The US Federal Trade Commission is reportedly reviewing Google’s recent $1 billion acquisition of social-mapping company Waze. It’s not clear if the FTC is looking at the loophole that Google exploited to avoid an anti-trust review before the purchase, or is actually investigating to see if there are anti-competitive practices at play.
Why did Google really buy Waze?
Benjamin Edelman, an attorney and Harvard business school professor who researches the architecture of internet markets, says the FTC will be looking for any evidence the company was purchased for anti-competitive reasons. While there may be a good case for the valuation, the high price paid for a company with such low revenue could suggest problems making the case that Google is “genuinely acquiring it to make their own map service a billion dollars better,” especially when Waze’s own founder conceded his company was Google’s main maps competition.
“People are going to write e-mails, don’t you think some of them are going to say, ‘we need make sure Apple and Facebook don’t get it, we need to pay the money?’” Edelman predicted. “Someone will have written that in email and it will kind of ring true.”
While regulators may prefer operating or competitive restrictions to breaking up the deal after the fact, if something goes wrong, expect Google to pay a significant break-up fee to Waze.
Will the deal affect future offshore acquisitions?
Google’s suggestion that the Israeli company it purchased for $1 billion, largely on the value of its intellectual property, doesn’t have $70.9 million assets in the US, is a fairly provocative statement. That argument operates, Edelman suggests, in a similar way to Apple’s approach to paying low taxes relies on the international mutability of intellectual property. Waze’s IP is presumably located in Israel and only used in the US day-by-day to avoid being considered an asset here. But that argument raises the question of what would limit the application of such a standard in the future, were companies to transfer ownership of intellectual property and other assets offshore in an attempt to circumvent anti-trust review.
Will the deal hurt Google’s efforts to escape broader anti-trust scrutiny?
The FTC handed Google a victory last year after concluding it did not use its dominance in search to go after rivals; the company is still trying to persuade European regulators to draw a similar conclusion. However, this acquisition may set back those efforts by establishing a pattern of anti-competitive growth. Seven years ago, Google was a major search engine, but by dint of acquisitions, it has also gained market-shaping power in online video (YouTube), mobile operating systems (Android), cloud documents (Writely) and now maps (Waze). “Dominance grows and grows, from one sector that has a monopoly, to multiple sectors at risk of monopoly,” Edelman says.
One historical case he cites is AT&T, America’s telephone monopoly until 1982. As early as the nineteen fifties it seemed that the monopoly could be problematic, but regulators didn’t have a clear avenue to change the system, just as today many wonder if Google’s two-thirds share of the US search market is necessarily a bad thing or fixable. Regulators did, however, forbid AT&T from going into other lines of business, barring the company from making computers after a series of anti-trust actions in 1956, which provided opportunities for IBM and other early computer companies. Edelman suggests a similar policy might buy time to figure out what to do about Google, while fostering more competition.