Google’s been running a gauntlet of regulators in Europe and the United States at least since 2007. It has managed legal challenges to any number of corporate practices ranging from the way it protects user privacy to how it chooses mergers partners to how it protects copyrights. And perhaps the FTC probe may prove to be just another minor bump on the road to riches.

But there are reasons to believe that it will prove to be a big distraction. The investigation will apparently focus on the search-advertising business, which is Google’s bread and butter. And the specific concern – that the company is using its pre-eminence in searches to direct consumers to Google-related enterprises – could be problematic because it potentially threatens Google’s ability to exploit economies of scope and scale.

This doesn’t necessarily mean, of course, that the rest of us should identify with Google’s worries. But the parallels with the global assault on Microsoft’s dominance in PC operating systems and Internet browsing, which in the end served hardly anybody’s interest, are troubling.

For starters, serial run-ins with regulators have a way of changing New Economy corporate cultures, and not for the better. An army of lawyers and consultants, who are paid not to think outside the box, gain influence over strategic planning. Why risk the wrath of government in the next acquisition, or the next challenge to other established enterprises? And along with the lawyers come the lobbyists, who in the process of speaking money to power further pollute American politics and policymaking.     

This might all be worth it (from the public’s perspective), if one could count on antitrust policy to put the interests of consumers first. But antitrust is built on models of slow-changing markets in which the name of the game is to prevent sellers from charging more than costs. By contrast, high technology in general and information technology in particular is all about charging more than costs – that is, earning amazing returns on amazing innovations. And market concentration says more about who’s king of the hill now than who has the power to stop others from becoming king of the hill tomorrow.

Microsoft, you may recall, was pilloried for its “impregnable” advantage in Internet browser software thanks to the dominance of its Windows operating system. But somebody forgot to tell hundreds of millions of PC users, who turned to Firefox, Safari and Chrome when Microsoft became complacent – or too distracted by regulation to defend its turf with improved versions of Internet Explorer. Today, IE is down to 55 percent of the market – and its share is still falling in spite positive reviews for the latest version.

Ah, but Google really does have a hammerlock on web searching, you say.  Look again. In the past year, Google has lost 10 percentage points of the market, ironically, almost all of it to Microsoft’s Bing. Moreover, the mojo that made Google seem invincible seems to be wearing off. Yes, the Android operating system has made a giant splash in mobile devices, but not at the expense of Apple’s iPhone. Yes, Google’s efforts to move computing and information storage to The Cloud may yet pay off. But any number of competitors in the cloud, including Amazon, Netflix and Apple, are doing just fine.

Antitrust isn’t an idea whose time has come and gone. But it has entered a phase in which the old ways apply awkwardly, at best, to new industries. And the consequences of missteps – especially for economies like ours, whose only shield against senescence is innovation – are growing. Does it make sense to take Google down a peg? We’ll probably only find out when it no longer matters.

For all the hoopla, the cloud is a work in progress, with different companies offering variations in what they store, and how easy it is to access and share content. Cloud storage has been around for a while, in the form of online backup services like Carbonite and Dropbox. What’s new – and what’s changing the game – is the entry of major integrated IT/entertainment vendors including Microsoft, Google, Amazon, Facebook and now Apple.

So, what’s not to like? Once again, money is the root of all evil.

We kid, of course: Somebody has to cover the costs of all those petabytes of secure storage capacity in servers around the globe – not to mention all the computer power to manage the data efficiently. But the way the providers plan/hope to make money will certainly affect what economists think should matter most: the value to consumers.

All the new high-profile cloud storage services want to sell you something – or perhaps many things. Google is selling storage capacity beyond a free taste; Amazon offers a lot of free space, provided you buy some music; Microsoft is selling business software and entertainment hardware (Xboxes) to complement its storage.

Which brings us to the subject of Apple and the concept of the “walled garden”—the technology-driven barriers to moving off the platform. Apple wants you to play and work in its cloud using only hardware sold by Apple and (in a concession to commercial reality) PCs as long as they have Apple’s iTunes on board to sell entertainment. Oh, and did we mention, that Apple will allow only apps approved by Apple?

