In Washington, a Search Giant Meets Its Match

This past Thursday Google received a subpoena from the Federal Trade Commission, notifying the internet giant that it was under investigation for anti-competitive practices. Yet as a former employee of one of the firm’s main competitors, I can tell you that they have done nothing wrong.

The main charge against Google is that the company unfairly leverages its search engine’s powerful market share to engage in practices that promote its own products and harm other businesses.  Said another way, it uses its strengths in one area of the internet space to better its position in others. In the process, winners and losers are created. And the losers (who aren’t even really losers in the grand scheme of things, but more on that later) are pissed.

To fully comprehend the Fed’s case, a brief tutorial in online marketing is necessary. Companies like Google, Yahoo, and Microsoft have a few different revenue streams within their advertising businesses. One of them is search engine marketing.

For example, if you search for “adidas basketball shorts” on one of these engines, the top (and sometimes the right side) of the page has what look to be normal results, but are actually not. Demarcated by a different background color from the rest of the page and a header that says “Sponsored Listings”, these are results placed there by advertisers. In this case, Adidas decided that it was worth it for them to bid on the term “adidas basketball shorts”, so that when someone searches for the term (or a close variant of it), they will potentially see an Adidas ad, with a customizable title, ad copy, landing page, etc. Adidas only pays Google when the user clicks on the sponsored ad.

Whether or not it even shows up is ultimately controlled by the search enginge’s ranking system, which factors in a great deal of information (including ad quality, how much the advertiser is willing to pay for the click, etc.). If the user searches for this term, but instead of clicking on the sponsored result clicks on a normal Adidas page, Adidas doesn’t pay Google a cent. This is how Google, and to a lesser extent Yahoo and Microsoft, make a large share of their money.

Another way is through display advertising. Like myriad other sites, Google/Microsoft/Yahoo sell the graphic ad space on their websites. In this case, a user going to sports.yahoo.com may see a banner ad featuring Derrick Rose sporting the newest Adidas basketball shorts. Pricing can get tricky depending on the model, but for the sake of this discussion, just know that it behooves internet firms to drive as many users to their own sites as possible. More viewers of ads ultimately equate to more money from advertisers.

As search engines have become more popular (the “big three” combine for over 100 billion searches per month), a growing number of companies have become increasingly reliant on them for revenue. The majority of internet users looking for products or services go through search engines to find them. Companies spend a lot of money with the engines to have their goods presented to users; if done correctly, this can be an absolute windfall for the advertisers, who have their messages in front of clients who have already expressed a willingness (via searching) to buy something.

The problem is that, like their advertisers, Google, Microsoft, and Yahoo are profit seeking entities. They want to maximize their revenue, and doing so often requires them to place their own content (where they can sell the display ads mentioned previously) above content from other sites. So through the introduction of new products and designs, as well as the continuous tweaking of their search ad ranking systems, some sites lose traffic and some gain it. This irritates major firms (like Expedia, Kayak, and Yelp, among many others), who can see serious disruptions to their revenue streams as less users are driven to their sites.

In short: Google et al have made a lot of companies a lot of money. These companies are now mad that they aren’t making as much money as they were before, and/or that their revenue streams aren’t as predictable as they were prior. But, legally, should this be Google’s problem? I’d argue stridently: hell no. 

By tweaking their search ranking systems, Google is not violating any contract. Google is not obligated to keep Joe’s Shoe Shop in the first position for anyone searching for “shoe store”. Joe may not be happy if a Google algorithm change throws his site all the way to the bottom of the results page, but the onus isn’t on Google to keep Joe happy. The onus is on Joe to build a better website, use different marketing channels, and find other ways to acquire customers.

The big firms who likely influenced the FTC’s decision to investigate Google should lessen their reliance on Google. Instead, they have decided to continue a trend in corporate America of being free market proponents until things go bad. Then, its off to Washington to stress the importance of “fairness”, “corporate responsibility”, and other hollow terms.

Specifically for this case, I doubt that Google will get much more than a slap on the wrist, especially given the Obama administration’s close ties to Eric Schmidt and other Google executives. More broadly, however, the fact that this investigation is even being conducted is a terrible sign for our country. While hard work and innovation are all well and good, scurrilous lawsuits and shameless lobbying seem to be the real keys to business success.

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