Google, Zen Master of the Market

In today’s New York Times, Steve Lohr writes:

"Google’s market power, it seems, is the economic equivalent of what in foreign affairs is called ‘soft power,’ a term coined by the political scientist Joseph S. Nye Jr. This is the power to co-opt rather than coerce."

That’s in an analysis titled Google, Zen Master of the Market. Comparing Google’s market success to Microsoft’s, and then looking at possible antitrust implications, the piece starts with Microsoft and how Microsoft rode to power:

Microsoft was a master practitioner of “network effects,” the straightforward precept in economics that the value of a product or service often goes up as more people use it. There is nothing new about the concept. It was true of railways, telephones and fax machines, for example.

Microsoft, however, applied the power of network effects more lucratively than any company had done before it.

In context, he’s talking about how in computers and software, you build the platform that everybody uses, and the world follows the bandwagon. DOS and Windows, then third-party software development, and then the whole world.

Google, in taking over the Internet like Microsoft took over the PC, is working in new ways in a new world, but also building on network effects.

Michael A. Cusumano, a professor at the Sloan School of Management at Massachusetts Institute of Technology, sees the difference in terms of what he calls “direct network effects” and “indirect network effects.” The direct effects, he says, include software document formats and technology standards that are owned by one company and that are incompatible with a rival’s technology. The indirect effects, he adds, include large numbers of users, the ability to learn from those users, the power of a well-known brand and user inertia.

“For Google,” Mr. Cusumano said, “the indirect network effects are very powerful.”

Google, however, has learned from Microsoft, and is managing the potential antitrust implications skillfully. U.S. law generally looks at antitrust as having 70 percent of a market. Google has more than 60 percent of the search market and about 70 percent of the search ad market.

Still, dominance alone is not an antitrust problem. The issue is the powerful company’s behavior, says Andrew I. Gavil, a professor at the Howard University School of Law. “You have to be big and bad, not just big,” he said.

That’s Google, Zen Master of the Market. It’s a good read.


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