I. Summary
Google’s market capitalization has approached a half trillion dollars as its stock hit an all time high, because of a positive quarterly profit surprise and because Google’s new CFO signaled that “Google cost discipline” may no longer be an investment oxymoron.
The market appears to be ignoring that Google’s legal status as a corporation changed in 2Q15 to an FCC Title II regulated common carrier that is subject to very strict and preemptive behavioral non-discrimination requirements to mitigate potential abuse of market power on Google’s network -- per the FCC’s new Open Internet Order which reclassified Internet infrastructure as Title II common carriage regulated to enforce strict net neutrality.
This analysis of Google’s many new common carrier liabilities has four parts: I) the investment and regulatory relevance of Google being a common carrier; II) the evidence of Google being a major Internet access player via the surprising size of its Internet infrastructure, communications, traffic carriage, and market power; III) a listing and explanation of Google’s many new FCC common carrier liabilities, including nine potential net neutrality violations, three privacy, and three transparency; and IV) a conclusion about what this could mean for Google and its valuation going forward.
II. Investment & Regulatory Relevance
Google’s new FCC common carrier requirements for its vast U.S. network to be net-neutral, appear to be antithetical to Google’s dependence on favoring Google content, services, and apps over competitors and to being nontransparent about how Google currently discriminates.
Apparently investors and the market have not processed what it means for Google, and its vast network infrastructure, to be a strict, nondiscrimination-regulated Title II common carrier that: is more vertically-integrated; carries more traffic; and has more real market power, than any other U.S. carrier – by far.
The dissonance -- between the market’s optimism and the new legal facts and potential risks and liabilities on the ground -- appears substantial.
The new lens of the FCC Title II net neutrality rules spotlight how Google: appears to be seriously violating net neutrality in at least nine ways; is not allowing users to control their private identifying information from commercialization in at least three ways; and is not transparent about how its world’s largest communications network manages its traffic.
A few explanations for the market’s big dissonance here could be: few investors have done their due diligence on the implications of Google’s change in legal status, (hence this analysis); the market implicitly assumes the Obama FCC majority will specially protect Google from any material FCC regulation impact applied to other ISPs; or the market could be betting that the FCC order will not cumulatively survive the gauntlet of Congressional appropriations policy riders, appellate court review, and the 2016 election.
However, if investors are not confident Google will enjoy sufficient special FCC treatment or that the FCC Open Internet Order will survive, investors should become familiar with the phalanx of serious headline and actual Title II common carrier risks Google faces going forward.
First we will consider the relevant Google facts and network statistics which illuminate how sweepingly-impacted Google’s network is by Title II net neutrality/common carrier regulation. Second we will review the many ways Google may currently be violating the FCC’s Internet Order concerning: net neutrality; confidentiality and user control of their private information on Google’s network; and the transparency of Google’s network management to ensure no anti-competitive discrimination.
III. Google Common Carrier Facts & Network Statistics
A. Concerning being a broadband ISP, at a minimumGoogle is a now legally an FCC Title II common carrier because it is a Broadband Internet Access Provider (BIAS) via Google Fiber and Google Project Fi, Google’s national wireless broadband offering which resells Sprint and T-Mobile’s national networks combined with WiFi.
Also, Google is investing heavily in eventually becoming the world’s primary ISP via remote Internet access technologies involving satellites, drones, and balloons. In addition, Google is investing and lobbying heavily to become America’s primary ISP long-term via a pursue-ISP-progress-on-all-fronts-strategy of promoting Google Fiber-anchored Gigabit cities, fixed wireless-enhanced super WiFi mesh networks via more spectrum sharing of more Government spectrum, FCC unlicensed spectrum, and “white spaces” broadcast spectrum; and by promoting city-wide WiFi-based Internet access via Google’s Sidewalk Labs.
Google’s consistent actions over the last several years belie its network infrastructure ambitions to eventually be the leading ISP, Internet backbone, and DNS resolver/database in the U.S. and the world.
