beginning, eventually unraveled in 2010, with Time Warner having to pick up the liabilities of AOL to avoid its own financial demise.
There are two key lessons to learn from these episodes. The first is that the most powerful constraint against one firm’s market dominance is a new player’s entry into the market; this player may not even be in existence when the danger of monopoly is thought to be at its height. The second is that prophylactic measures are often overbroad, and tend to do far more social harm than the simpler strategy of letting the deal go forward, subject to the understanding that no company, large or small, enjoys a status immunity from the antitrust and other regulatory laws. In antitrust enforcement as elsewhere, too much too soon, is as bad—indeed, often worse—than too little, too late.
The Regulatory Spotlight Shines on Google
It seems that many have forgotten the lessons of a decade ago as they attack the latest generation of successful firms. As mentioned, Robert Epstein recently denounced Google on both antitrust and privacy grounds. Epstein was driven to his conclusion that the government should regulate Google not because of any expertise he has in regulated industries or privacy law, but because of his ongoing personal saga that arose when Google wrongly shut down his website.
Epstein also mentions a set of highly questionable actions by Google that have attracted a strong regulatory response. In one instance, Google started Buzz, a social networking service, and enrolled people in certain affinity groups without their knowledge. In another well-known case, Google used its own Street View teams to “sniff” information about Wi-Fi networks; in the process, it collected ordinary peoples’ confidential information. In another instance, Google services were used to market Canadian drugs in the United States in violation of federal law.
And, of course, the FTC and the Department of Justice are currently considering conducting an antitrust investigation to determine whether the algorithms that Google uses to respond to various requests for information unduly favor its own sites.
Epstein overwrought conclusion is: “But as good as the company is at providing information, it should not and must not be allowed to conduct business as usual. It must and will eventually be regulated, just as the phone companies and credit bureaus are regulated. Fundamental civil liberties issues are at stake.”
It is important to untangle the many different strands of this confused argument. The first and simplest point is that Google is regulated right now. It is not clear that the company should be subject, as Epstein argues, to the same types of regulation that credit cards and telephone companies are. More specifically, there is no reason to believe that the forms of regulation to which Epstein points do any good.
The regulation of credit cards under the CARD Act (2009) and of debit card interchange fees under Dodd-Frank’s Durbin Amendment have been highly counterproductive, stifling innovation while increasing the number of unbanked customers who have to pay far more for credit assistance at local check-cashing operations. Telephone company regulation is a fiendishly complex business, where the breakup of the Bell System did not anticipate the arc of new technological developments that completely undid the regulatory system used to govern the operations of the old AT&T.
There is no reason to think that the current systems of regulation are insufficient to meet challenges posed by the next generation of Googles. The instances Epstein cites to support his position have already been subject to various sorts of government sanctions and investigations. The correct question to ask, therefore, is not whether Google should be regulated, but whether the types of regulations already in place are sufficient.
For at least 50 years, the use of various parabolic listening devices has been regarded as an illegal form of invasion of privacy in both public and private places, so that no new sanctions are needed to stop Google from engaging in their improper use of such devices. The level of harm associated with Google’s use of data is not likely to be all that severe—indeed specific allegations of abuse are very hard to come by. Clearly, these cases do not involve any element of voyeurism. The information Google is collecting is usually used for legitimate ends, like how to best market products to consumers, and not nefarious ones, like blackmailing its customers. None of those factors justify the conduct; nor are they sufficient to allow the practice to continue. But they are relevant to the size of any fine that should be imposed.
The use of internet advertising to promote the sale of unapproved Canadian drugs in the American market is illegal right now for ordinary pharmacies. So, once again, there is no need to invoke new or special laws to stop the practice. Likewise, potential antitrust claims against Google face an uphill battle. There is no evidence whatsoever that Google acquired its dominant market position by improper means, so that legal broadsides against the firm should all be dismissed.
What is left, therefore, are far more limited claims that are directed toward particular practices that Google engages in, including claims that it gives its own products preferential search positions. This recalls the issues involved when Microsoft sold its Internet Explorer web browser as part of its integrated operating system. The inclusion increased operability and gave Microsoft an incentive to get that system to market more quickly. Other companies were not excluded, because Microsoft customers could download their browsers from the Internet at virtually no cost.
The Google preferences raise similar issues, for which the conclusion is more or less the same. Given the ease with which a consumer can switch to Yahoo! or Bing, or websites like Trulia, Expedia, and Yelp for more tailored searches, it is difficult to claim monopolistic exclusion. If consumers do not find the results they want on Google, they can switch search engines at the click of a mouse.
No one can claim that Google’s position will not raise difficult issues that could require particular fixes. But it is imperative to note that the costs of rapid and thoughtless government intervention must be reckoned with. The most common piece of advice that medical ethicists give to doctors is summarized in these four word: “First do no harm.” Those four words apply with even greater force to government regulation, where they counsel against wholesale attacks against highly successful firms. Regulation is a blunt instrument, which rarely acts with surgical precision.
Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).