Posted March 7, 2004
This blog was written long before Google began its acquisition of Doubleclick, potentially giving it control of both search- and display-advertising online, as well as confidential information on its competitors' revenue and site traffic.
An Open Letter to Susan Creighton, Director of the FTC's Bureau of Competition
Dear Ms. Creighton,
As the person at the Federal Trade Commission responsible for monitoring fair trade issues, you should be aware of marketing strategies by Google that have the potential to create restraint of trade and market-leadership abuse problems similar to those Microsoft has been accused of, and in some cases found guilty of.
The key justification for the many legal actions taken against Microsoft's monopoly is that Microsoft used or is using its leadership position in one market to unfairly suppress competition in other markets.
Although it hasn't gotten any attention yet, Google is using this same approach to leverage its leadership in online search to expand into online advertising across the Internet, not just on its own site. There are many parallels between what is said to be wrong about Microsoft's past behavior and what Google is commencing. In some cases, Google's behavior is more brazen. Many taxpayers are losing faith in government regulatory agencies, believing that industry gives the FTC, SEC, FERC, and others as much respect as a crossing guard at the Pamplona Bull Run. This is an opportunity to change those opinions and be proactive before a large portion of the Internet industry suffers serious damage. Fining companies such as Goldman Sachs, Microsoft, and other large enterprises after they've reportedly benefited from questionable behavior is about as effective as giving Bonnie and Clyde's getaway car a parking ticket and saying the government is dealing with bank robbery. We need action before various Internet-based businesses are damaged.
Google is the universally recognized leader in providing Internet search. Some market research studies put Google's share at only 31%, but if you remove proprietary, closed systems such as AOL and MSN, Google's share is perhaps in the 70% range. Certainly, the public and the industry perceive Google as the dominant leader. The term "Googled" has entered the vernacular for a reason, whereas you don't hear "MSN'ed" or "Overtured."
Now, in preparation for a rumored public offering of stock, Google is attempting to expand its revenues by selling advertising that appears on other Web sites. This is admirable and the service is potentially of real value, but Google's approach to entering the market is not, and amounts to leveraging its search business to prevent others from selling advertising. Google has two approaches, so far, to restraint others' ad sales.
First, before serving ads to others' Web sites, Google began distributing a "Google search bar," which attaches to the user's browser. This toolbar blocks ads from other companies' Web sites, specifically popup banners. After Google's utilities reached an installed base of millions, it began promoting this popup blocking as a feature, but in fact that function was basically hidden when the toolbar was launched, and is set on by default.
No one would win a popularity contest by defending popup ads, and I believe it is legitimate for companies to distribute utilities that block them. However, the issue becomes quite different when a company sells advertising—while preventing competitive ads from being displayed. Google claims this is a service to users, and for many it is (I know I don't want to see another Orbitz popup, ever). But, that does not give the company the right to block competitive advertising channels. (Ironcially, InterMute in Braintree, Mass., introduced on December 8 a beta release of AdSubtract PRO 3, which blocks paid-search ads from Google and Yahoo. What goes around comes around.)
Further, the popup blocker is on by default, making it difficult for the typical user to even know this is happening (another argument presented in Microsoft's legal battles). As The Wall Street Journal has reported, the blocking function even impairs the operation of many sites' content presentation. (For more on this issue, see "Judge rules in favor of pop-up purveyor" on CNET.)
According to BusinessWeek, popups account for 5% of the $8.3 billion in annual Internet advertising revenue, delivering 2% click-throughs—four times that of average banners. So although popups are annoying to many of us, they are sold because they are far more effective for advertisers than Google's simplistic text links.
Microsoft gave away a free utility, its Internet Explorer browser, to block Netscape from gaining revenues by selling Web server software—the case for accusing Microsoft of leveraging its market leadership in desktop operating systems to compete unfairly in other markets, namely browsers and Web server software. Google is leveraging its leadership in Internet search facilities to unfairly block others' sales of advertising on the Internet, by giving away a free utility that undermines its competitors' sales. In fact, what Google is doing is more pernicious, because it goes beyond price competition to actually block competitors from delivering a product that has been already sold. That is equivalent to Microsoft designing its operating system to block other browsers, or application software from running.