Walled gardens can have several advantages. They can improve user security and lower the costs of getting information, and they encourage firms to innovate by allowing them to keep more of the profits from innovation. Note, however, that walled gardens have downsides. In particular, they can affect the ease with which other companies can entice people – and, in the case of the cloud, people’s data — to move outside of the garden.

It’s tempting to give government a role in deciding what’s kosher within the garden and what’s not. We think the burden of proof should certainly be on those who want to regulate them. But there are gray areas – for example, when the garden owner attempts to foreclose options for competitors. Think of Apple not permitting apps on the iPhone that compete with Apple services, or a cable company barring access to specific VoIP services on the Internet. The test, in the end, ought to be whether the consumer benefits of a walled garden exceed the consumer costs.  

If, for example, an Internet Service Provider keeps suspect web sites off the platform to enhance security or the general user experience, this may not be a bad thing. The same is true of applications on the iPhone. In this case, competition from other phone providers should keep the company honest.

Should we stop worrying and learn to love yet another neat (and ultimately, expensive) innovation from Apple? Yes, as long technological change and ferocious competition offer alternatives to Steve Jobs’ sometimes-smothering embrace.

(This post was also published on Forbes.com)

That hypothetical may not be so far-fetched. The US, Israel and Britain reportedly designed the Stuxnet virus, which scrambled the computers at Iran’s uranium enrichment complex. Russia temporarily brought down critical Websites during its brief war with Georgia in 2008. And the Russians may have aided and abetted hackers who breached the firewalls on some top-secret Pentagon computers.

Fastforward to today. According to Google, hackers from Jinan, China targeted the Gmail accounts of “senior U.S. government officials, Chinese political activists, officials in several Asian countries (predominantly South Korea), military personnel and journalists.” Google does not mention whether the Chinese government was behind this, but notes that the goal apparently was “to monitor the contents of these users’ emails” – not standard operating procedure for hackers with mayhem or fraud in mind.

Google has a history of being on the wrong end of the sort of cyber aggression that has “government” written all over it. In December 2009, the company “detected a highly sophisticated and targeted attack on our corporate infrastructure originating from China that resulted in the theft of intellectual property from Google.” That assault targeted Chinese human rights activists and their supporters outside of China. It prompted a call from David Drummond, Google’s chief legal officer, for “a new approach to China.”

Alas, more than a new approach to threats from one country is needed. Cybersecurity concerns, public and private, will likely get worse before they get better. And the slew of successful attacks (mostly in the service of old-fashioned theft) in the recent past suggests how vulnerable our IT-dependent economy is to marauders.

This is disheartening for a variety of reasons. First, the economic and technological barriers to engaging in cyber attacks are so low that any number can play. It takes billions of dollars worth of infrastructure to even begin to think about making highly enriched uranium for a nuclear weapon. But there’s good reason to believe that a few well-trained engineers armed with laptops and an Internet connection could do massive damage to the global economy.

By the same token, the source of a nuclear weapon can be traced relatively easily from the radioactive signature of the fissile material. But sophisticated hackers have a good shot at completing attacks without leaving fingerprints. And if you don’t know who did it, the threat of retaliation isn’t much of a deterrent.

But arguably the most troubling consequence of living with cyberthreats is the potential cost of deterring them. Consider the parallel of the war on terror: the response to September 11 has cost untold billions in everything from the cost of more police to more time wasted in security lines at airports, office buildings and sport stadiums. The first time a cyberattack blacks out Chicago or Los Angeles, utilities across the country will spend billions hardening their infrastructure.

There’s a familiar irony here. One of the reasons that the decentralized market economies of open societies are so productive is that they minimize costly restrictions on everyday life. But that very openness lowers the barriers to threats such as cyber warfare. The best we can hope for is that the flexibility inherent in free markets will also make them more nimble in responding to the challenge.

Clever, but a tad shaky. Google operates in a “two-sided” market in which both advertisers and users of Google services are needed to make money. Without eyeballs on Google pages, the space is worthless to advertisers. But without advertising, Google couldn’t afford to give away services ranging from Google search to gmail to Google Docs.  

Google, moreover, is in no position to take its rank-and-file users for granted. While the Don’t-Be-Evil company still garners the majority of Internet searches, Microsoft’s Bing (and its ally, Yahoo!) have picked up about 30 percent of all search traffic in the United States. And there’s no reason to believe Google’s dominance would survive a serious decline in consumer goodwill, since the quality of the Bing search engine is plenty good enough – and sometimes better — than Brand G.

