“search neutrality” –Google’s newest challenge? the ITA acquisition

Everybody is by now familiar with the topic of net neutrality.  This is the question of whether the owners of high-speed transmission networks for internet traffic have the right to regulate the flow of data, assigning some information to what is in effect the slow lane while allowing other content to barrel ahead in express.

This issue still hasn’t been fully dealt with.  As I posted in April, the FCC ordered Comcast to stop interfering with traffic through BitTorrent, a peer-to-peer file-sharing service that the ISP claimed was using up too much bandwidth.  Comcast sued, on grounds that the FCC didn’t have the authority to issue it such an order–and won.

The FCC responded by moving to reclassify Comcast as a public utility, like phone companies ATT or Verizon, so that it would have the regulatory authority it needed.  This opens a whole political can of worms, however, so it’s still not clear where matters stand.

GOOG’s ITA purchase

The wheel of competition has recently taken a turn in a different, but related, direction with Google’s agreement to buy ITA Software, founded by MIT scientists and now held by private equity, for $700 million.  ITA makes the airline database search software that powers the air part of travel sites for online agencies like Kayak and Orbitz, as well as for the online sales sites of Continental Air.

GOOG’s isn’t the first purchase of this type.  Two years ago, MSFT paid $115 million for the smaller private company Farecast, which is at the heart of MSFT’s Bing Travel service.  But ITA is bigger and already services significant third-party customers.

unhappy campers

Not everyone is happy with this development–especially not Barry Diller, CEO of online travel agent (and former MSFT subsidiary) Expedia.  He’s worried that if/when it acquires ITA, GOOG will promote its own services over those of EXPE.

This assumes, of course, that GOOG will follow MSFT’s lead and create a travel site similar to Bing Travel.  That may well happen.  In paid search, a prospective GOOG Travel could outbid everyone else for keywords, since this would just be transferring revenue from one GOOG pocket (travel) to another (search).  It’s not so clear that would happen in any unfair manner in unpaid search.  The reputational, and legal, risk to GOOG is too high, I think, for that to occur.

EXPE isn’t out of the woods by any means, however–in my opinion.  It’s possible that the combination of GOOG and ITA professionals will produce new travel software that’s significantly better than anything on the market today.  Maybe ITA can do this alone, with GOOG financial support.

Suppose that instead of using ITA software itself  GOOG offers it for free to any travel site that is willing to allow GOOG advertising on it. This is basically what it did with cellphone operating system software.   That would give any takers a 10%-15% cost advantage over sites which either develop their own travel software or buy it from third parties.  It would also make it easier for new firms to enter the market.  Any way you look at is, GOOG offering ITA for free would  lower the value of any database technology that a company like EXPE holds.

That’s Mr. Diller’s real problem, I think.  If so, he can’t just say this–that there’s something wrong with a new market entrant turning up with better, lower-cost technology.  Search neutrality may be the best weapon he has to fight with.