Part of the case against Microsoft was and is that the terms of its contracts and its negotiations were so odious that no company could impose them without having monopolistic market presence, and that they were abusive. Here, Google could teach Microsoft some lessons.
Sites as diverse as The New York Times and Gizmodo.com use Google to deliver text or banner advertising. FTPOnline, our network of Web sites, also uses Google's AdWord service for text advertising, in addition to our own banner ads, sold in-house and delivered by DoubleClick's DART server. In essence, Google's AdSense and AdWord deliver on the promise that DoubleClick made years ago, but lacked the technology to implement. It is impressive. Google's AdSense boasts a base of 150,000 advertisers.
FTPOnline was one of the original sites in the IT market to be contracted with Google to deliver advertising. At the time, we thought the terms were unusual. Google insists that it won't disclose what share of revenues you'll get, can change your share at any time with no notice, and can decide to stop paying you without cause. Other terms include advertising any of its products on your site that it wishes, for free, and running any charitable ads at its sole discretion. (It would be interesting to know if Google is claiming charitable deductions for giving away other companies' advertising inventory, and if so whether the IRS recognizes that is happening. But that's another issue.)
That sounds audacious, but it gets worse.
Google has now changed its contract terms unilaterally—and retroactively.
Here's how the bait-and-switch works. All management of the advertising is done online. When Google wants to change anything, it forces you to sign another End User License Agreement (EULA) to get into your account. We actually read the license when it changed and found that, buried in the pages of boilerplate, Google was now claiming it had exclusivity. Not only had Google never notified us of a change in terms, but it had approached us because of the value of our IT audience and offered to pay a premium for an exclusive license. Now, it was "taking" that right unilaterally. We refused to sign the new EULA.
Then it gets interesting.
After paying one commission check, Google's Web site presented yet another sign-up form, this one requiring tax ID information before payments would be issued. That's fair.
But filing the tax ID form requires—REQUIRES—agreeing to a new licensing scheme that demands exclusivity along with other odious terms that we had not previously agreed to, before Google will pay commissions FTP had already earned on prior advertising. That's right: Google is requiring retroactive changes in its agreement with its partner sites and withholding payments previously earned under different terms, and with no notification.
This is astonishingly arrogant and coercive. Even Microsoft, if you believe all the worst accusations, never went back to customers to demand they pay increased prices for services and software already bought and delivered. Imagine if a Microsoft salesperson came to a client and said, "Remember that copy of SQL Server you licensed last year for $100,000? We're raising the price—for last year—and insist that you stop using Oracle." One wonders what the IRS would think of using a tax form to coerce licensing agreements. Google is preventing companies from complying with tax law.
Google's restraint of trade is doubly pernicious because Google's business model is at its heart parasitic. Google's entire business is based on using other companies' and individuals' content without their consent and without compensating them. That's historically allowed because the Internet community in an informal way agreed that the concept of Web search, spiders, and crawling was worthwhile. But that approach is based on the idea that search is an aid to going elsewhere, not that the search engines become the destinations. When Google becomes a news publisher, it is competing with companies that it is taking free content from. This requires a higher standard of behavior. Beyond that, Google is no longer simply publishing headlines and links; with its cached pages, it is taking the entire content of other sites and displaying them on Google, without permission and in a fashion that clearly goes beyond what "fair editorial use" under the law allows.
Combine taking others' content in whole without permission or compensation, then blocking those same companies from selling ads on their own—then offering to selling ads on their sites, but paying only an indeterminate, randomly changing commission for those ads, and you have a complete picture that is daunting. Google's response, when we've discussed this with them, is basically "trust us, we'll behave."
Numerous business publications have already written that Google is accused of "punishing" companies by supposedly juggling its search algorithms to reward some firms and penalize others whose behavior it doesn't approve of. If those accusations are true, the marketplace is not able to exert enough force to make Google behave reasonably. Who can complain that Google is stealing their content and blocking their advertising, when Google can punish them by suppressing their search results and thus their site's traffic?
Again, Google's technology and the company's achievements are impressive. We partner with Google to run its advertising, and hope this missive won't sour that relationship.
But Google's behavior goes beyond tough negotiation and, when a company has the market presence Google does, only the government can constrain its behavior. I hope, Ms. Creighton, that you and others in the government will consider this seriously. One of the main criticisms of the government's action against Microsoft was that it was too little too late, with the government not acting until the damage was done.