Google's greatest challenge as it heads into its second decade may very well be innovating without ticking off Uncle Sam.
The position taken by the Department of Justice two weeks ago on the Google Books search settlement marked the second time in about a year the U.S. government has taken an active step to rein in one of the tech industry's signature companies. Google now is in the process of renegotiating a deal it once called "a historic settlement," one that gave it sweeping and exclusive rights to digitize certain kinds of books that competitors and activists feared would allow Google to gain more control of access to digital information.
Unlike the famous technology antitrust cases of the last century--IBM, AT&T, Intel, and Microsoft--Google has not drawn government scrutiny based on allegations of past conduct. Rather, the focus is on what the company might do or is about to do, which should be both comforting and troubling for Google executives.
Such scrutiny means that almost every product launch will be examined for signs that Google is abusing its dominant search position by moving to control other areas of the tech world. You can double that level of scrutiny for any potential acquisition. And it also means the company will need to aggressively court government officials, who are getting an earful from companies like Microsoft, Amazon, and AT&T about what a bully Google has become.
In short, it means Google has entered a new era where its cost of doing business has changed.
"I don't think Google wants to start imposing limits on itself," said Eric Clemons, a professor at the University of Pennsylvania's Wharton School of Business. But it may not have any choice, if the Justice Department proves continually willing to impose such limits on Google's behalf.
Scrutinizing what it is about to or might do
How did Google get here, without actually being accused of anything more than hubris? Just 10 years after its founding, and five years after its IPO, Google has evolved from scrappy start-up to innovative game-changer to domineering titan in less time than it took to prosecute the Microsoft antitrust cases of the 1990s.
There's no real hard-and-fast rule concerning when a company turns the page from big to too big. That's because it's not illegal to be big: what is illegal is using that heft to expand into other areas or fend off challenges to a company's dominance.
Microsoft, for example, was prosecuted under two separate areas of the Sherman Act, the 100-year-old law that governs antitrust investigations in the U.S., said David Turetsky, co-chair of the antitrust practice at Washington, D.C., law firm Dewey & LeBoeuf and a former deputy assistant attorney general for the Justice Department during its prosecution of Microsoft. It was investigated for the onerous contract terms it imposed on its customers as well as its plans to bundle Internet Explorer with Windows, which conflict with Section 2 of the Sherman Act.
No allegations like that have been made against Google. Instead, Google has been scrutinized for what it is about to do or could do, such as when it proposed the purchase of DoubleClick in 2007 (which was approved) or its proposal of a search advertising deal with Yahoo (which came within hours of a Justice Department lawsuit before Google folded its hand).
In the Yahoo case, the government objected to a deal that would have put almost 90 percent of the search advertising market in the hands of a single company. It had several bones to pick with the Google Books deal, which it called "anticompetitive" and an abuse of the class-action settlement process.
Now that it has had its hand slapped twice, Google's lawyers will have to advise caution among product development executives, adding antitrust concerns to the normal practice of getting legal to sign off on a new product or strategy. Kent Walker, Google's general counsel, in a fine example of trying to make lemonade from lemons, argues that might actually burnish Google's image before the government.
"The whole shift of antitrust law in the U.S. and Europe of the last 20 years has been in the direction of protecting consumer welfare," Walker said. "That makes it relatively easy to advise management, because the goal is consistent with the values that (Google co-founders) Sergey (Brin) and Larry (Page) set out, which is about making the Internet an open place."
Walker admitted Google had a few lessons to learn following the Justice Department's indication that it would sue to prevent Google and Yahoo from pooling their search advertising. Google has embarked on an educational campaign since then, posting videos featuring chief economist Hal Varian explaining how Google's ad auction process works and devoting more time to projects like the Data Liberation Front, which works to make sure Google users have simple ways to export their data from Google should they wish to move on. This has probably helped Google in the court of public opinion, but it's not clear whether government regulators have been swayed.
One concern often advanced by competitors and detractors is that Google can use the cash cow it enjoys from its dominant position in the search advertising market to subsidize businesses in ways that other companies can't afford to do, thereby driving everyone else out of the market. Last quarter, Google generated $1.4 billion in cash. The Android operating system and Google Apps often come up in those types of discussions, because there aren't many companies who could afford to invest that much money in software development only to give the product away for free.
