The Market Exerts Its Power Over Google

(Bloomberg Opinion) -- Google founders Larry Page and Sergey Brin are still among the richest people in the world, but they are worth a lot less this week than they were last. The decline in their fortunes, and that of Google parent company Alphabet Inc. after a disappointing earnings report, should sound a note of caution — not just to investors, but to members of Congress.

As conservatives and progressives have increasingly complained about the behavior of Big Tech, Congress has taken the debate over how best to regulate the industry more seriously. There are legitimate gripes to be aired and issues to be discussed. What all sides may want to consider is that some of the industry's unsavory behavior represents the growing pains of an industry that is only beginning to come under market discipline.

The contours of the policy debate are clear enough. Many conservatives claim that the “liberal” tech companies systematically discriminate against conservative viewpoints. Many progressives argue that Big Tech abuses its power and wealth, squashing the competition and exploiting its customers' data.

In each of these cases the core culprit is the presumed market power of tech companies: Consumers have little other choice in finding news and information, and advertisers have little other choice in reaching those consumers. As a result, Big Tech has been free to write its own rules. The solution, then, is for the government to write rules instead.

Google's first-quarter results show that the market's rules may take precedence over anyone else's. Alphabet blamed its revenue shortfall on efforts to cut prices for advertisers and to improve the advertising experience on YouTube. Alphabet risks losing future market share if it's not sensitive to its users' and advertisers' current needs. In other words, its current position of strength is by no means assured.

It's a concern other tech companies have expressed in the past, notably IBM in the 1970s and Microsoft in the 1990s — both of which seemed unstoppable forces in the market right up until the moment they stopped. The government pursued antitrust cases against both, but ultimately it was competition that caused them to change their behavior; government actions had little significant impact.

Critics point out that Big Tech is more dangerous today because network externalities enable natural monopolies: Everyone using Google for search, for example, gives Google invaluable insight into what people want to buy, find or know. As a result, Google simply has too much power. Even if this theory is correct, however — and there are good reasons to believe it isn't — the standard response to a natural monopoly is to make it into a public utility, as some candidates for president and members of Congress have proposed.

Yet this would insulate the tech companies from exactly the type of consumer and advertiser pressure they are just starting to face. It would replace market discipline with a regulatory board. If the board was wise and well-staffed (not a foregone conclusion), it could force some short-term accountability. But it would snuff out the incentives of companies such as Alphabet to focus on long-term value for users and advertisers. It would also prevent the type of disruptive market discipline that IBM and Microsoft faced.

Big Tech certainly has a lot of power, and (at the very least) it has been careless with it. There is no easy long-term solution here — except to focus on increasing the incentives to foster competition. That means, among other things, cracking down on patent trolls and making it easier for young companies to raise revenue through IPOs. As Google's founders and investors learned this week, the market can just as easily degrade power as bolster it.

To contact the editor responsible for this story: Michael Newman at mnewman43@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Karl W. Smith is a former assistant professor of economics at the University of North Carolina's school of government and founder of the blog Modeled Behavior.