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Will Google’s Massive Profits Ever Attract New Competitors?
The search giant seems to be defying a law of economics since rival Bing retreated years ago, but no company stays unbeatable
By Emily Washburn
In the age of the internet, no company infiltrates our lives like Google. How did you stumble upon this article? Google. Where do you start when you search online? Google. What do you use to get email, look at a map or attend a meeting? Google.
We have a love-hate relationship with the ubiquitous company. It provides a bevy of convenient services for free. But maybe it’s a little too powerful: Should one company control so much? Websites supported by advertising charge that Google abuses its dominant position in the online ad industry. Republicans say it downplays conservative politicians and issues in its search results.
So why doesn’t Google face more competition? Is Google’s Achilles Heel its dominance in advertising rather than in search? Should the government break up Google on antitrust grounds?
Google controls 92% of the global market for search, a share that’s held steady for more than 15 years. Last year its parent company, Alphabet Inc., earned an enormous net profit of $76 billion on revenue of $258 billion, nearly double its net profit the year before. Economics 101 says numbers like this in an industry eventually attract competitors and brings profit margins down to normal levels.
As far as search engines go, however, serious competitors haven’t arrived. There’s Microsoft Bing, but with only a 3% market share, it’s not much of a threat. Bing isn’t a bad search engine: It offers fewer features than Google, but it provides better-quality images. Bing also sends biweekly search engine optimization reports telling websites how easy or hard it is to search for them and how they can improve. It tried to catch up to Google, though no amount of modernization or money helped.
An Exception to the Laws of Economics?
But don’t think the search industry is different, says Don Boudreaux, a Mercatus Center scholar and an economics professor at George Mason University. General Motors, Microsoft, Walmart and many other corporations also enjoyed massive market shares and seemed unassailable before something better came along. “When Google stops pleasing consumers, some clever entrepreneur will capitalize on that profit opportunity,” he says.
Adam Thierer, a senior research fellow at Mercatus and an internet expert, also expects Google to meet its match someday. “So far, [entrepreneurs] haven’t been able to build a product [to compete with Google], but I don’t think we’ve seen the end of [innovations in] search,” he says. “It could evolve in ways that are hard to imagine right now. Google is prone to the same forces of creative destruction that every other company is. While it may look like they are the king now, they may be at the bottom of the pack later.”
But Jonathan Taplin, director emeritus of the Annenberg Innovation Lab at the University of Southern California and the author of “Move Fast and Break Things,” is skeptical that anyone could compete with Google. “It has gotten to a point economists call a natural monopoly,” he says. “There is no real alternative for it. Nobody will fund a competitor in the search-engine business because the calculation is, ‘If Microsoft threw a couple of billion into Bing and was unable to compete, why does anyone think a startup could take on Google?’ ”
A Rising Search Star
Today, Google is synonymous with internet searching, but in the late 1990s, it barely registered on the search-engine menu. Back then, it was eclipsed by sites such as Excite, Lycos, AltaVista, Ask Jeeves, HotBot and Yahoo that, today, are largely nostalgic reminders of the web’s early days.
Google burst into the big time in 2000, when Yahoo started using Google’s web crawler and PageRank algorithm to produce search results and unwittingly introduced Google to the world. Google based PageRank on the idea that relevant sources got more traffic than bad sources. Instead of listing sources that included lots of keywords, Google based its search results on the number of places where a page was linked.
Word of Google’s superior searches spread and in 2004 it became the most popular search engine in America. From 2004 to 2008, Google’s growth averaged 63% a year, and it has continued to grow by 20% each year since.
Network Effects and R&D
Bing, then called MSN, developed its own web crawler in 2005, but by then Google had better algorithms and a larger search index. In a different industry, Microsoft’s clout could have helped it catch Google. Instead, Google’s head start gave it the benefit of network effects—the more people used Google’s search engine, the more accurate the searches became. Bing could never made up the deficit. Microsoft declined to comment for this story.
Dominant companies tend to get fat and lazy over time, eventually becoming vulnerable to hungrier, more nimble upstarts. But Google hasn’t let that happen and keeps pressing its advantage. Financial filings indicate that Alphabet invests much more money in Google than Microsoft does in Bing, though neither company reports exactly how much it puts into its search engine. Google rolled out a series of updates in the 2010s designed to further refine its search results, most notably 2011’s Panda, 2012’s Penguin, 2013’s Hummingbird and 2019’s BERT. Last year Alphabet spent $31.6 billion on research and development, up from $21.4 billion in 2018. Microsoft, whose search engine is a much smaller part of the company, spent $20.7 billion last year and $14.7 billion in 2018.
The Murky World of Online Advertising
Thanks largely to Google’s search engine, online advertising generates more than 80% of Alphabet’s revenue. Google started making money in 2000 by auctioning space on its search-results pages to advertisers. In 2003, it began brokering deals between advertisers and other websites. Its purchase of YouTube in 2006 and the advent of data tracking in 2007 solidified Google’s position as the biggest and best in targeted advertising. Today, it controls 29% of the global online advertising market.
But while Google may remain the search giant for years to come, it doesn’t charge for searches, only for ads. There’s much more competition for ads and its huge share of ads is far more vulnerable than its control of search. A better way to advertise is likely to arrive before a better way to search.
