Friday, July 7, 2006 - The Progress & Freedom Foundation Blog

eBay-Google Battle Over Online Payments

I find this eBay versus Google battle over payment services quite interesting. In case you missed it, eBay stuck it to Google this week by notifying the world that it would not allow Google's new "Google Checkout" payment service to be used to clear transactions on eBay. A lot of people are up in arms about this claiming that eBay has excessive market power and that antitrust actions need to be considered (or at least threatened).

But I think there's a different way of looking at this scuffle.

First, it will be really interesting to see now what eBay does if people still take steps to work around the system and clear transactions outside of their walled garden. For example, there is nothing stopping me from just mailing a check (or even cash) to someone after I complete a deal with them on eBay. In fact, I do this all the time today. And other ways exist to clear transactions outside of eBay. I've used many different methods of settling payment for the 4 cars I've moved on eBay over the past 5 years.

So, what happens if I just cut-and-paste my eBay transaction number into a Google Checkout system that allows me to automatically zap my payment to the vendor without going through eBay / PayPal ? How are they going to stop that? Of course, eBay knows that only a very small percentage of people will go through the hassle to do things that way. Thus, if they can restrict the automated incorporation of Google Checkout into the eBay walled garden, their job is probably done and Google will not be able to get a piece of that pie. At least not in the short-term.

But how will Google, and others, respond to this setback? eBay's seeming discriminatory behavior in this instance could have quite pro-competitive long-run effects: If eBay continues to play ball this way, at some point Google might start partnering with a lot of independent sites (like Craig's List) to create a legitimate mega-competitor to eBay. eBay could have made a foolish move here because they might just have awoken the one giant that really could mount a serious run at their core business. Google has a lot of money in the bank, after all!

Anyway, we'll see how this plays out over time. But I do hope that lawmakers allow this marketplace experimentation to play itself out and not impose draconian antitrust solutions.

Some critics are also pointing out that eBay is being somewhat hypocritical in this case by violating some of the "digital non-discrimination" (or "Net neutrality") principles that endorse for broadband companies. But just as I oppose Net neutrality mandates for broadband networks, I would oppose them in this case too, regardless of how much market power eBay possesses. eBay obviously wants to take steps to protect their significant investment in PayPal, which is why they want to block Google Checkout from becoming an automated transaction clearing mechanism within their walled garden. If lawmakers applied "digital anti-discrimination mandates" in this case, it would be tantamount to a declaration that eBay is an "essential facility" of e-commerce that everyone (including giants like Google) must have access to on "just and reasonable" terms.

Such a move would be a disaster because it would invite the government to play a far greater role in the online world as a regulator of rates and terms of service. Anyone who has spent a minute studying the disastrous history of telecommunications economic regulation can tell you why this would be an anti-consumer, anti-innovation fiasco. Worse yet, it might discourage the sort of serious, facilities-based innovation and competition I mentioned above. Again, their might be a serious consumer backlash to eBay's move in this case. And if eBay continues to play hardball with big dogs like Google, it could come back to haunt them in the end if Google cuts deals with others to create a serious competitive threat to eBay's business model.

posted by Adam Thierer @ 11:38 AM | Antitrust & Competition Policy , E-commerce , Innovation , Internet , Net Neutrality