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Obama's Coming War with Silicon Valley

Steven Titch
September 11, 2009, 2:52pm

Clint Boulton at eWeek.com has compiled a slide show looking at 10 Google services that failed. The look back is important for a couple of reasons. First, on a granular level, it is a reminder that the Google, whatever its perception among government regulators, has not come close to dominating every segment it has entered.

The controversial idea of pre-emptive anticompetitiveness: that a single strong company poses a monopoly threat because by entering a related business segment, even if it possesses nothing to leverage, it scares off all other would-be entrants, has driven European antitrust thinking for several years. Unfortunately, it has found an adherent in Christine Varney, Obama’s chief antitrust enforcer at the Department of Justice. Varney has made no secret of her desire to pursue and curtail Google. Her basic reasoning is that its search engine business is so strong, it can’t help but unfairly tilt business in its direction wherever else it may choose to go. 

If so, why, as eWeek shows, did Google fail to gain traction in so many areas, including radio and print advertising? This is significant because Varney has been particularly concerned as to whether Google illegally monopolizes the ad market. But that case only can be made credibly (and not definitively) if you isolate Google's ad market metrics solely to the Web. Google has garnered a 30 percent share of Web advertising, but this still amounts to less than 3 percent of total ad dollars spent across all media.

Second, on a broader level, Google’s approach to business demonstrates why it’s dangerous to introduce government regulation into the IT sector, something the Obama administration has signaled its willingness to do through the appointments of Varney and its tacit approval to allow FCC Chairman Julius Genachowski to investigate the handset distribution agreements forged by Apple, Palm and BlackBerry maker Research In Motion, companies and businesses that never before have come under FCC jurisdiction.

Google typifies the intense trial-and-error approach the high-tech industry takes to its ventures. Try this. If it doesn’t work, try that. It’s been par for the course at companies like Apple, Microsoft and Cisco Systems for years. Google, however, may have mastered it, especially in terms of aggressiveness and speed of decisionmaking. If something works, run with it. If it doesn’t, kill it quickly.

Yet it’s antithetical to current policy thinking. If the same central management model Obama is applying to the banks and car companies is attempted in high-tech, innovation is dead. Nothing would be allowed to happen until every agency is allowed to judge every angle and likely outcome. At the policy level, that means questioning every private sector initiative or venture as to its potential affect on competition, pricing, market share and disruptiveness. Remember, Obama himself has spoken of his desire to temper excessive risk and boom-and-bust cycles. He has even begun pushing for sweeping regulation of venture capital funds, confusing entrepreneurial risk with systemic risk. Since VC is the lifeblood of the high-tech sector, these regulations, if enacted, would have a sclerotic effect on cash flow to start-ups. Yet it’s another example of the undeniable way Obama prefers stability over dynamism.

As far as IT goes, he might be wrestling with a tiger. Excessive risk and boom-and-bust are amplified in high-tech, which is the reason it has been one of the most innovative sectors for the past 30 years, although not always the safest for investors. And if anything’s been borne out in high-tech, it’s that you can’t predict winners or losers, let alone engineer them. Varney, without any sense of irony, belied this when she told the American Antitrust Institute, as Wired reported in August, that the Microsoft antitrust case fizzled because the government waited too long to bring it. In other words, she admitted that market realities made Microsoft’s monopoly ephemeral. It was not a long-term threat. Microsoft could not, as Justice claimed, leverage its Windows operating systems to the point it would squash competition, illegally or not. Sadly, the only lesson Varney came away with is to speed the Google prosecution before market circumstances inevitably undermine her (already weak) case.

Still, the Obama administration and Google (and by extension all of Silicon Valley) appear to be on a collision course. Despite their mutual admiration during last year’s campaign, their underlying philosophies are exactly opposite. America’s high-tech industry is the country’s best example of a functional free market. Innovation and disruption is valued and barriers to entry are low. It is filled with entrepreneurs who thrive on high-risk and high-reward. But it’s this culture of free-wheeling capitalism that’s in the White House crosshairs. Ultimately something’s going to give.



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