In GOOG We Antitrust

I’ve recently been introduced to Waze, a mapping application for iPhone and Android developed by an Israeli tech startup. It’s a pretty great app, one that leaped several plateaus as a result of the opportunity created by the Apple Maps fiasco that decoupled Google Maps from Apple. Waze was the option adopted by many iOS users post-Google. Perhaps most surprising, even after Google Maps was re-released for iOS, many users stayed with Waze, preferring it to even the new-and-improved Google Maps. Waze has basically done what every tech startup hopes to do. They’re competing with the big boys and have hopes of maybe, just maybe, dethrone the king of the hill.

Waze’s success as a mapping utility lies in the fact that it has cultivated a community that is willing to contribute to the content of the application: they report traffic incidents, mapping inaccuracies, and their own location for added social benefits. And when it comes to tech companies, any actively engaged and devoted community is worth major money.

So, does it come as any surprise that the likes of Apple, Facebook, and even Google have expressed interest in acquiring Waze before it can grow up to be a fully-fledged competitor? Has that set off any bells for anyone remotely aware that this country used to have a policy of vigorous antitrust enforcement? Does it not seem intuitively problematic that the largest player in the maps business might buy one of the few proven potential competitors? Isn’t this what antitrust law is for? What possible pro-competitive rationale could Google advance for simply buying a direct competitor and consolidating the top market share?

Of course, intuition and the law overlap far less often than one would hope. Through the George W. Bush years, the Administration didn’t file a single antitrust case against a dominant firm for violations of antitrust law. And 2001-2009 wasn’t exactly a lull in mergers and acquisitions. Acquisition became a common exit strategy for tech startups. The model was simple: make enough of a splash with your technology that it looks like the inevitable Next Big Thing, sell out to some deep-pocketed public firm, and walk away a happily cashed-out entrepreneur moving on to the next venture. E.g., AOL, MySpace, Skype, Instagram, and now Tumblr. With all of these companies growing themselves up with their eyes fixed on the exit-prize, the Bush Administration self-enforced a rule that made it harder to find anything problematic in a merger or acquisition, because “hey, that’s the beauty of capitalism.”

Certainly, Waze is complicit in this cycle; they’ve almost deliberately ignored the need to create a revenue model that would actually support it as a business. Instead, the plan all along has been to find some company with the deepest pockets that either wants the freshest, newest mapping application on the market or very specifically does not want a fresh, new mapping application on the market. For the founders of Waze, who have families and mortgages, how can you blame them for selling their company for a billion dollars?

That re-raises the incredulity of Google’s potential attempts to buy Waze: Google has no legitimate need for what Waze has developed (other than their user base, maybe). Google already has all the technology that Waze has to offer and more. Google is already installed on the vast majority of smartphones, and can track and correlate user data better than any firm on the market. Instead, the far more likely rationale for buying Waze would be to prevent some other competitor from offering a package that could compete with Google on some other level, e.g., smartphone, operating system, search platform, etc. In “platform analysis” terms, this is known as “vertical leveraging.”

In brief, you can think of just about anything as a platform in that content gets delivered to consumers through various pipes and competitors and any way a user interacts with the stream of content is a platform. So, a TV is a platform, an internet browser is a platform, a streaming video service is a platform, and a cell phone is a platform. Everything is really a platform. Now, whenever one or a few players dominate all possible choices at any stage of the process, they can create a bottleneck according to standard microeconomic behavior when there are few competitors in a market. Essentially, those players get a higher-than-efficient price or can otherwise constrain consumer choice to their own products (where they may get another subsidy to the company’s overall bottom line). For example, Comcast as a local cable internet monopoly may prefer to limit the users’ ability to stream Netflix at top speeds in order to make its own cable TV packages look relatively more attractive. By the same token, Comcast may hold out on licensing NBC shows to Netflix because Comcast wants people to think of Netflix as an incomplete substitute for what they’d get with Comcast TV. Thus, Comcast has effectively “vertically leveraged” its monopoly as the only high-speed internet service provider in town to subsidize its other businesses in a way that would never fly if those other markets were straight-up competitive.  That’s vertical leveraging.

So, to see a political-economic climate that encourages consolidation of firms and power as “the beauty of capitalism” is a near-sighted view of the picture (or maybe just depends on the eye of the beholder). From my own vantage point, I get slightly more concerned about the effects of monopolies and oligopolies on consumer welfare than I would be in a more competitive market. When firms are simply competing by buying each other out, consumers lose out by losing both the ability to control the terms and conditions of how they are able to consume and redistribute content as well as the competitive spirit that would have instigated innovation in a competitive market. And after all, isn’t beating out the next guy on the product or price level the whole presumptive motive for a firm to innovate when all they are induced by is a profit-maximizing motive? Isn’t this what led to too-big-to-fail banks when they consolidated so many assets with values contingent on them remaining stable that they can hold the economy at knife-point? And when a company like Google buys the services you like, those same monopolistic control you can’t negotiate with will just spread. Google doesn’t have any reason to respect its users anymore, if Google’s streamlined-to-the-point-of-illegality privacy policies are any indication.

So that’s why I’m willing to go out on a limb and guess (without knowing all of the specific details of possible software synergies or other benefits from vertical integration with a more major player in the space) that from a social standpoint, the public would probably be better served by Waze remaining an independent and competitive firm than by being bought out by Google or by Facebook (though less clearly bad in Facebook’s case, since Facebook might not already have all that Waze has to offer and more technologically speaking). Of course, Waze would have to find the profit model that it has been deliberately ignoring first, which might mean that Waze simply couldn’t exist if it weren’t able to simply sell out. To many, that new product might justify any social costs of giving a buyer like Google even more power and access to data. However, I think there is still the concern of the deceit that must have been perpetrated in getting people to use a product like Waze in the first place: the calculus (specifically) didn’t include the possibility that one’s Waze data would be integrated into the all-knowing Google profile. And if people did realize that, maybe they would have acted differently or preferred to pay for another application with another business model.

Even apart from Waze specifically, I think we all need to be interested in fostering a healthier marketplace for competing technology companies that encourages bucking the normal trend toward consolidation of both power and services. That consolidation leads to oligopolistic results, where the firms don’t make choices that benefit consumers so much as they create deadweight welfare loss by artificially constraining choice and the ability of competitors to offer different goods and services. Antitrust litigation and enforcement would go a long way to keeping markets healthy. See, e.g., the FTC’s intervention and prevention of AT&T’s acquisition of T-Mobile. It would just be nice if it wasn’t a once-in-a-decade thing. Then again, it would be even nicer if the space had some ethics or pride that came along with remaining a profitable and independent startup so that they could self-enforce the principles of antitrust.

Regardless, at present, Waze has reached a major fork in the road: to sell out or to stay independent and create its own path. And I’m guessing, to my own dismay, that they will follow their own product’s advice and follow the surefire paths blazed before them.