Jonathan Hillel

Trustbusters should call off fishing expedition in Microsoft-Yahoo deal

by Gary Howard on August 11, 2009

in Legal, Tech & Telecom

In today’s Seattle Times, CEI Information Policy Analyst Ryan Radia and CEI Policy Fellow Jonathan Hillel talk about the U.S. Senate Antitrust Subcommittee’s threat of “careful scrutiny” over the recent Microsoft-Yahoo deal.  Read the piece here or see below.

MICROSOFT and Yahoo want to join forces in Internet search to better compete against Google. But first, they need the blessing of government antitrust enforcers. Senate Antitrust Subcommittee Chairman Herb Kohl, D-Wis., already has threatened “careful scrutiny” of the deal. But trustbusters should not go fishing for problems in the Internet search market. In the relentlessly fast-moving digital economy, government intervention contorts the market and ultimately harms consumers.

Under their proposed decadelong pact, Yahoo searches will be powered by Microsoft’s Bing search engine, which launched this June. The two search firms will maintain separate Web sites, but Microsoft will administer the technical side of both. Microsoft will also gain access to Yahoo’s vast volume of searches and query data. In exchange, Yahoo will receive 88 percent of ad revenues from searches performed on its own site.

As Steve Lohr of The New York Times noted recently, the scale advantages resulting from the arrangement will be significant. By teaming up with Yahoo, Microsoft will gain a much larger share of Internet searches, helping it attract a bigger slice of the $11 billion search advertising market.

An equally important benefit of the deal is “data scale.” Search engines are forever tweaking their underlying algorithms using complex statistics and machine learning. More searches mean more data can be mined – and, therefore, more accurate results. This, too, can fuel ad sales by making targeted placements more attuned to user preferences.

Both Yahoo CEO Carol Bartz and Microsoft Chief Steve Ballmer have admitted that scale is the driving force behind the deal. To antitrust enforcers, however, “scale” is often a major red flag. This is because the Justice Department assumes that in markets where competitive advantage stems from firms’ size and market share, the consolidation of existing competitors thwarts the entry of newcomers.

Scale may make Microsoft and Yahoo more competitive, but it hardly guarantees them success. Indeed, history tells us that innovation, not scale, is the one true silver bullet in Internet search. Google earned its crown nearly a decade ago by revolutionizing search technology, devising the revolutionary PageRank system for indexing the Web and toppling AltaVista in the process. More recently, Microsoft’s Bing has made inroads by combining a clever cataloging system with alluring design.

In the same way, the firm that ultimately dethrones Google will likely do so by offering superior search technology, not simply more of it.

The Microsoft-Yahoo deal has also raised concerns over “network effects.” This refers to the phenomenon whereby a technology becomes more valuable to its users as the size of its user base grows. Concerns over network effects were at the center of Microsoft’s antitrust woes beginning in the late 1990s.

Yet online search is not a network market. The reason Google attracts so many users is not because it already has lots of them, but because it gives the best search results. Once again, innovation, not scale, is the real trump card in the Internet search market.

Farhad Manjoo of Slate recently observed that search engines including Cuil, Wolfram Alpha, Topsy and Bing all emerged as viable players in Internet search despite Google’s supposed dominance. To be sure, none of these search engines have yet threatened Google. But since Web users can switch search engines with a few clicks of the mouse, sustaining market share over time is impossible without continual innovation.

Antitrust policing lags far behind the rapid-fire evolution of dynamic Internet markets. It is no accident that Web search depends on innovation; rather, this is the very nature of the modern information economy. The Justice Department should stop worrying about scale and keep its hands off the Internet search market.

Fred Smith comments on Hillel’s piece

by Gary Howard on July 23, 2009

in Economy, Legal, Tech & Telecom

Below see CEI President Fred Smith’s comments on Jonathan Hillel’s piece in the San Jose Mercury News:

Hillel’s piece raises the very interesting question of whether the use of copyrighted materials must forever remain out of reach of most people.  The vast majority of creative works disappear from public view within a very short time of their release.   Few books or records are best sellers, many magazines (especially specialized magazines and journals) go out of existence in a decade or so.  Yet, the information and enjoyment value of these works might enrich millions of people in our new e-world.  Currently, the length of copyright and the reluctance of any one to devote the resources to bring them back into view mean they’ve been taken from the world’s “library” and “record/CD/DVD” shelves.

One way to think through this topic is to consider how real (as opposed to intellectual) property that has been “abandoned” is treated.  Land, for example, remains in the hands of the original owners unless (as is very often the case) no one has paid the property taxes for a number of years (in political jurisdictions without property taxes – there must be some – I have no idea what is done) and then these lands are sold to compensate the jurisdictions for the unpaid taxes.   In another case, individuals may open a financial account in some institutions and then for some reason (death, forgetfulness, small balance) simply abandon it.  Since some costs are incurred in maintaining such accounts, some private institutions will simply close the account and absorb whatever assets are in that account (airline loyalty programs, for example) although generally an effort is made to warn the user that such action is imminent.  Banks, being regulated and subsidized, take various approaches to what, in that context, are called “dormant accounts.”  After a period of inactivity, the banks post notices and, if no response is received, any funds (less management fees) are generally transferred to the state in which that account exists.  (Depending on state law, one may be able to recover the funds even after this transfer if adequate documentation can be provided.)  In some jurisdictions, however, the financial institution simply retains the funds and uses them as part of their reserves, while still honoring the obligation to repatriate the funds (perhaps with interest) if a qualified owner eventually turns up.

Whether the shift of “orphan” copyrights to the state or a creative party and, in either case, what obligations should exist if the owner does appear after some period of time, is an interesting question.  The Google “answer” seems both equitable and fair.