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What Google Can Learn From Microsoft

By 21 July 2010 No Comment

Anyone with a taste for irony must be amused as the press, regulators, and the blogosphere zero in their sights on Google, the “do no evil” company.

Google’s basic business model is to provide one function – search – in a complicated Internet system, and monetize it. This is a fine thing, since the ability to find things is a valuable part of any system. Imagine, for example, a university library with 10 million books and no catalogue – just a big pile. (Sort of like my office.)  The developer of a catalogue or search mechanism certainly contributes great value to the system.

On the other hand, the authors who produce the books, the printers, the erectors of the building, and so on also contribute great value.

For any such system, the question is which of these contributors gets what share of the value. Normally, we don’t think about this; we simply leave it up to the market to sort out, and assume, usually correctly, that the normal forces of competition will produce numerous versions of each needed component, and that the pay-offs will work out.  In any event, the chances that government intervention would improve matters are minuscule.

The system does not work without pain. If some of the contributors have already sunk their capital irretrievably, then whoever produces a new component that increases the productivity of the system will be able to extract most of the increase in value for itself, to the annoyance of its complements.  Usually, this state does not last long, precisely because of competition, but if some of the participants are not allowed to exercise their property rights, then they will wind up being exploited. And if the provider of one component gets a monopoly, then obviously a large share of the returns will flow to it.

All of these problems arise in the context of Internet search. Providers of content have lost the ability to exert control over their property. Providers of the physical infrastructure are subject to an array of regulatory requirements that compel them to give away much of the value of their contribution. Developers of applications and other complements fear that they are at the mercy of the major providers, which means, increasingly, Google. The result is that a disproportionate share of the value of the network is flowing to the providers of the search function, of which Google is the most prominent, which irritates everyone else involved.

So it is not surprising that the political heat is increasing. Free market types can provide all sorts of reasons why things will work out, but when one probes the reasoning, it turns out to involve lots of time and spectacular losses, which the participants do not regard with the same level of philosophical detachment as do the academics. One can predict with some certainty that the attacks on Google will increase, and that we are going to hear much more about “search engine neutrality.”

Google Uses Microsoft

But Google should not despair, because it can easily find an interesting model on how a company can deal with charges that it has inordinate power over complementary businesses and either does or might abuse it. Google can look north, to Redmond.

In 2006, Microsoft announced its Windows Principles, 12 tenets designed to ensure openness, interoperability, access, and non-discrimination for people producing complements to Windows.

These Windows Principles embody some of the provisions that were part of the government/Microsoft settlement of the antitrust case, plus a few additional thoughts, but to regard them as part of the case is not quite right. The case was based on allegations that Microsoft tried to maintain a monopoly over the operating system used on personal computers. The provisions of the settlement that wound up in the Windows Principles had zero to do with this charge; instead, other participants in the Internet ecosystem used the existence of the case to get the government to extract from Microsoft guarantees about how it would deal with these participants in contexts that had nothing whatsoever to do with the gravamen of the case itself.

On the whole, in considering the obligations involved in the Windows Principles it is best to forget the case and regard them as a set of guarantees from a powerful platform company as to how it will deal with complementary businesses, and directed both at muting political opposition and at assuring these complements that they can safely invest in confidence of being treated fairly.

Google could learn, here.  Or else it, too, will someday wind up in the government cross-hairs.

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