Walker, as might be expected, doesn't buy that line of thinking. "The Internet is not a place where you can lock out competition," he said, arguing that the barriers to entry in the Internet applications market are low and that Google could never get away with trying to charge money for things it previously gave away for free, government scrutiny or not.
Of course, Google didn't exactly invent the concept of the loss leader. Microsoft does something similar with its Internet strategy, using the immense profits from sales of Windows and Office to allow it to lose money competing with Google in search and Yahoo on portal services.
Google is taking this increased government scrutiny seriously. It has built a D.C. operation from scratch over the past few years to help lobby its case in Washington, and lawyers assigned to product teams now consider antitrust issues along with the usual assortment of legal concerns.
And Google CEO Eric Schmidt has taken a very active public policy role over the last few years, stumping for President Obama during his campaign in 2008 and serving as a technology adviser to the administration. It's not clear whether that has had any effect--the current administration seems much more intent on scrutinizing big business than the Bush administration--but a fair number of ex-Googlers have taken positions in the administration. Perhaps most notable is Google's former head of global public policy and government affairs, Andrew McLaughlin, who is now deputy chief technology officer for Internet policy under federal CTO Aneesh Chopra.
The case against Google
Wharton's Clemons think Google's antitrust issues start with its bread-and-butter business. Google, he believes, could be taken to task if the Justice Department thinks about Google's search business as a distribution channel, rather than advertising-based.
Clemons' argument is that Google controls so much of the information that is presented to Internet users through both search results and search advertising that it creates a disincentive for companies to do anything that runs afoul of Google. As of August, according to ComScore, Google held 64.6 percent of the U.S. search market, compared to Yahoo's 19.3 percent and Microsoft's 9.3 percent.
It also means, according to Clemons, that Google's practice of allowing companies to purchase ad keywords bearing their competitors' trademarks forces companies to overpay for ad keywords they arguably own and can deceive the Web searcher if a competitor's ad is placed among the prominent search ads accompanying a search for the original company's trademark. Lawsuits over this practice are pending, and could potentially add another headache for Google's lawyers down the road.
"Monetization of misdirection frequently takes the form of charging companies for keywords and threatening to divert their customers to a competitor if they fail to pay adequately for keywords that the customer is likely to use in searches for the companies' products; that is, misdirection works best when it is threatened rather than actually imposed, and when companies actually do pay the fees demanded for their keywords," Clemons wrote as a guest author on TechCrunch in March.
Not surprisingly, it's a controversial and perhaps extreme view; Clemons was taken to task by several search industry veterans including Search Engine Land's Danny Sullivan regarding two articles he guest wrote for TechCrunch espousing that view. "Search advertising is one of the most powerful forms of advertising precisely because it does not misdirect searchers, nor interrupt them but instead provides answers that they seek," Sullivan wrote in response to one of Clemons' articles.
There's no indication the Justice Department is looking seriously at this argument, but it's an example of the kind of opposition Google can expect to face if it remains the dominant player in the search market.
In Google we trust?
Google is an unlikely robber baron. The company's public image is carefully crafted to seem warm, open, friendly, and respectful. No doubt, Google execs have learned from their competitor's mistakes: Microsoft continues to be haunted by what some saw as the company's arrogant and condescending performance during its own antitrust defense.
"They (Google) seem to be able to move forward with energy and creativity despite whatever antitrust issues they've encountered," Turetsky said.
However, Jeff Jarvis, author of the book "What Would Google Do?", believes there is a disconnect between how Google sees itself and how a growing portion of the public sees Google. "Google thinks (it's) Snuffleupagus--big but cuddly and good--and just doesn't realize that some people see it as a potential bully and so it has to act accordingly. With size comes responsibility," he wrote in a blog post last week.
Few deny Google's important contributions to advancing the story of the Internet. Even Google's fiercest critics of the book search settlement agree that a digital library would be a tremendous asset to the world, and that few other companies, organizations or governments seem willing to invest the time, effort, and money into such a product.
But Google, simply because of its success in becoming synonymous with "discover information on the Internet," makes people uneasy about granting it a further lock on information. And with the number of companies with a serious chance of challenging it in the search market set to dwindle to one, that uneasiness is not going away.