"But to live outside the law, you must be honest
I know you always say that you agree"
Bob Dylan, "Absolutely Sweet Marie," Copyright © 1966 by Dwarf Music; renewed 1994 by Dwarf Music
Google has the power to do almost anything it wants. Time and again, it takes actions that require apologies, and that skirt both the law and the standards of corporate behavior. If I am correct, the FTC is going to find significant abuses, the DOJ is going to have to act, and significant changes will need to be made to Google's governance structure.
The motivation for these misdeeds is clear, and clearly human. Firms maximize profits and shareholder wealth and indeed this is what they are supposed to do. Powerful firms have more opportunities for maximizing profits and shareholder wealth than small firms. If the firm's senior executives are major shareholders themselves, then we would expect these opportunities to be more vigorously pursued. Mature firms have governance structures in place, including outside directors and widely-held voting shares, that place some limits on corporate behavior. Unfortunately, the governance structures at Google appear to be extremely limited. While Mel Brooks noted in The History of The World that "it's good to be King," today the power of crowned heads of state and of most corporate royalty is severely limited. This power is not limited at Google. The boys believe that they can do whatever they want.
Sergei, Larry, and Eric control 66 percent of voting shares, with less than a quarter of the company's shares, and although the company plans to release additional shares, these shares will almost certainly be yet another class of non-voting stock. The boys will stay in charge. Governance at Google is broken, and apparently will remain broken.
Power corrupts. I don't know if absolute power corrupts absolutely, but it certainly provides the opportunity for some pretty spectacular abuses. Absolute power also provides mechanisms for hiding your abuses, or at least provides some mechanisms for avoiding significant punishment. Bank robbers go to jail; after the major DOJ "drug smuggling scandal" Google was allowed to return the profits it illegally obtained in exchange for having all the DOJ's evidence sealed. This is a much better deal than the treatment offered others who might be guilty of repeated felonies.
So, certainly, if absolute power provides both the ability to commit spectacular abuses and the ability to hide them, then absolute power demands absolute integrity. It also demands some pretty serious oversight, both from internal control mechanisms, and to satisfy external reviewers that acceptable practices and acceptable procedures are in place. Moreover, when governance of a powerful company is demonstrably broken, then it demands external, governmental or regulatory review.
When an all-powerful company acts honorably, then regulation can be done without a heavy hand, and without being especially intrusive. But if the company demonstrably has failed in its own oversight, by demonstrably violating cultural, ethical, and legal norms, then it's time for more serious government intervention.
Sometimes it may even be necessary to remove senior executives, restructure the board, or declare some executives or board members morally unfit for higher office. A British Parliamentary Committee has found Rupert Murdoch "not a fit person to exercise the stewardship of a major international company." While Mr. Murdoch is unlikely to lose control of News Corp., his recent behavior and the behavior of News Corp. under his watch will almost certainly affect News Corp.'s bid to increase its ownership of BSkyB.
There is something morally repugnant about News Corp.'s hacking into the cell phone of a missing, presumed murdered, British teenager or the email accounts of celebrities and British politicians.
But under Sergei, Larry, and Eric Google has done far more spying and invasion of privacy, and in a real sense has exhibited far worse behavior:
- Google's Wi-Spy scandal involved the illegal acquisition of 600 gigabytes of traffic during its filming for Street View.
- Google subsequently was fined $25,000 for impeding the FCC's investigation into whether Google was guilty of illegal wiretapping. It has not been charged with breaking any laws, but was criticized for obstructing the FCC'sinvestigation, including its false denials and withholding of information while the FCC was attempting to determine the severity of the Wi-Spy events.
- Google tool bar spyware has gone largely unnoticed, but it tracks every website you visit, not just every website you search.
- Google Analytics clearly violates EU laws on the privacy of data regarding individuals. For those not familiar with the spyware embedded in Google Analytics, Google Analytics is admittedly a very useful product that allows businesses to track and to analyze in aggregate the sources of their internet traffic; there is nothing wrong with that. Although it was previously unknown to these businesses, the product also reported back to Google the IP address of all visitors to these businesses, allowing Google to track the Internet traffic of individuals all over the world, regardless of whether they, or these businesses, had agreed to this tracking. This has been ruled illegal in Germany. It remains unclear to me whether Google Analytics will be allowed to operate without requiring businesses to obtain prior consent from all visitors to their website before subjecting them to behavioral tracking.
