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House Judiciary Subcommittee on Courts and Competition Policy HearingSep 17, 2010 (Congressional Documents and Publications/ContentWorks via COMTEX) -- I. Introduction Mr. Chairman and Members of the Subcommittee thank you for the honor of testifying on the important subject of: "Competition and the Evolving Digital Marketplace" I am Scott Cleland, President of Precursor LLC, an industry research and consulting firm, specializing in the future of the converging techcom industry. For the last four years, I have also been Chairman of NetCompetition.org, a pro-competition e-forum funded by telecom, cable and wireless broadband companies. In addition, I have done consulting for Microsoft. My testimony today reflects my own personal views and not the views of my clients. My purpose today is to help the Subcommittee see the proverbial forest for the trees. In other words, I hope to help distinguish the most important and serious system-wide competition problems in the evolving digital marketplace, from the less serious or not serious competition problems that may be garnering the attention of the subcommittee. The outline of my testimony is as follows: I. Introduction II. The Competition Digital Dichotomy III. Googleopoly - The Main Antitrust Event IV. Conclusion V. Appendix: Bio & Googleopoly VI II. The Competition Digital Dichotomy In evaluating competition in the evolving digital marketplace, the first order insight is to understand the competition digital dichotomy - that competition is very different in the physical world of networks and devices than in the online/virtual world of information and applications. The critical and defining difference is that over the last fifteen years the evolution of competition in the physical world of networks and devices has steadily evolved from monopoly toward competition, while the evolution of competition in the online/virtual world of information and applications has steadily devolved from competition toward monopoly. The competitive trend in the physical communications world, which originated in the change in law and policy in the 1996 Telecom Act, was fundamentally anti-monopoly, pro-competition and pro-antitrust. * Wireline: The wise removal of government prohibitions of communications competition has resulted in the U.S. having the most competitive facilities-based broadband market in the world and the most competitive wireless handset market in the world. No other country in the world has a second national broadband infrastructure that reaches 95% of households - cable. As a result, the rest of the world does not enjoy the consumer and investment benefits of real national-scale wireline broadband facilities-based competition. De-competition advocates who yearn for the 1934-era central planning powers afforded by monopoly regulatory policies, derisively and wrongly frame America's unique real facilities-based competition, as a "duopoly" glass-half-empty situation, when the rest of the world has a glass-half-full envy of America's real facilities competition that has fueled hundreds of billions of private broadband investment and spurred broad innovation. * Wireless: De-competition advocates also try and frame the U.S. wireless market, the most competitive in the world by most every measure (choice, price, concentration, innovation, etc.), as somehow not competitive "enough," so again they can impose their 1934-era centrally-planned regulatory policies. The billions spent annually on wireless advertising is a daily testament to the fierce competitiveness of the American wireless market where consumers have their choice of at least four full service national wireless providers and more handset choice (over 600 handsets) than any nation in the world. Moreover, Clearwire is on path to be a fifth nationwide wireless competitor using WiMax technology and the FCC is poised to approve yet another form of wireless competition leveraging unlicensed "white spaces" broadcast spectrum. * Software: The analogous situation in the physical technology world to the 1996 Telecom Act, was Microsoft's monopoly of the PC operating system market and the DOJ's antitrust enforcement action that also allowed the Internet to emerge competitively. Like the 1996 Telecom Act, the 1990's Microsoft antitrust case was anti-monopoly, pro-competition and pro-antitrust. In stark contrast to the physical network/device dynamic of moving from monopoly toward competition, the competitive dynamic in the online/virtual world has been the opposite, starting with wide open competition and moving towards monopoly in an environment of and lax antitrust enforcement. Consider the well-known evidence of this competition toward dominance/monopoly trend: * Google's dominance of search; * Google-YouTube's dominance of video streaming; * Google-DoubleClick's dominance in ad-serving and analytics; * eBay's dominance of online auctions and epayments; * Amazon's dominance in e-retailing; * Facebook's dominance of social networking; * Skype's dominance of global VoIP calling and video-calling; and * Twitter's dominance of real time infocasting. Why does this competition digital dichotomy exist? The reason for this digital dichotomy is more than their starting points of a monopoly origin versus a competitive origin. Simply, the online/virtual world is powerfully different than the physical world. The online/virtual world is characterized by a "winner take all" dynamic. Why is that? * First, the Internet, by definition, is standardized around Internet protocol. What makes the Internet unique is that it is the most standardized and internationally harmonized technical foundation for communication and commerce -- ever. This near perfect standardization creates unique global universality. Ironically, the Internet's greatest strength, its universality, is also its greatest weakness - its natural propensity to extreme centralization, concentration, and monopoly power. * Second, the online/virtual dimension of the Internet is vastly different than the physical infrastructure and devices that enable it, because the online world generally does not have the friction and inefficiency of governmental borders/sovereignty or the substantial distribution costs/delays that