article

09.26.12

Will Regulators Give Google Its Comeuppance?

With anti-trust litigation potentially hanging over the search giant, some members of the news media appear to be mounting their own offensive. Peter Jukes reports.

Over the next few months, Google could find itself in trouble with regulators on both sides of the Atlantic. Not only are European regulators set to decide next week whether to take Google to court over its ranking of search findings, but last week reports surfaced that the Federal Trade Commission soon might pursue an anti-trust case of its own against the Internet search giant. “They are going for the guts and the glory,” on Google, the New York Post reported, suggesting that the company and the FTC were nowhere close to a settlement.

The Post, of course, is owned by Rupert Murdoch, who has already made his personal views about Google clear in a tweet earlier this year accusing the company of being a “piracy leader.” Murdoch’s comment appeared primarily to refer to films, but his online outburst points to a broader source of tension and resentment between the ink-stained moguls of the newspaper world and the new digerati of Silicon Valley: when it comes to making money from content, the hacks remain peeved that the geeks are drinking their milkshakes.

Now, with litigation potentially hanging over Google’s head, some members of the dead-tree press appear to be mounting their own offensive. On Sunday, the Guardian’s chief investigations editor, David Leigh, wrote that print’s financial problems could be solved by a levy on Internet service providers, redistributed back to papers based on their traffic.

The suggestion was almost immediately dismissed as ‘infantile’, ‘sinister’ and ‘insane’ by senior journalists on The Times and The Financial Times, which said his solution appeared to be little more than a tax on Internet users raised to fund a broken business. Yet at the least, Leigh’s criticism has the virtue of highlighting how Google’s dominance affects an important industry and its future.

It’s no secret that newspapers are in deep trouble, or that they have been for quite some time. Throughout the U.S. and the U.K., revenues are down between 6 and 9 percent year-on-year. Over the past half-decade, local papers have been closing or merging, while national newspapers have been drastically reducing staff. Some niche publications such as The Economist and Financial Times have made online subscriptions work, but for others such as The New York Times, reaching half-a-million digital subscribers only covers the loss of print readership—and that’s not even the real problem.

The real problem, of course, is the catastrophic crash in advertising revenues. For most the last century, subscriptions have only provided about one-fifth of the income for independent commercial papers. As the writer Clay Shirky points out, readers have rarely paid for journalism. The cover price never covered the cost of content—advertising did.

And now it’s advertising revenues rather than readership that have fallen off the cliff.

They’ve fallen so precipitously over the last decade that, adjusting for inflation, ad revenues will be lower this year than in 1950. For a 60-year period, which peaked in 2000 with income of roughly $60 billion a year, print advertising effectively funded journalism—from the investigative reporting of Bob Woodward and Carl Bernstein to the New York Post’s salacious exposés. But last year, revenues dropped to around $19 billion.

Where has that $40 billion gone? Here’s a suggestion: last year Google generated $37.9 billion in revenue, 96 percent of which came from advertising. The bulk of these ad dollars come from traditional finance, retail, travel, and education companies that—presumably—would have otherwise advertised in the dead-tree press. So far, so good for Google: if it can deliver advertising more efficiently and more directly to the consumer, it deserves to win this race.

If unaddressed, a market failure of this scale would cause content to deteriorate—an outcome, which would be bad for newspapers and consumers, but also bad for Google.

But here’s where the EU anti-trust case comes in. If regulators are correct, Google may be big enough to shape the market it now competes in to the disadvantage of potential rivals. Ultimately Google relies on people searching the Internet looking for content, especially news. While newspaper providers have little choice but to make themselves searchable to remain relevant, Google has no such obligation to pay them in return; the search company can reap the rewards of providing other people’s content for free. This could be seen as a market failure or externality, comparable to a successful canning industry inadvertently polluting the waters, which harms the local fishing industry. If unaddressed, a market failure of this scale would cause content to deteriorate—an outcome, which would be bad for newspapers and consumers, but also bad for Google.

In the end, the ultimate solution to Google’s dominance might not be legal action or tariffs at all, but instead more innovation. Like Facebook, Google has come from nowhere in roughly a decade. And the tides can shift very quickly. Case in point: the last time European trust busters targeted a high-tech U.S. company was in 2004, when the commission told Microsoft to produce its Windows operating system without its proprietary Media Player. Microsoft resisted, and within four years accumulated nearly $2 billion dollars in fines. Ironically, two years ago, the E.U. anti-trust investigation began after the Redmond, Wash.–based company, among others, complained about Google’s dominance in the European search market. Time and tide favor no company for very long it seems, but regulators can play their part in making sure the flow of news continues.