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Google, Dominant in Search, Tries Disrupter Role in Wireless and Broadband

Google, Dominant in Search, Tries Disrupter Role in Wireless and Broadband

By James B. Stewart, The New York Times | Updated: 8 May 2015 12:00 IST

Call it the Google paradox.

Last month, the European Union's antitrust chief accused Google of abusing its dominant market power in Web searches.

A week later, Google announced it was entering the wireless service market in the United States, threatening to disrupt one of America's most concentrated industries. Meantime, it is expanding its super-high-speed broadband Internet service to as many as 34 cities, taking on another market so concentrated that the government recently derailed the proposed Comcast-Time Warner Cable merger.

So is Google an evil monopolist or competitive champion?

In the stodgy wireless service industry, long dominated by AT&T and Verizon, with struggling Sprint and feisty T-Mobile a distant third and fourth, the possibility that a new competitor might disrupt this cozy oligopoly has long been considered a pipe dream. When the Justice Department sued to block the proposed merger of AT&T and T-Mobile in 2011, it concluded it was highly unlikely that other competitors would enter the market. Last year, Sprint abandoned its bid for T-Mobile after the Justice Department suggested that deal, too, would be anticompetitive.

But now Google's entry into wireless - named Project Fi - has changed the conversation about competition in that market, even though Google said the move was still an experiment.

"I'm delighted that Google is doing this," said Scott Hemphill, visiting professor of antitrust and intellectual property at New York University School of Law. "This is an industry that's ripe for disruption."

Google's wireless business certainly seems disruptive. It takes direct aim at the fat profit margins and high prices of the dominant firms. Google is charging $20 a month for basic voice and text service, and $10 for a gigabyte of cellular data, according to a blog post on the company's website. And in a move unheard of among traditional wireless providers, Google will rebate payments to customers for any unused data.

(A Google spokeswoman, Niki Christoff, said Project Fi is currently available only to users of the Motorola Nexus 6 smartphone, and even then only by invitation.)

Google's service also uses a combination of innovative technology and partnerships with existing cellular providers to overcome its lack of wireless spectrum. Project Fi uses Wi-Fi networks whenever possible (hence its name) and, when Wi-Fi isn't available, moves seamlessly to cellular networks. The cellular networks are provided by Sprint and T-Mobile, the current cell service underdogs.

Hemphill said Google's inventive service shows the wisdom of the Obama administration's having challenged the T-Mobile-AT&T transaction. "Now you have two firms open to alternative business models," he said. "Surely a duopoly would have thumbed their noses at Google's idea."

In the high-speed broadband market, even the prospect of Google's coming to town has caused entrenched providers to improve their service in anticipation of a new competitive threat. After Google said it would bring its fiber service to the Charlotte, North Carolina, market, Time Warner Cable announced it was offering a free higher-speed upgrade to its customers there.

And after Google pushed into Austin, Texas, in December, AT&T and Time Warner Cable announced they would upgrade service, and new entrants have made Austin a high-speed Internet paradise that's enhancing its reputation as a technology magnet. Google has also said it is bringing its service to the Atlanta, Nashville, Raleigh-Durham and Salt Lake City metropolitan areas.

Of course, Google isn't doing this because it's trying to win a corporate good citizenship award from the Justice Department's Antitrust Division. These are strategic moves aimed at enhancing Google's position in search while exploiting new profit opportunities.

Like many of Google's forays into nonsearch businesses, cellular service and high-speed broadband feed users to its search business, since the more cellular usage and broadband access, and the cheaper they are, the more consumers will use Google's search function.

"We call these businesses complements, since having more of one creates demand for the other," said Herbert Hovenkamp, professor of antitrust law at the University of Iowa College of Law.

Also, entering big, concentrated markets offers Google greater profit opportunities. "There is something to be said about going for fat, complacent industries," Hovenkamp said.

That, of course, might be said of Google's core search business, which is what drives the company's high profit margins - which have typically exceeded 20 percent. New entrants and existing competitors have failed to erode Google's market share, which in the United States has been fairly consistent at about 65 percent and in Europe is over 90 percent.

Google's dominant position has long drawn regulatory scrutiny in both the United States and Europe and now a European enforcement action. (On Wednesday, European officials continued to flex their antitrust muscles, opening an investigation into whether large technology companies were impeding competition in online shopping.)

It isn't inconsistent for a monopolist in one industry to be an innovative upstart in another. "Monopolists have historically invested in more competitive markets," Hovenkamp said. "They might prefer to pour all their investment capital into their high-margin dominant business, but that isn't feasible, so they turn to related businesses." (He mentioned Ford, which at the height of its market power in automobiles turned to manufacturing tractors.)

But success and a dominant market position aren't illegal unless they're acquired unlawfully or if a monopolist abuses its market power.

European antitrust officials have tended to be more skeptical about large market shares than U.S. regulators have been, especially when it comes to U.S. technology companies. In the suit against Google, they claim it rigged search results to favor its shopping sites over competitors (including some large European companies). They have also said they are scrutinizing Google's Android mobile phone operating system, which typically features Google as the default search engine.

It remains to be seen what new evidence the European Union investigators may have uncovered, but both of those issues have been examined at length by U.S. regulators, who concluded no action against Google was warranted after the company agreed to relatively minor adjustments.

And the European case has generated skepticism among U.S. antitrust experts. "You have to ask, where's the harm to consumers?" Hemphill said. "By all indications, Google is providing something that consumers want."

Hovenkamp added that even if Europe wins the case, it risks having to micromanage search algorithms. "That's a costly, never-ending and ultimately destructive game," he said. "You don't want to turn Internet search into a regulated industry."

Google has denied the charges in detailed blog posts, arguing that European consumers have benefited and that Android has created more choice and innovation.

Whatever the outcome in Europe, Google is emerging as a formidable competitor in wireless and broadband, two of the most entrenched oligopolies in the United States. So while European regulators go after the search giant, their U.S. counterparts would seem to be rooting for Google.

"The Justice Department must be thrilled," Hemphill said.

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