the physical world must overcome. This inherent boundary-less-ness of the Internet allows it to achieve greater and faster economies of scale, scope and reach than any entity ever could hope to achieve in the physical world. These vastly greater virtual economies of scale, scope and reach dwarf potential physical economies, which means that after fixed costs are covered, going-forward incremental costs can be near zero. * Third, it is also vastly different in that the Internet has exponentially greater network effects or inherent the strong-get-stronger perpetual feedback loops, that are powered by Metcalfe's Law where the value of a network is the square of its nodes. * Fourth, first movers often can develop insurmountable switching costs and user stickiness because of the Internet's unique attributes. The first "free" offering in a segment seizes the monopoly advantage of eliminating the central mechanism of a competitive market - the potential for price competition. In order for a "free" offering to ultimately be commercially viable and sustainable, it must win the race to lock up a dominant share of the user audience for that application. Purveyors of the first-mover "free" model know that they must thwart the possibility of a viable competitor by creating as many switching costs and user stickiness as possible through cookies, passwords, storage, and as many integrated/bundled features, products and services as possible. * Fifth, there is the "Internet Choice Paradox," a concept I introduced in 2007 Senate antitrust testimony on the Google-DoubleClick acquisition. The "Internet Choice Paradox" is the counter-intuitive reality in a "free" Internet sector model; competition is not "one click away," because advertisers not consumers pay for availability and use of "free" content. That means there is very limited choice for web publishers and advertisers -- the ones that really pay for the "free" content -- to reach users with their info or ads. * Counter-intuitively, the Internet is inherently a monopolizing technology. Now that we see the big picture that the physical world of networks and devices are trending imperfectly from monopoly toward competition and that the online/virtual world is trending imperfectly toward monopoly, it is important to see the big picture and to focus on by far the most important and serious competition/antitrust problem in the digital marketplace today - Googleopoly - the "Antitrust Main Event." III. Googleopoly - The Main Antitrust Event What follows is the Executive Summary of my just published study of Google's impact on competition, the economy, pricing, and jobs: "Googleopoly VI -- Seeing the Big Picture: How Google is Monopolizing Consumer Internet Media and Threatening a Price Deflationary Spiral and Major Job Losses in a Trillion Dollar Sector." A. Recommendation: The facts and stakes warrant the U.S. DOJ filing a Sherman Section 2 Antitrust Case and the EU Filing a Section 102 Statement of Objections - against Google Inc. for monopolizing consumer Internet media services. * Since Google increasingly is the Internet for info access and distribution, and also is increasingly monopolizing the consumer Internet media ecosystem with a systematic monopolization strategy, a broad antitrust case is warranted, because event-specific investigations/actions are a losing antitrust game of 'whack-a-mole.' B. High-Level Conclusions: 1. Lax antitrust enforcement tipped Google to monopoly and facilitates monopolization of consumer Internet media. 2. Google's monopoly platform increasingly is supplanting and dominating the consumer Internet media ecosystem. 3. There is more at stake than competition from a global information access bottleneck; Googleopoly threatens economic growth, jobs, privacy, intel. property, a free press, fair elections, cyber-security, & sovereignty. 4. Only Google has a billion user audience, ~all information/advertisers/publishers, & a free-info business model that can sustain pervasive predatory free info/products/services long term. There's no net-economic-growth or net-job-creation in a "free" Internet sector model -- only: a deflationary price spiral; net negative growth, property devaluation, job losses, and monopolization. Over 20 industries, 200+ US/EU companies, and hundreds of thousands of jobs are at risk from Googleopoly's anti-competitive price deflationary spiral. 5. The consumer does not win long-term from monopoly-control over "free" information access & distribution. C. Additional Conclusions: 1. Google is a vastly more serious antitrust threat to consumers and the economy than Microsoft, because the DOJ blocked Microsoft from extending its monopoly vertically into the broader economy, while antitrust authorities have unwittingly aided and abetted Google's vertical monopolization of vast parts of the broader economy. 2. Lax antitrust enforcement allowed dominant Google search to acquire: YouTube's dominant video-streaming, DoubleClick's dominant display ad-serving/analytics, and AdMob's dominant mobile advertising -- to create a dominant Google TV global "monocaster" platform for all types of IP devices with 80% of the video streaming audience and dominance of IP video views/minutes viewed. Only Google TV has no media concentration limits. 3. The Internet's greatest strength is also its greatest weakness, in that the Internet's universality naturally leads to extreme centralization, concentration and market power. Thus Google increasingly is the Internet for most. 4. Google has systematically assembled all the building blocks in the "stack" of necessary capabilities to become the dominant platform of the consumer Internet media ecosystem: a winner-take-all dynamic; omniscient mission and omni-directional ambition; omnivorous info collection; Internet omnipresence; Internet-scalable infrastructure; omnifarious products, services & info types; Internet behavior omniscience; and omnivorous ecosystem share. 5. Google has unique "Total Information Awareness Power" where it collects, records, stores, and analyzes most all Internet activity: all the world's information and all market information of usage, traffic, supply and demand; and permission-less profiles of users': personal identifications, locations, intentions, and associations. 