So, while it’s true Apple’s special place in supercool-gadget-loving hearts gives it very good reasons not to alienate the public, Google’s behaviour is also constrained by the market. We’re not claiming that either company’s incentives to balance gross commerce against high minded principle are perfectly disciplined by Adam Smith’s invisible hand. But neither are the incentives of those who would regulate them. For now, anyway, we think it makes the most sense to insist that all Internet companies make their privacy policies very clear, and let consumers decide what they think of them.

Start at the back end. President Obama hosted a town hall meeting on Facebook today because there is probably no more effective way to attract (positive) attention from under-forty-somethings. No suprises there. What may give you a slight jolt is how little attention Facebook has been paying to the nice folks who make and enforce the laws about privacy and competition on the Internet.

Facebook, it seems, has come very late to the lobbying party, spending just $351,000 last year on the arts of political persuasion – one-fifteenth as much as Google. Indeed, they seem to have been following the path once trod by Microsoft, which largely ignored the machinations of politicians in distant capitals.

But we all know what happened to Microsoft, which went from market Goliath in just about everything techie before the antitrust prosecutions in Washington and Brussels to Google wannabe thereafter. And Facebook has apparently learned from recent history: Along with beefing up its DC operations, it is hiring a gaggle of Washington insiders to woo the powerful.

It would be nice to believe that Facebook could get along fine by pleasing consumers and just minding its legal P’s and Q’s. But that’s not how it works in Washington anymore. Maybe it never really did – GE, after all, managed to get FDR to bless the cartelization of all of American big business during the Depression. (Don’t believe us? Just Google/Bing the National Recovery Administration.) But our own sense is that money talks on a scale never before seen in the nation’s capital.

Call us old-fashioned. It seems a pity, though, that the returns to investments in the political market are often higher than the returns to making better stuff and selling it for less.

(This post was also published on Forbes.com.)

On the plus side, the acquisition will advance Google’s plans to become a major presence in the online travel market, a move that’s bound to add competition in the already fiercely contested online travel services market. On the minus side, it might allow Google to gain unfair advantages in the market by tapping other firms’ proprietary data, or by tweaking its search engine to favor its preferred travel sites.

Hence, the DOJ’s ambivalence – and added strings. To get Justice to sign off on the deal, Google accepted the department’s requirement “to develop and license travel software, to establish internal firewall procedures and to continue software research and development.” These restrictions will allow other online travel companies access to technology that gives them a solid shot at competing with Google’s travel progeny.

So far, apparently so good, unless the department also decides to become a third wheel by micromanaging negotiations over license fees. But one additional restriction is potentially quite troubling. The settlement creates a “formal reporting mechanism for complainants if Google acts in an unfair manner.” While this may appear innocuous, it amounts to an incentive for competitors to game the system, to battle Google in regulators’ offices rather than in the marketplace.

This special invitation to whine might be justified if antitrust regulators were otherwise inclined to brush aside allegations of unfair behavior by the information technology goliaths. But there’s every reason to believe that the little guys have no particular problem in gaining the attention of competition authorities in Washington or Brussels. Indeed, the Davids of the IT world may have more friends in government than makes sense: Some individual state attorneys general, who probably should not be in the antitrust business, appear to be chomping at the bit for a chance to make a high-profile case against an iconic Internet giant like Google. The close monitoring provision thus amounts to an invitation to compete the new-fashioned way, using regulation as a means to raise Google’s costs of doing business.

There’s always a delicate balance between facilitating competition and curbing competitive abuses, especially in industries in which innovation is the key to success. We’re worried that the trustbusters have crashed a party where they don’t belong. And that consumers will pay the price.

(This post was also published on Forbes.com.)

Google’s Android – the newcomer in the Darwinian market for mobile operating systems just two years ago – has leapt past both RIM’s Blackberry OS and Apple’s iPhone OS to take the lead as the most-used platform for smartphones in the United States.

That’s a stunning commentary on the ferocity of competition in the wireless space; it also offers a cautionary tale about the risks of regulating in the hopes of leveling the proverbial playing field in markets for digital technology. As Bob Hahn and Hal Singer put it in Why the iPhone Won’t Last Forever: “New technologies often seemingly emerge from nowhere, but also frequently lose their luster quickly.”

