by Timothy Lee

Filed Under:
antitrust, lockin, network effects

google, microsoft, yahoo

When Judging Antitrust Claims Against Google, Look At Lock-In, Not Network Effects

from the low-barriers-to-entry dept

Bill Snyder has an article calling Google "Microsoft's evil twin" because if it completes its merger with Yahoo it will have 90 percent of the advertising market and will be able to jack up the price of online ads. Snyder cites the concept of "network effects" and suggests that Google's market share advantage will "weaken of Microsoft's e-commerce infrastructure will further discourage competition and stifle innovation." This argument is confused. Almost every business enjoys "network effects." Wal-Mart, for example, is able to use its large base of customers to extract lower prices from suppliers, and is then able to use its lower prices to attract more customers. That's a network effect, but it's not a problem. What regulators have traditionally been worried about is not "network effects" in and of themselves, but network effects combined with technological lock-in.

In the Microsoft antitrust case, for example, the "network effects" argument was that various vendors had invested billions of dollars in research and development on technologies surrounding the Windows platform, and that these investments created an almost insurmountable barrier to entry for new operating system vendors: the creator of a new OS would have to persuade hundreds of companies to spend billions of dollars re-designing their products for a new platform. In contrast, the switching costs in the advertising market are extremely low. A small website owner selling inventory on one advertising network one week can easily switch to another the next. Larger sites might take a little longer but it's still not a large investment. Switching costs are even lower for advertisers, who can advertise on multiple networks simultaneously and shift their allocations on a daily basis.

There are a ton of small advertising networks focusing on niche advertising markets. Without the risk of barriers to entry due to lock-in, there just isn't much reason to worry about Google's large market share. If advertisers and website operators become frustrated with Google's advertising network, they can and will switch to another one. And Google, knowing how low the switching costs are, will still have plenty of incentive to treat its customers well.

Reader Comments (rss)

(Flattened / Threaded)

  1. identicon
    John Duncan Yoyo, Jul 22nd, 2008 @ 4:34pm

    Evil Twin?

    If there is an evil twin I'd say it is M$.

    reply to this | link to this | view in thread ]

  2. identicon
    some old guy, Jul 22nd, 2008 @ 4:35pm

    Microsoft's evil twin

    Yes, you could call an evil entities evil twin to be benign. That makes sense.

    reply to this | link to this | view in thread ]

  3. identicon
    Anonymous Coward, Jul 22nd, 2008 @ 5:16pm

    Microsoft is Satan's evil twin.

    reply to this | link to this | view in thread ]

  4. identicon
    Anonymous Coward, Jul 22nd, 2008 @ 5:33pm

    The analysis is confused

    Tim -

    While your analysis is usually on point, in this case you've missed the boat by a mile. The "network effect" in advertising is essentially the same as "lock in". A large ad network with many advertisers can better monetize the same impression than a small one with fewer advertisers. In other words, they are able to slice is available impression to a specific advertiser (who impose caps, targeting criteria and other limits). In aggregate they wind up paying higher PCM to the web-site publisher. In turn the publisher can not switch from a high paying network to a lower paying one. Here is your lock-in

    reply to this | link to this | view in thread ]

  5. identicon
    bigpicture, Jul 22nd, 2008 @ 6:19pm

    Re: The analysis is confused

    Advertising is a business choice, there is usually some percentage of business volume, of straight out dollar value budget assigned. Then there is the value assessment, if I spend this much on advertising, how much additional revenue/profit does this generate. Google makes it easy to relate these business decisions.

    So all this crap about "lock-in" and "network effect", in the end the business can decide not to spend the money, or spend it on TV adds. Where is the lock-in here????

    But if all of my enterprise systems are MS, and I want to expand the systems, but cannot buy anything else that will inter operate, or read the propriety file systems, so I have to pay $MS whatever they ask to expand the system, now THAT"S LOCK-IN. MS even contemplated making a price fixing charge stick on Linux because it is free.

    How much do you think Ford or GM pays for an advertising spot on the Superbowl, but that is a value decision, not a lock-in, it is "what result will I get in terms of dollars paid"? A simple business decision.

    reply to this | link to this | view in thread ]

  6. identicon
    Tim Lee, Jul 22nd, 2008 @ 6:24pm

    Re: The analysis is confused

    So the "lock-in" is that Google can offer a better deal? And that's bad why?

    reply to this | link to this | view in thread ]

  7. icon
    PaulT (profile), Jul 23rd, 2008 @ 12:25am

    Re: The analysis is confused

    I disagree with that. The advertisers will go where the users are. The reason why many people (myself included) use Google's search site instead of Microsoft's is because it's better. I do try other search engines, but always return to Google because I find it to be the least intrusive, easiest and most accurate search engine.

    If a competitor were to bring out a competing product that's better, users would go there, and the advertisers would follow. Microsoft only have their own shoddy product and reputation to blame if they're not attracting advertisers.

    reply to this | link to this | view in thread ]

  8. identicon
    Abdul, Jul 23rd, 2008 @ 7:11am

    Re: Evil Twin?

    You must be kidding if you think M$ is the evil twin! I only hope the regulators give Google the same anti-trust lessons they dished to M$ over the years. We just can't accept another google monopoly!!Monolithic Monster: Is Google Replacing Microsoft?(http://tinyurl.com/5ud36h)

    reply to this | link to this | view in thread ]

  9. identicon
    دردشه, Jul 5th, 2009 @ 2:25pm

    While your analysis is usually on point, in this case you've missed the boat by a mile.

    reply to this | link to this | view in thread ]

Add Your Comment

Have a Techdirt Account? Sign in now. Want one? Register here
Get Techdirt’s Daily Email
Use markdown for basic formatting. HTML is no longer supported.
  Save me a cookie
Follow Techdirt
Insider Shop - Show Your Support!

Report this ad  |  Hide Techdirt ads
Essential Reading
Techdirt Deals
Report this ad  |  Hide Techdirt ads
Techdirt Insider Chat
Report this ad  |  Hide Techdirt ads
Recent Stories
Report this ad  |  Hide Techdirt ads


Email This

This feature is only available to registered users. Register or sign in to use it.