- The Wall Street Journal published a story on Google's hacking into iPhones to allow it to track the behavior of iPhone users, including those who had explicitly attempted to block Google's tracking of their searches (using the methods recommended by Google itself). It appears that the FTC may ultimately fine Google for this violation of privacy. The anticipated fine would be $10 million; given Google's cash on hand and the amount of cash in my wallet, this would be roughly equivalent to fining me a dime, but it is a start.
Although Stephen Conroy, Australia's Minister for Minister for Broadband, Communications and the Digital Economy, called Google's Wi-Spy scandal the largest breach of privacy in history "across western democracies," spying may be only one of several questionable behaviors.
Whether or not the harm of Google's Wi-Spy abuses is comparable with their magnitude, I would like to suggest that Google's privacy practices can no longer be considered acceptable.
- If a rogue Chinese official collected this much information on American citizens, even without authorization within the Chinese Government, we would be outraged
- If a rogue CIA or FBI agent collected this much information on American citizens, even without authorization from appropriate authorities with the Federal Government, we would once again be outraged.
And yet we now know that Google's Wi-Spy scandal was not the work of a rogue employee, but had been cleared and was intentional.
Moreover, while invasion of privacy and spying may have the most immediate relevance to consumers, these behaviors ultimately may not be the most dangerous of Google's activities.
- Google's repeated and knowing support for companies trafficking in illegal sale of prescription narcotics and counterfeit drugs in the United States almost certainly will be shown to have been damaging to the health of some consumers.
- Deceptive practices may be more difficult to establish, given the quality of Google's legal advice, their timely relabeling of sponsored links (deceptive) as ads (less so), and their unwillingness to share the details of their ranking algorithms. I suspect that legal discovery will provide interesting information on what Google knew or did not know, and studied or did not study, about consumer behavior before deciding to use the term "sponsored links" initially. Likewise, discovery should provide interesting information on how often poor-quality high bidders are allowed to feature prominently in page positioning, and how often paid search facilitates clicking and spidering, ultimately affecting organic search. Since Google's website claims almost saintly behavior and motivation for the company, the possibility remains that current and prior practices will be found to have been deceptive.
- Google's promotion of its own offerings, and discrimination against competing sellers, will probably be shown to be a form of unfair competition after the ongoing FTC investigation. Other researchers have documented the presence of Google's manually tampering with the order of search results to benefit their own offerings. Google has been sued by those who alleged that they were damaged by by Google's preferencing. The Senate Judiciary Committee subcommittee investigating Google was concerned about Google's alleged preferencing of their own products and services. Facebook, MySpace, and Twitter allege that Google preferences Google+ over competitive offerings. The list goes on. This also may ultimately be seen as a deceptive practice.
- If Google faces little or no competition in the pricing of its keywords, and if the cost that companies sustain as a result of keyword auctions are passed on to consumers to a significant degree, then Google has almost certainly resulted in harm to consumers that regulators would recognize. At a minimum, excessive costs lead to higher prices, and higher prices lead to what economists call dead-weight loss. Regulators hate dead weight loss.
It is not my intention to try a potential Sherman Act Section 2 violation for anticompetitive behavior or an FTC Act Section 5 violation for unfair or deceptive practices violation in the press. But I would like to suggest that business as usual at Google, and not just Google's privacy practices, can no longer be considered acceptable.
I believe, as I have believed for some time, that more active regulation of Google is warranted. Google has demonstrated that it cannot be trusted. In fairness, no one could be trusted or should be trusted with so much power. We did not trust AT&T with this much power in 1913 when it controlled the vital telecommunications industry in the United States. And we cannot today trust Google to be the arbiter of its own behavior when it controls so much of our access to the Internet. This does not apply only to Google. Certainly no other company with Google's governance structure and current behavioral norms could be trusted with this much power.
I suspect that a DOJ Sherman Section 2 investigation is warranted. If my worst fears are confirmed at trial, with the documents that would be revealed in pre-trial discovery, I believe that a fundamental restructuring of Google would be appropriate. I have not said this before; indeed, I have not been convinced of this before. But no company can be allowed to control search, and search advertising, while expanding into so many other online businesses,if it remains the tool of three all-powerful shareholder executives.
A subsequent post will lay out what I believe is the source of Google's market power, and why Google can enjoy monopoly pricing power even in the presence of apparent competition. It will also describe the harm that this monopoly power causes consumers. A third post will propose some very simple but draconian steps that would limit Google's power, allow it to earn profits on its areas of expertise, and create a far more open, more fair, and less deceptive marketplace for search. The result would be a better Internet for all of us.