B. Concerning Internet infrastructure, Google operates the world’s, most cutting-edge, high-volume, synchronized network infrastructure because Google virtualizes all of its network information across all of Google’s global data centers in perfect triplicate at all times via the only network perfectly synchronized with atomic clocks in all its server blades.
Constantly, Google’s network, among other things, transports: the crawling of ~60 trillion unique URLs to produce its uniquely large >100 million gigabyte search index; Google-YouTube’s world-leading Internet video viewing business and distribution infrastructure of network transport, caching and local servers 75 countries; DoubleClick’s world-leading ad-serving network; and Google Analytics ~98% share of the top >15m websites tracking data.
To carry this gargantuan traffic load, Google owns “massive” amounts of dark fiber backbone capacity/rights in the U.S. and overseas as a result of very shrewd and prescient purchases after the tech bubble. Google also owns parts of four differentsubmarinecables connecting to the U.S. to the world; and Google has >1,400 global server points-of-presence in 140 or 68% of the world’s countries per USC research that mapped Google’s global serving infrastructure.
If Google’s network is not America’s or the world’s largest, it is among the very largest.
C. Concerning Internet communications, Google provides many tens of millions of Americans with messaging, video calls, voice calls and video conferencing from any device with Hangouts. Google Android also controls ~90% of the licensed mobile operating system market; and Google Gmail is America’s leading email provider.
D. Concerning Internet traffic, Google could treat much of the Internet’s traffic non-neutrally. 60% of Internet devices & users exchange traffic daily with G’s servers. >50% of websites’ traffic involves G’s analytics, hosting & ads daily. ~25% of the Internet’s daily traffic is Google’s. When Google suffered a widespread 5 min system outage, Internet traffic declined 40%. Google handles >70b DNS address requests daily as the world’s leading “phone/address book” online. And Americans watch tens of millions of hours of YouTube every day, while the number of YouTube hours viewed overall are growing 50% annually.
E. Concerning market power, relevant to Google having the incentive to discriminate or violate net neutrality by blocking or throttling traffic non-transparently, Google has dominant (>50%) U.S. share of the following leading Internet content services that each serve a ~billion plus users globally: Search, Chrome browser, YouTube video distribution, Android mobile operating system, Gmail email, Google Maps location services, and Google Play app store.
Simply, Google and its network may enjoy the most market power of any company in the world.
III. Google’s Potential for Violations of the FCC Open Internet Order
A. NETWORK NEUTRALITY – Under the FCC’s Title II net neutrality rules, Google’s network management cannot favor Google content over competitors.
1. Google Project Fi – appears to clearly violate the FCC order because Google Fi wireless service only works with a Google Nexus phone, rather than the required neutral provision of user handset choice.
2. Google-YouTube – Given the recent precedent of the AT&T-DirecTV merger condition that AT&T cannot favor DirecTV video traffic over competitors’ traffic, does Google-YouTube network management or special caching favor YouTube’s quality of over-the-top video traffic treatment over the video traffic of Netflix, Apple, Amazon, Hulu, etc. in any way, i.e. bandwidth available, reliability, jitter, latency, etc.?
3. Google Android – Does Google’s requirement in its Android MDA agreements with manufacturers -- that in return for licensing its free and dominant mobile operating system, the manufacturer must place up to twenty of Google’s Apps (Search, Chrome, YouTube, Maps, Google+, etc.) most prominently on the Android home screen by default – constitute anti-competitive discrimination prohibited by net neutrality bright-line rules in the FCC’s Open Internet Order? This tying behavior is the focus of the EU’s Android antitrust investigation.
4. Google Search – The NYT reports that the expert that coined the term “Net Neutrality,” law Professor Tim Wu, did a study of whether Google search was neutral as it publicly represented, and the study found that consumer choice was hurt by Google blocking competitors local content in its search rankings based on traffic over its network. This is effectively the abuse of dominance that EU has found Google to be violating in its official antitrust Statement of Objections.
5. Google Maps – Does Google’s preference for recommending local establishments on Google Maps network based on how much they pay Google, violate net neutrality’s principle of nondiscrimination?
