Should Google be Regulated?

The “do no evil” company changed the slogan “to do the right thing” in October 2015. And they are doing the right thing if you are a Google Shareholder- you are definitely happy 🙂 .
Recently, Google has been fined a record 2.4 Billion Euros by EU, for what they call, “abusing internet search monopoly”.  This was based on EU findings that:

  • Google is steering customers to its own shopping ads and has systematically given prominent placement to its own comparison shopping service.
  • Google has demoted rival comparison shopping services in its search results.

So was EU right? Is it time for Google to be regulated?

The Market share of search engines

Market Share of Search engines

While globally Google has near 80 % market share, in US, it dominates the market with 87 % share.  From the market share data itself, Google appears like a monopoly.

Is Google a Natural Monopoly?

Are monopolies invariably bad?  Peter Thiel, a famous Silicon Valley venture capitalist, in his book “Zero to One” strongly advised entrepreneurs that “If you want to create and capture lasting value, look to build a monopoly”. In his view monopolies are good for innovation and, ultimately, for society at large.

What is a Natural Monopoly?
As per Wikipedia, “A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors.  Public services like Water and Electricity are natural monopolies.”
And natural monopolies are invariably regulated by government.
So are there any large entry barriers for a new search engine? Prima facie, No.
Unlike with an electricity distribution company — where the high cost of capital keeps new competitors from stringing wires to everyone’s homes — nothing’s assumed to be stopping entrepreneurs from making their own search engines.
By this logic, Google is not a natural monopoly and need not be regulated by government. In any case, Google search is a free service with no explicit commitment on quality of service. The users can switch to any other search service provider, whenever they desire.

Why does Google’s search beat every other search engine? – The Virtuous Cycle of Artificial Intelligence

Google is the best. I acknowledge. Not necessarily because of the inherent superiority of its algorithm, but because of greater access to data which makes its algorithm better. The large user base of Google feed more and more data into its algorithm, which makes it get better. So, the more people use Google for search, the better it gets and hence even more people use Google. This is called the Virtuous cycle of AI, whereby a great product (like Google Search) leads to a greater user adoption, which in turn leads to more data being available to the product, that finally leads to the product getting even more better- and this cycle continues.

Virtuous Cycle of AI
Virtuous cycle of AI: (Source: Andrew NG: Deep Learning Course)

Revisiting the Natural Monopoly Argument: Can any other search engine better Google at its game?

Given the wide user base of Google, it has an overwhelming advantage over its competing search engines.  Its sheer access to data generated by its existing user base is a huge entry barrier to existing and potential competitors. What will it take for a competitor like Bing to reach where Google is? It needs to become as big as Google to beat Google.
Does this argument not make Google a Natural Monopoly? In my view- Yes.  It is a natural monopoly as there are “strong entry barriers”, which would prevent any new entrant from upstaging Google.
So, did the stodgy Europeans get it right?  Yes. They are bang on target when they view Google as a monopoly that can abuse its power. Antonio Garcia Martinez(author of Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley), when commenting on this issue, very obviously spoke in favour of Google and ridiculed European authorities by saying that Europe lacks innovation and not a single European company has a data product like Google or Facebook.  And maybe now, you know the reason why.
European regulators will never allow any company to aggregate data and misuse it to attain dominance.  By this logic, it is not necessarily a lack of innovation, but a cultural issue which respects individual’s privacy that prevents European companies’ from reaching dominance status.

In conclusion, I would say that Google IS a monopoly. The service that it provides can easily be construed as a public utility, and may be it is time for it to be regulated.
So should you sell your Google stock now?



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