Meta, the parent of another online ad giant, Facebook, is learning just how fleeting the ad business can be. Meta says it will lose $10 billion in advertising revenue this year because it relies on Apple for data on Facebook users, and Apple’s new privacy policies allow iPhone users to opt out of having their applications tracked. Google, which doesn’t use Apple for data, is capturing much of Meta’s lost advertising. But like Meta, Google’s bottom line relies on decisions made by other giants—especially companies that produce the devices people use to search online.
Launching an Antitrust Assault
Big companies are prone to antitrust trouble, and Google is no exception. In 2020, the U.S. Justice Department and 38 states and territories filed antitrust lawsuits against Google, charging that it was abusing its dominance in online display advertising (ads that appear on other websites, not on Google results pages). They claim that Google holds a monopoly in display ads because it owns the biggest platform for ad buyers, the biggest ad exchange and the biggest platform to publish ads. That makes them the biggest buyer, seller and broker of display ads.
Hosting the largest ad exchange gives Google access to the bids and bidding histories of other ad buyers and sellers. The suits claim that Google uses this information to undercut rival bids when the company buy ads to market its own brands and services, and to raise the auction floor when selling ads. Google, in its role as an ad broker, is also accused of charging publishers exorbitant fees. If the allegations prove true, the government could pursue a variety of antitrust actions, including forcing Google to sell some of its ad businesses to eliminate any conflicts of interest. The case is scheduled to go to trial in September of 2023.
Google calls the suits “deeply flawed.” In a blog post, Google’s president of global affairs, Kent Walker, says: “People use Google because they choose to, not because they're forced to, or because they can't find alternatives…. [The suit] would do nothing to help consumers. It would artificially prop up lower-quality search alternatives… and make it harder for people to get the search services they want.”
Does It Act Like a Monopoly?
Is Google a monopoly in the online advertising and search markets? Mercatus’ Boudreaux argues that it isn’t, it’s just a very competitive company. Referring to the classic definition of a monopoly as something that only a government can create, he says “real-world monopolies don’t exist unless they have government protection from competition,” which Google doesn’t have. Plus, he points out, Google is not the only search engine. If it were a monopoly, it would typically be restricting output, raising prices and producing lower quality. That’s because consumers wouldn’t be able to switch to an alternative, such as Bing.
Mercatus’ Thierer adds that if Google were a monopoly, it would have achieved dominance in other sectors. As it stands, it hasn’t been able to create even a social media platform, noting the failure of Google+ in 2019 after eight years. Competition is possible, he says, even if it means improving on just one of Google’s many functions.
But Taplin, of the Innovation Lab, disagrees. While Google isn’t a government-protected monopoly, he says, it has so thoroughly saturated the market that competition is impossible. At this point, he reiterates, there’s no startup with the money to compete with Google, given the network effects it uses to its advantage.
Boudreaux maintains that costs aren’t a bar to competition. Every company must spend money to start a business, including Google. He is confident that an entrepreneur could break into Google’s market with investors’ help: “You don’t need to be a multi-gazillionaire—you have to have an idea worth multi-gazillions. If your idea is good, chances are slim that you won’t be invested in.”
Invincible, Until They Weren't
In any case, taking advantage of network effects doesn’t mean a company will be invincible forever—especially online. Take, for instance, MySpace, the social media king before Facebook. Or BlackBerry cellphones—so addictive that users called them CrackBerry—until iPhones came along. iTunes had tens of millions of users before falling to Spotify.
Even if the courts rule that Google is a monopoly, it’s doubtful that breaking up the company or other antitrust remedies would be the best fix. In fact, Boudreaux says antitrust rules often punish companies simply for being successful, unfairly label them monopolies and stifle competition instead of encouraging it.
When the federal government adopted the first antitrust laws more than 130 years ago, the idea was that it should break up big companies so the little guys could have a better chance to compete. The two original targets were the American Tobacco Co. and Standard Oil. Their prices were declining faster than in the rest of the economy—the opposite of what would happen with a true monopoly—but smaller rivals, unable to develop better products, demanded that the government dismantle them.
It was a similar situation in 1970, when an antitrust suit was brought against the four cereal giants: Kellogg’s, General Mills, General Foods and Quaker Oats. The complaint? To satisfy consumer demand, the companies were making so many varieties of cereal that smaller companies couldn’t compete. In 1998, the Justice Department sued Microsoft on antitrust grounds and to make its case relied heavily on Netscape, whose once-dominant web browser was losing to Microsoft’s Explorer. “Google should not be held legally liable for being successful,” says Boudreaux.
The Bell Labs Model
Taplin, who calls Google a functional monopoly, believes that there are ways to introduce competition to the ad and search markets without breaking up the company. The Federal Trade Commission could punish any proven bad behavior and, to reduce Google’s enormous market power, regulators could force Google to grant free access to its intellectual material in return for keeping the company intact. Competitors would get the chance to use Google’s innovations in new and creative ways. This is how the government regulated Bell Laboratories in the 1950s.
Google offers a competitive, cheap, innovative product, and makes lots of money doing it—a model of capitalist success. But critics charge that it has used its power and influence to change the game in its favor. What’s certain is that Google’s rise to preeminence illustrates the complexity and interconnectedness of the online industry. Even if Google gets knocked down a peg, our lives will continue to become more enmeshed with the companies that rule the internet. And they will all have power over you.