How to Deal with Google

By , 17 April, 2009, 5 Comments

When I posted my concerns about the market power of Google a few weeks ago, I got the following arguments in response:

–what Google offers the ordinary computer user is the opposite of a monopolized experience: free innovate products. Let’s call this argument “Google is not evil.”
–what Google offers the buyers of ad space and data is also the opposite of a monopolized experience: innovative services that cost less than their competitors. Let’s call this argument “Google is not greedy.”
–Google has achieved its dominance of search-based advertising and data-aggregation on the merits of its algorithms. Let’s call this argument “Google is not cheating”
–Google plays in many fields but doesn’t own any of them, since there’s still all that TV, radio and yes, print advertising still out there that Google hasn’t yet taken over. Let’s call this argument “Google is not that big.”

As I learned in class this week, these arguments have different underlying legal assumptions. One school argues that antitrust statutes prevent companies from using overwhelming power to explicitly nefarious ends, like buying policymakers’ support on regulatory issues. The other school assumes that the law prevents companies from acquiring overwhelming power: even if the monopolist is a “good guy,” a market without competition is a “bad thing” in and of itself.

Arguments that “Google is not evil” or “Google is not cheating” reflect the first, political, motivation. Arguments that “Google is not greedy” or “Google is not that big” reflect the second, economic, interpretation. I will concede that under the political definition, Google has done no wrong. But I would argue that under the economic definition, Google might have.

Firstly, Google is greedy, but not yet in the obvious monopolist way of artificially raising prices on clients [advertisers] who have nowhere else to go: Google ads are cheap, and there are still other places to advertise. Instead, Google dramatically LOWERS prices. Since other websites have to cover the costs of producing their own content, a burden Google doesn’t have, –whether news outlets or entertainment sites like Hulu–they cannot price comparatively. This means advertisers have a good reason (above and beyond the better quality of Google’s search-based formula), to put all their dollars in the Google basket, and eventually they DON’T have anyplace else to go because the competition goes out of business. This is called predatory pricing, and its a problem. In Europe, you get fined for it. In the U.S. it is only illegal if you can prove that the prices are below what the product or service costs to produce.

This brings us to the fourth claim, that “Google is not that big.” Google will argue that Hulu and the New York Times are not its competition, because it is not a content site, and on the other side, that Ogilvy & Mather is not its competitor because it is not an ad agency. They will define advertising, entertainment and news as separate markets, then they will argue that advertising includes both online and offline platforms. Framed that way, Google doesn’t have pricing power over anything.

But Google controls prices in the emerging market of digital information. While THEY do not produce any content, the ads they charge for run against search-results carrying content from other places, and the prices Google charges advertisers are far below the costs of producing the content that the advertising runs against. That’s why the pricing is predatory: over time, it erodes the ability of the content-producers to do their jobs. Because, online, Google functions as a middleman between advertisers and content-producers [unlike in the newspaper or TV-entertainment business], the advertisers are no longer paying for the content when they buy ads on Google, the way they do when they buy ads on Hulu.com. That allows Google to argue on a theoretical level that they aren’t competing with content sites, but in practice, they are. This is difficult to pin down in an antitrust case, but I maintain it’s worth an inquiry, and I’m hoping Team 44 tries.

In the meantime, I have another idea, a way to exploit the structure the clever folk at Google have set up to argue that they don’t really compete with anyone and therefore (circular argument much?) can’t be reducing competition with anyone:

Accepting Eric Schmidt’s eloquent offer to partner with content sites, especially news sites, to support their activities on the basis of ad revenue, the news industry should stop suing Google to get flat payments for the use of its content, and instead, ask for a percentage fee of Google’s ad revenue based on the percentage/frequency of news sites in Google’s search results. We should ASK Google to run ads on GoogleNews too, something they don’t do now because we initially asked to have it that way. Over time, this would require Google to raise rates, a bit, on its clients, who would still have no place else to go [because the rates would never be as high as taking a page in the local paper], and the higher rates would gradually allow web advertising prices to be sufficient to support the costs of web content-production [which is also a lot less than writing a page in the local paper]. Why would Google agree? Because they ultimately need good content people want to access to sell ads against. If enough reputable organizations make this play together, then Google might play ball.

BusinessWeek’s Steve Adler suggested something like this when visiting Columbia last month, but I haven’t heard anyone else plug the idea, so I’m trying to advance it. Thoughts?

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5 Responses {+}
  • shazia

    most important point re: google, even your mom can use it and not get confused. nb congrats on passing 5000 hits

  • Michael Morgenstern

    OH MY GOD!

    Google is a MIDDLEMAN.

    I just got it.

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