6. Google Play – Google Play, the world’s leading App store of the Google-Apple app-store-duopoly, blocked the availability of a privacy app, Disconnect, on its integrated Google Play store, because Disconnect’s app allowed users to protect their private network information to prevent from being served unwanted ads, which is in conflict with Google’s business model. This appears to be a violation of the FCC’s network non-discrimination principle.
7. Google “Mobile-geddon” – Google used its market power to force all websites in the U.S. and the world to revamp their websites at their cost to be mobile-friendly or Google would demote their sites in Google search. A study from Adobe Systems on the aftermath of “mobile-geddon” showed Google’s market power discrimination over its network hurt almost half of all websites studied.
8. Traffic Acquisition Costs (TAC) via AdWords/AdSense – Google’s core business model is designed to be non-neutral. That’s because it inherently favors Google-owned sites over Network sites operated by competing publishers. In Google’s latest 2Q15 earnings, Google continued a consistent trend of capturing relatively more advertising revenue for Google at the expense of its competitors by favoring Google-owned sites in Search, AdWords, AdSense, Maps, etc. because Google must pay Traffic Acquisition Costs (TAC) of 67% of revenues to non-Google-owned Network business where it only has an internal cost of traffic acquisition of 8% for Google-owned sites.
Per The Information reporting: “Google Network advertising dropped to 20.4% last quarter, down from 22.3% the year before and 27% three years ago.” Clearly Google has a huge financial incentive to not treat traffic, content and competitors neutrally when it can earn 59 cents more on every AdWords/AdSense dollar by discriminating against competitors’ traffic or content.
Such traffic/content discrimination is exactly the corporate market power behavior the FCC purports is illegal under its open Internet net neutrality rules. To put a dollar value of Google’s network neutrality discrimination, the value of the Google TAC falling from 27% to 20.4% over three years has increased Google’s annual profit by $4.2b. ($70b annual revenues x 90% advertising revenues = $63b; .27 - 20.4 = .066; $63b x 6.6% = $4.2b)
9. Interconnection -- Given Google’s outsized carriage of Internet traffic on the Internet backbone -- combined with both the market power of many of its integrated services and the huge profit differential between Google-owned site traffic over Network site traffic -- does Google manage its fiber backbones neutrally? Or does it discriminate and provide more bandwidth/speed for Google traffic to and from Google-owned sites than to and from the much less profitable and important Network sites?
In other words, does Google manage its network or route traffic preferentially, so that Google-owned sites video will load faster and serve ads faster than its Network of competitors’ sites, as a way to discriminate and encourage use of Google-owned services or apps over a competitors’ service or app?
Given Google’s huge TAC differential, Google has a huge financial incentive to manage its network speeds in a discriminatory manner in violation of the FCC’s net neutrality rules of the road.
B. PRIVACY – Under Title II Section 222, Google now has the legal “duty to protect the confidentiality” of consumers’ private network information (CPNI) from “marketing purposes” with a consumer’s affirmative approval. Importantly, two of the first three stated priorities of the FCC’s new Internet conduct standard in the Open Internet Order are “end-user control” and “consumer protection.”
Since Google’s mass-tracking and advertising model is largely antithetical to true customer control of their CPNI private information for marketing purposes, Google faces especially broad privacy risks and liabilities from any real FCC Title II Section 222 enforcement.
1. Do Not Track List? – Consumer Watchdog has filed a petition for edge providers to create an FCC Do Not Track List patterned after the FTC’s Do Not Call List under Section 222, that would affect Google more adversely than any company because Google has overwhelming market power in the tracking and analytics business in that Google Analytics is used by ~98% of the top 15 million websites in the world.
Consumer Watchdog also argued that the FCC has the authority under Section 706 to impose a Do Not Track List as well, if the FCC’s Title II authority were to be blocked or overturned.
2. Chrome Do Not Track? – Google currently denies consumers the clear choice to not be tracked by its dominant Chrome browser, in clear violation of section 222, because Chrome collects tons of section 222 CPNI protected private information and admits it does not respect users’ choice to not be tracked.