This, alas, is a lesson easily forgotten. Washington is now abuzz with proposals for regulatory interventions designed to give some companies a leg up in various niches of the wireless market at the expense of rivals. No doubt, the FCC’s upcoming report on competition in wireless will provide fodder for such pleadings, even though the ascent of Android (and similar tales from the annals of Silicon Valley) ought to remind us that today’s 90-pound-weaklings may be kicking sand in the faces of digital bullies in the time it takes to download the Godfather trilogy from Amazon. And that churn is typically traceable to the ingenuity and nimbleness of upstarts in an open marketplace — not the inclination of regulators to call balls and strikes.

The most benign explanation for the regulatory amnesia is that big innovations can radically change the business pecking order, inevitably undermining somebody’s idea of equity and fostering new demands to put things right (or at least back where they were).

Some wireless companies are already seeking rules that would allow them to avoid big capital outlays to build networks in rural areas, while others want regulators to deny their competitors access to more spectrum for expanding broadband capacity.  The FCC’s next wireless competition report may hint at whether and how the Commission wants to play ump.  If you ask us (please…), this would be a good time for the FCC to show some humility as the current pro-competition, pro-investment, pro-innovation trend plays out.

Some four decades ago, Nobel economist George Akerlof argued that markets didn’t get it right when sellers knew a lot more than their potential customers. In the used car market, for example, buyers can’t readily distinguish lemons from non-lemons without investing in the services of an independent mechanic. So they are forced to assume the worst. Bad cars, in effect, drive the good ones from the market, leaving both buyers and sellers worse off.

To many economists, this problem of “asymmetric” information constituted a solid justification for regulating car sales. State legislators agreed, passing a spate of laws that guaranteed buyers the right to return lemons. But this consumer protection was hardly free: it added to the cost of transactions in the used car market.

What nobody noticed at the time, though, was that one man’s market failure was another’s market opportunity. CarMax pioneered the used-car guarantee, which finessed the information problem. And many other used car dealers followed suit.

These dealers have a strong incentive to discover faults and repair them before they put them up for sale. Of course, guaranteed cars sell for higher prices. But that’s just the point: the market found a way to separate the good cars from the bad ones.

Why are we telling you this? Because, given a little time, markets have a way of fixing themselves in more situations than you might imagine.

Consider the latest example. Everybody (well, lots of people, anyway) worries that companies are misusing sensitive customer information collected on the Internet. And in response, at least two states (Nevada and Minnesota) have passed laws that specify what can and can’t be done with such data.

But this is a subtler issue than it first appears. In some cases, buyers as well as sellers benefit from the information collection. If, for example, you search online for compact hybrid cars, Google can use the info to offer you a deal on a Prius and spare you any advertising for Escalades. Some people really, really don’t want to reveal what brand of vodka they prefer, or whether they vacation at the beach; others are indifferent.

Should government get in the middle? Not if markets can do it better. And that, apparently, is what’s happening. To induce you to use the latest versions of their web browsers, both Microsoft and Mozilla (the open-source software parent of Firefox) are including “do-not-track” options that will make it far harder to glean information from surfing behavior.

Wait, it gets better: the market is creating ways for those who don’t much care about privacy to make a buck by revealing all. And at least two companies, Personal and Allow are going into the business of acting as agents for individuals, selling their personal information (whether they use electric razor or blades, whether they’re planning beach vacation in the next six months, etc.) to advertisers for a commission.

We don’t have a clue where this privacy-for-profit stuff is heading. What we do know is that the market seems to be well on its way to solving a problem that would otherwise be an obvious candidate for a regulatory solution.

Don’t get us wrong: Sometimes the best fix for what ails is, indeed, government intervention. But it’s always worth asking whether markets can be mobilized to achieve the same end without help from big brother.

(This post was also published on Forbes.com.)

We wouldn’t know how to call balls and strikes here. Google probably does have market power in online searching and thus any discrimination against competitors would be problematic. But there are issues of motive in dispute: Google argues that it must continually adjust its search algorithms to prevent others from using dirty tricks to manipulate their placement on the rankings pages.

