Google: A 'natural monopoly'?

NEW YORK (Fortune) -- For the second week in a row, reports have surfaced that government regulators are closely eyeing Google.

The Justice Department is taking a closer look at Google's settlement with authors and publishers over how material will be accounted for on Google's book search service. And the Federal Trade Commission is wondering whether the boards of Google (GOOG, Fortune 500) and Apple (AAPL, Fortune 500) are a bit too close.

It was bound to happen: Google couldn't get this dominant - with 76% of the search market - without attracting some attention in DC. The question is whether the company has played by the rules in gaining its status.

The last thing the "do no evil" company wants is a rehash of Microsoft's situation in the 1990s.

Google has a number of explanations for why it plays fair, which it's been sharing in a presentation called "Google, Competition and Openness."

For one, the company likes to say its competition is "just one click away." In other words, there's nothing really preventing users from switching to another search engine - aside from sheer habit - if they want to find better results.

As proof, Google points to an incident from January 31 when a Google coding error affected all of its search results and users shifted search engines immediately; Yahoo (YHOO, Fortune 500) queries apparently doubled over the usual figures.

As for the charge that the Google can produce the best search algorithm because it has more data on what users want than anyone else, the company says its search improvements are based only on 1% of searches.

Another difference between Google and Microsoft (MSFT, Fortune 500) of yore: Google tries to keep its software formats open, so users aren't tied to their programs. So it's possible to export Google Docs into Word, PDF, OpenOffice and others. Again the idea is that Google doesn't lock anyone in; if a user wants a better piece of software, the open formats makes it easy to change.

(This is a topic the European Union has tirelessly hammered away at Microsoft for, saying the company tries to limit consumer choice by steering them towards formats exclusive to Microsoft products. Microsoft, however, responds that its applications are interoperable with a large range of document formats. For instance Office supports about a dozen formats, including non-Microsoft formats like PDF, ODF and HTML.)

The advocacy group, Consumer Watchdog, released a marked-up version of Google's presentation that raises questions about Google's openness claims, saying the company is not transparent about its ad auction system, quality score, Page Rank and use of private user data.

Regulators are so far just nibbling around the corners. When they seemed really ready for a fight last year over Google's proposed search ad partnership with Yahoo, Google backed down from the deal, proclaiming it wasn't worth the trouble.

As James Stewart wrote in The Wall Street Journal this week: "Google's continued gains in market share bear out my contention that Google is that rare breed: the natural monopoly. By natural, I also mean lawful, since the monopoly derives from Google's skill and qualities inherent in the business, not from anticompetitive behavior."

Adds Stewart: "I sometimes get the sense that antitrust regulators, in their single-minded zeal to promote competition, ignore the fact that monopolies, in and of themselves, aren't illegal, or even necessarily bad."

So go ahead. Call Google a monopoly. But the government hasn't turned up anything untoward yet. And whatever Google's doing, it's making it very hard - for now - for anyone to unseat it from its throne.