Fact-Checking Google: Scale is a Barrier to Entry in Search

At the Sept. 21 Senate Antitrust Subcommittee hearing on the “Power of Google,” Senator Blumenthal asked Google Chairman Eric Schmidt to “please explain why ‘[m]anaging search at our scale is a very serious barrier to entry’ and how this can be reconciled with your claim that competition is ‘one-click away.’”

Senator Blumenthal was talking about Schmidt’s comments in an interview with The New York Times where Schmidt commented that “[m]anaging search at our scale is a very serious barrier to entry.”

In response, Schmidt notes “I made that statement to the New York Times over eight years ago.”

We’ll humor that response. But, have there been any more recent examples of Schmidt or other Google executives commenting on the importance of scale?

• 2008:  Hal Varian, Google Chief Economist said “Scale is pretty critical” to search advertising because “search technology exhibits increasing returns to scale.” That same year, Jonathan Rosenberg, Senior Vice President of Product Management and Marketing said “So more users more information, more information more users, more advertisers more users, more users more advertisers, it’s a beautiful thing, lather, rinse, repeat, that’s what I do for a living.  So that’s, someone alluded to the engine that can’t be stopped.” And Eric Schmidt said, “We believe in scale. We believe in the power of information and we use it all ourselves.”

• 2009: Eric Schmidt said, again “Scale is key.  We just have so much scale in terms of the data we can bring to bear.” Later that year, Schmidt said “We are a company that operates at scale . . . trust me it is a scale company.” Then Schmidt said, With regard to Microsoft and its lack of scale, Schmidt stated:  “We think search is about comprehensiveness, freshness, scale and size for what we do.  It’s difficult for them to copy that.” (And that was just two short years ago…)

See, the thing about scale is, well, if it was a barrier in 2003 when Schmidt first made his comment, its only going to be a bigger barrier now. That’s kind of the whole concept of scale in network economics.

What changed? Google understands that boasting about scale and how it is a serious barrier to entry doesn’t go well with the “one-click away” argument. Or, as the DOJ confirmed in 2010, “[t]he search and paid search advertising industry is characterized by an unusual relationship between scale and competitive performance.”

Tom Barnett (former Assistant Attorney General in the Department of Justice’s Antitrust Division and counsel to Expedia, a FairSearch member) explained it like this in his testimony at the Google hearing, “If you have an 80 percent share of the market with barriers to entry, you have monopoly power. And those barriers don’t come from the supposed cost of switching or clicking to another site. The barriers come from building an effective search engine.”

What’s the point? In its analysis of Google’s acquisition of ITA Software, the American Antitrust Institute warned that “maintaining competitive markets for both general and niche search may be the only alternative, ultimately, to an unregulatable monopoly.”