Moreover, even if Google proves to be the one wearing the black hat in this drama, it’s unclear whether government intervention is merited. Market power in the 24/7 world of information technology has generally proved to be fleeting. And, as US v. Microsoft illustrated, remedies against anti-competitive behaviour all too often come long after the king of the hill has been put on the defensive.

But that’s not what is bugging us. It’s the fact that EU probe isn’t stopping the attorney-general of the State of Texas from opening his own parallel investigation of discrimination by Google.

Google, of course, operates in a global market. And, in the absence of international coordination of antitrust policies, the company’s behavior ought to be fair game for national competition authorities. But does it really make sense to allow attorneys-general in Austin or Des Moines or Helena to pile on?

The hitch here, apart from the potential waste of resources in multiple investigations, is that the incentives of the state AGs are not well aligned with the broader public interest. Many of them use their offices as stepping stones to higher ones – think Eliot Spitzer and Richard Blumenthal – and are thus inclined to go after high-profile antitrust investigations even when the feds are on top of the issue. In the Microsoft case, grandstanding by state AGs in pursuit of headlines back home complicated its settlement by the Justice Department. (Disclosure: both of us have consulted for Microsoft.)

Moreover, there’s a problem here even when the state AGs have nothing in mind but the well-being of their constituents. State A may be happy to ignore the costs of an action borne by the citizens of state B (perhaps the state where the company at risk has a factory). Indeed, an AG may feel obliged to put his state’s interest ahead of the national interest.

We don’t deny there are times the state AGs’ authority to poke around in national (or global) matters does more good than harm. Eliot Spitzer, after all, played a very positive role in policing Wall Street in an era in which the SEC had neither the resources nor the inclination to do the job properly. But we think it does make sense to draw some rough-and-ready jurisdictional lines, creating the presumption that national regulators should take the lead in markets that are truly national (or international). In regional markets (funeral parlors, for example) the presumption should fall the other way.

Let’s let Brussels or Washington figure out if Google has done wrong. We’re pretty sure that the Texas AG has better fish to fry close to home.

Way back in 2007–an eon in the telecom industry–Google lobbied quite effectively for federal communications regulators to auction off a swath of the airwaves (“spectrum” to us nerds) with an “open access” mandate. This requirement allowed third parties with wireless apps for smartphones and other wireless gadgets to piggyback on the spectrum owner’s wireless network at no charge. Google, by the way, was potentially a prime beneficiary–think, among other apps, Google Maps. But openness comes at a cost to the public, reducing the incentives of spectrum purchasers to use it in ways that maximize societal value because they would be obliged to share the benefits.

This, incidentally, wasn’t our idea. The point was made a half century ago by the Nobel Laureate Ronald Coase in a seminal article on why spectrum should be auctioned to the highest bidder without restrictions on the property rights. So one must weigh the value of openness against the risk that open spectrum will not be dedicated to its best use: no easy task.

Which brings us to Google’s latest foray into the openness arena. Speaking at a Google-sponsored conference on Sept. 15, Eric Schmidt (Google’s CEO) outlined the company’s plan to expand its reach into social networking–a piece of the telecom market now dominated by Facebook. And how, you might ask, does he plan to get from here to there in a hurry? By demanding that Facebook allow users to transfer information amassed on their Facebook pages–friends’ lists, bios, photos, etc.–directly to Google. (Of course, Facebook users can now post any information they wish on Google sites, but the process is manual and thus less likely to happen.)

We’re a little uneasy about Facebook’s tight grip on social networking. But it’s common to have winner-take-all outcomes in the information technology space, market dominance that almost inevitably gives way to another company with another good idea. And we can’t think of a good reason why Facebook should hand over the keys to the kingdom at no cost. If Google wants data, it can always pay. Presumably there is some price that would make the deal worthwhile to Facebook shareholders.

Here’s our advice to Facebook: Offer to trade all that data Google covets for something equally valuable–maybe the formula for Google’s search engine or the technology for its ad platform. Perhaps Google and Facebook would both end up winners. Whether they did or not, we know that consumers would benefit from more competition on the home turfs of these Internet behemoths.

So let the openness show begin–but with a healthy respect for the sanctity of intellectual property rights that make both Google and Facebook so successful.

(This post was also published on Forbes.com.)