6. Google's monopoly power is lasting because of re-enforcing spheres of monopoly influence --a monopoly platform surrounded by: 75+ acquisitions; many satellite companies financially dependent on Google for search monetization; thousands of publisher revenue-share "partners;" and a phalanx of free info, products and services. 7. Google's secret weapon is its "deep tracking inspection" of everything that passes through Google's cloud, where "innovation without permission" means that Google has to ask no one for permission to use the derivative tracking metadata from anyone: publisher partners, advertiser clients, competitors, proprietary owners or users. 8. Google is not an honest broker in search; it hides multiple serious conflicts-of-interest. D. Google's Monopolization Strategy 1. Misrepresent conflicts-of-interest to build trust as an honest broker. * Google built an ill-gotten critical mass of user trust through systematic misrepresentation of Google's real broker interests and by not publicly disclosing multiple serious conflicts-of-interest that would be considered fraudulent and deceptive if done in the off-line marketplace. 2. Systematically foreclose competition. * Google uses unique market-wide metadata information power to find and buy the most strategic first movers cheap before: a business model can form effectively; revenue hits the "hockey stick" growth inflection point; a market can be defined for antitrust enforcement purposes; and others learn what Google knew from analyzing everyone else's proprietary metadata without permission. * Google co-opts and subordinates actual and potential competitors by providing outsourced search, tracking/analytics, and advertising monetization through opaque and supra-competitive revenue-sharing arrangements that create business dependency on Google. * Google forces the wholesale price for information access towards zero by copying all information without permission/compensation to make it accessible for free, then forcing an ad-monetization model so that information itself is not valuable, but only access to information & adding functionality to information. * Google predatorily dumps monopoly-subsidized omnifarious products/services to eliminate competition. 3. Structure opaque derivative markets so Google can be player, referee, scorekeeper & paymaster all at once. * Google's "auctions" are not auctions between buyers and sellers where the highest price prevails; Google's auctions are a derivative algorithm that discriminates against bidders to award the ad, not to who bids the most, but to who Google estimates has the best probability of generating the most derivative ad clicks and hence revenue for Google. Google also unilaterally sets minimum bid prices. 4. Exclude competitors from information critical to competition. * Google owns and controls uniquely vast and critical datasets (YouTube, Books, Earth/Maps/StreetView, etc.) and makes them publicly accessible and useful to users, but excludes competitive crawling or indexing so competitors cannot offer competitive search results. * Google harvests and controls all the derivative "metadata" (data on the data) that the dominant Google Internet media platform produces, i.e. the how, what, where, when, why and how much of most Internet traffic, clicks and behavior, that Google uniquely records to allow Google to create unique derivative metadata profiles of individual users, groups, demographic slices, and the market overall. 5. Discriminate predatorily against competitors and self-deal in favor of Google info, products and services. * Google detects and impedes emerging search competitors from becoming more competitive by predatory monopoly discrimination using "human raters" to lower their search ranking and increase their price per click, so they have to pay more for less and can't compete; and * Google self-deals by using Google's unique knowledge of partners, competitors, and users' proprietary and private information to identify, own and then rank critical building block content first, above partners and competitors, so that competitors cannot succeed. 6. Front-run partners and competitors by using their own confidential/proprietary information against them. * Google tracks, records and analyzes most all behavior on the Internet, Google's "Total Information Awareness Power," so Google can effectively reverse-engineer the most valuable trade secrets and confidential information from partners and competitors, i.e. their confidential client lists (users, advertisers), their actual measured strengths and weaknesses, plans, strategies, and tactics. VI. Conclusion: One of the most difficult jobs this Subcommittee has is to sort through all the competition noise and zero in on the most important and serious antitrust problems facing the country, that if they are not addressed appropriately could be disastrous for the economy and the American people. A key takeaway for this subcommittee is that real and serious antitrust issues in the physical world of networks and devices inherently are slower paced and easier to detect -- so they are not going to sneak up and surprise the Subcommittee. In stark contrast, antitrust problems in the fast-paced and opaque online world can and have sneaked up on the Subcommittee in the case of Googleopoly. While there may be many competition/antitrust issues put forth today for the Subcommittee's attention, don't be distracted and miss the Main Antitrust Event: Googleopoly. No other digital competition threat poses anywhere near the detrimental impact as Googleopoly does. Googleopoly threatens: the economic recovery, job creation, privacy, jobs, intellectual property, a free press, fair elections, and cyber-security. Don't ignore the blue whale in the antitrust room - Googleopoly. I recommend the Subcommittee urge the DOJ Antitrust Division to enforce the law and sue Google Inc. for monopolization of consumer Internet media -- under Section 2 of the Sherman Antitrust Act. Let the rule of law work and have the court determine the facts and judge if Google is indeed monopolizing markets. Thank you again Mr. Chairman and Members of the Subcommittee for the opportunity to share my personal views and analysis on "Competition in the Evolving Digital Marketplace." |