Google the Destroyer

By James V. DeLong, special counsel and chairman of the Intellectual Property practice area in the Washington, D.C. office of Kamlet Reichert, LLP.  He also serves as vice president and senior analyst with the Convergence Law Institute LLC.

From its beginning, Google has been charged with grandiloquence for its corporate mission statement: "to organize the world's information and make it universally accessible and useful." More recently, the infosphere has gotten concerned that the grandiloquence is deserved, and is treating Google as a giant Pacman, with the only question being whose lunch (and breakfast and dinner) it is about to chomp.

In The Google Enigma, tech guru Nicholas Carr notes: "The many businesses that see Google as an actual or potential competitor include software houses, advertising agencies, telephone companies, newspapers, TV networks, book publishers, movie studios, credit card processors, and Internet firms of all stripes. Even financial advisors, doctors, and librarians eye the company warily." Since Carr wrote this, even fellow openness community member Wikipedia has been subject to Google ranging shots.

One can make a case that these reactions are overdone. Google is not really all that big a company; its annual revenue of $15 billion represents only 5% of total annual U.S. expenditures on advertising ($285B), and contrasts modestly with the revenues of other information industry companies, such as AT&T ($104B), and Microsoft ($54B), and Disney ($35B). Its eye-catching $700 stock price is largely a PR gimmick, achieved by limiting the number of shares, and of course by Mr. Stock Market's assessment of its scalability and potential to take over more of the ad biz.

To further buttress the skeptics' side, Google's corporate mission statement can be regarded as rather limited, actually. It makes no claim to produce information, relying on others for that function. The "make it . . . accessible" is also passive, implying that Google has done its job when the information resides in its data centers. Someone else must build an infrastructure linking users with those centers, and with each other, so as to make the information retrievable in fact as well as theory.

Furthermore, the search business is not really the organization business. The average Google search produces thousands of hits, mostly duplicative or irrelevant. If you know pretty much what you are looking for, it is great, but "organizing" is not the right concept. Google's basic nature is a giant business/personal phone list, corporate directory, index of publications, music, movies, and so on.

What it does is awesome, but it is awesome because of the scale of its searches, not because of their sophistication, which is pretty much primitive Boolean. The information system has four components - generation of content; creation of the infrastructure for distribution; search; and organization/filtering. Google performs only one of them.

Nonetheless, the concern about Google is justified, not because of potential to take over the whole information business, but because of its potential and incentives to destroy the ability of the providers of the other components of the info system to perform their functions of creation, distribution, and organization. These components were already under severe stress as the forces of digitization, interconnectedness, and P2P wrecked their familiar business models, and Google is both profiting from these forces, and thus happily encouraging them, and making it difficult to develop new business models.

Carr's Google Enigma made a familiar business strategy point: companies that provide one component of a system love to commoditize the other components, the complements to their own products, because that leaves more of the value of the total stack available for the commoditizer. Microsoft famously commoditized the PC and captured money for the software stack, and IBM is now avenging itself by using open source to turn software into a commodity and capture value for hardware and services.

Carr noted that Google is unusual because of the large number of products and services that can be complements to the search function, including basic production of content and its distribution, along with anything else that can be used to gather eyeballs for advertising. Google's incentives to reduce the costs of complements so as to harvest more eyeballs to view advertising are immense. Hence his list of concerned sectors.

This point is indeed true, and so is an additional point. In most circumstances, the commoditizer's goal is restrained by knowledge that enough money must be left in the system to support the creation of the complements. The point is amusingly made in Steve Ballmer's famous "Developers! Developers! Developers!" video.

Google is in a different position. Its major complements already exist, and it need not worry in the short term about continuing the flow. For content, we have decades of music and movies that can be digitized and then distributed, with advertising attached. A wealth of other works await digitizing - books, maps, visual arts, and so on. If these run out, Google and other Internet companies have hit on the concept of user-generated content and social networks, in which the users are sold to each other, with yet more advertising attached.

Much of the necessary distribution structure also predates Google. The Internet was built initially on the excess capacity of the telephone network, and, later, on the excess capacity of the dot com bankruptcies. A mobile phone network is in place, paid for by the voracious human appetite for interaction, and now available for add-ons.

So, on the whole, Google can continue to do well even if leaves providers of its complements gasping like fish on a beach.

To some extent, the problem has been recognized by all, including Google, and in fact the company is sharing ad revenues with the providers of complements, though the terms are not public, which leaves it unclear whether the partnerships are serious or cosmetic. Most accounts peg the returns to partners as small.

This highlights the fundamental issue. Several ways of financing the creation and distribution of content exist. Consumers can pay directly, either per ticket (a movie) or for a subscription (XM Radio). Ads can be sold, either combined with a payment (magazines) or stand-alone (broadcast TV). Or a distribution company can sell raw access to the network, and let the users worry about the content (telephone). And of course there are hybrids, where basic service is sold cheaply, and premium offerings bundled on top of it (cell phones, plus ringtones)..

Of all of these, advertising is the least satisfactory. In a system based on advertising, the consumer is a product, not a customer. His eyeballs and ears are sold to an advertiser. The link between the value a customer places on a piece of content and the money available to fund its creation becomes slender indeed. I might be willing to pay $100 for a particular performance, while the value of my eyeballs to advertiser is a mere dime. In an advertising-based system, only the latter counts.

There is nothing wrong with advertising-based systems, but they should not be allowed to crowd out other forms of financing, in which the consumers of content are actually the customers (and thus the kings).

And this is where things get sticky, because for any other system to exist, defensible property rights must be restored to the system. ISPs must be able to make deals with content companies to filter the P2P traffic, user-generated content must indeed be user generated and not user-lifted, and the complex economics of distribution, which require heavy doses of tiered pricing, must be respected.

The concern about Google is based on a fear that it does not share this concern with restoring the viability of business models other than those based on advertising. Indeed, the concern goes further - that Google understands perfectly that the lack of property-rights based business models enhances its market power as the alpha dog of the ad biz, and that it will exercise its political and PR clout to prevent the development of alternatives. Hence its support for the academic communitarians, its hostility to proprietary software, its endorsement of net neutrality, its foot-dragging on YouTube filtering, its development of Android.

If the only viable business model for creation and distribution of content is advertising, then Google's algorithms reign supreme. This would be a pretty impoverished world contentwise, but Google would not be the first aristocrats who chose to maintain control of economic stasis rather than ease the grip and allow progress. A better image than Pacman might be the young Arnold Schwarzenegger, laying waste with his sword, all in the name of virtue of course.

Originally published in TCS Daily, January 7, 2008

For more information about this subject matter or other recent developments, please contact James V. DeLong or the attorneys in our Communications, Internet and Intellectual Property practice group by calling the Kamlet Reichert Washington, D.C. office at (202) 204 8600, or the Colorado office at (303) 825-4200.