3. Section 222 Privacy Opt-in Requirement – Probably the most problematic part of Google’s legal status changing from an information services provider to a telecommunications common carrier, is that the privacy legal burden has flipped.
Google currently operates under a de facto opt-out privacy regime where it does largely what it wants with users’ private information as long as it fits Google’s vague privacy policy commitments. Under Section 222, users have a strong legal right to an opt-in privacy policy.
If the FCC applies section 222 laws to Google, Google will have to make substantial changes in the way it does business, because they could have to ask users, and give them the real choice to not opt-into Google’s pervasive tracking, profiling, and metadata stockpiling, potentially overall or by Google service: Android, Hangouts, Chrome, Maps, YouTube, etc.
C. TRANSPARENCY, CALEA & WIRETAPPING – The FCC’s open Internet rules require Google’s network management to be transparent and to comply with CALEA, i.e. FBI requests for access to network traffic with a court warrant.
1. Transparency – The FCC’s pending Over-the-Top (OTT) video proceeding could require Google to be more transparent about its backbone peering and interconnection agreements, it’s caching and local serving protocols, to determine how it treats YouTube OTT delivery to ensure Netflix, Amazon, Apple, Hulu, et al are treated in a non-discriminatory manner to YouTube.
More transparency of Google’s massive amount of video “telecommunications” traffic could result in Google having a greater obligation to contribute to Universal Service fund commensurate with Google’s outsized use of the Internet’s infrastructure.
2. CALEA – Now that Google is a Title II common carrier, they have a much greater obligation to cooperate with U.S. law enforcement court-ordered warrants for surveillance going forward in making Google’s network as CALEA-compliant as other broadband ISPs have been and are.
3. Widespread Wiretapping – The FCC’s Open Internet order and Title II bring Google directly under the FCC wiretapping enforcement purview.
Remarkably, five different Google services have been, or are, all engaged in some form of audio interception/recording without peoples’ knowledge or consent – e.g. Street View WiFi communications; Gmail communications (via Content One Box); Chrome browser audio transmissions; Nestcam/Internet-of-Things-sensor communications; and Glass wearable communications. All of these interceptions upload the wiretapped communications to Google’s servers in Google’s data centers for storage, analysis, and in the case of Gmail Content One Box, for advertising monetization.
Apparently more than any network provider, Google is engaged in widespread wiretapping without consent.
IV. Conclusion
The implications, risks and liabilities of Google becoming an FCC Title II common carrier -- as the operator of one of the largest most-vertically-integrated U.S. networks and as a company with substantial market power -- are clearly under-appreciated and under-vetted.
Proponents of net neutrality and Title II were originally concerned about perceived ISP market power being leveraged into edge services, but now the Google common carrier reality confronts them with new net neutrality concerns of substantial edge market power being leveraged into Internet access.
If the FCC is principled, fair and treats all broadband providers equally and according to the FCC’s Open Internet order, Google faces substantial unanticipated regulatory risk and liability going forward that could rain on the parade of current investment optimism about Google’s long-term growth and profitability.
However, if Congress, the courts or the presidential election go against the FCC over the next two years, this Google as common carrier overhang could lessen substantially with those developments.
Every investor knows that common carrier models are usually valued at multiples less than growth companies. With Google’s legal status as a company changing to a common carrier in 2Q15, and with Google’s clear aspiration and progress to become its own Internet access infrastructure provider via most every kind of technology, the Googlomerate could be on path to become a more complex hybrid-valued company over time.
Just when investors thought the Google investment story became more simple and predictable, FCC regulatory disruption happened; or simply “FCC Happens.”
Scott Cleland served as Deputy U.S. Coordinator for International Communications & Information Policy in the George H. W. Bush Administration. He is President of Precursor LLC, a research consultancy for Fortune 500 companies, some of which are Google competitors, and Chairman of NetCompetition, a pro-competition e-forum supported by broadband interests. He is also author of “Search & Destroy: Why You Can’t Trust Google Inc. Cleland has testified before both the Senate and House antitrust subcommittees on Google and also before the relevant House oversight subcommittee on Google’s privacy problems.
