Google

Most of Google and Yahoo's defense of their ad agreement has been to claim it creates 'efficiencies.' The problem with that defense is that most all of the claimed "efficiencies' -- are negative in nature -- not positive justifications for approval.

New Negative Network Effect:

• The essence or core activity of the proposed ad agreement is removing Yahoo search queries from the Yahoo monetization engine and running them through the Google monetization engine.  
• Less queries drains Yahoo's Panama engine of what it needs to get better and produce more "relevant" targeted advertising -- so the more queries diverted away means less and less Yahoo Panama monetization efficiency.
  • In other words, Yahoo gets paid a market-premium by Google for suffering competitive dis-economies of scale -- for the benefit of the ad partnership. 
• On the other hand the more search queries to Google increases Google's monetization efficiencies and network effects -- effectively enabling Google to efficiently and anti-competitively widen its lead over all its competitors.
  • In other words, Google trades sharing revenue with its partner Yahoo -- for economies of scale and network effects which increase Google's pricing power.    

Cartel/Monopoly revenue efficiencies:

Given the Wall Street Journal's reporting that "Google, Yahoo seek to avoid suit over ad deal" -- what provisions are needed in a court-enforced consent decree between the DOJ and Google-Yahoo in order to protect competition?

Consent Decree Principles to Protect Competition:

• Prohibit any agreements between Google and Yahoo, which generate substantial negative efficiencies or negative network effects.
  • (At core, the proposed ad agreement embodies a negative efficiency-transfer dynamic. 
    • In other words, the agreement decreases Yahoo-Panama's efficiency in quality-improvement and relevance-learning, while simultaneously increasing Google's efficiency in quality-improvement and relevance-learning, by transfusing the efficiency-lifeblood of search engine advertising quality and relevance-learning -- search queries -- from Yahoo to Google.) 

Google's three-year-old video subsidiary, YouTube, now generates more searches than any other site or competitor in the U.S. -- surpassing #2 Yahoo in August per Comscore's U.S. expanded search rankings.

• Another way to look at this milestone is that Google:
  • is now both #1 and #2 in search,
  • is seeking an ad outsourcing partnership with the #3 and #8 players in search -- in the proposed Google-Yahoo ad partnership,
  • to go along with Google's existing ad outsourcing partnerships with the #5, #6, #7, #9, and #11 players in U.S. search.  
• Kudos to Ms. Klaassen of Ad Age and Mr. Helft on the NYT Bits Blog and for flagging this search ranking milestone.

The new ComScore August 2008 search rankings spotlight the awesome search cartel reach Google has assembled:

Google's CEO Eric Schmidt had the temerity to suggest that journalism consider becoming a not-for-profit enterprise -- at a recent Google program for magazine executives.

• See Ad Age's article: "Google's Schmidt says Internet 'cesspool' needs brands -- Says the solution is quality content; tells publishers and editors to 'increase your relevance'. 
  • From the article: "...when asked where the industry ends up if there aren't outlets willing to pay journalists to create quality content, Mr. Schmidt was a bit Palin-esque, saying that he didn't have an answer but one thing to look at is whether journalism should be a for-profit enterprise."

Google's CEO must think journalism-business people are stupid.

The untold story of the Google-Yahoo ad partnership is the exceptional closeness of the founders/leaders of Google and Yahoo -- and whether that exceptional closeness undercuts the credibility of Yahoo's assurances that Yahoo will compete with Google as vigorously after the agreement as before.

Consider how the leading authors who have written books about Google, describe the relationship between the founders of Yahoo and Google. 

First, as background, Yahoo founders, Jerry Yang and David Filo, and Google's founders Larry Page and Sergey Brin were all computer science PHDs at Stanford University a few years apart in the 1990's. 

• "It was Yahoo co-founder and Stanford alumnus David Filo who advised the pair (Google's Page & Brin) otherwise; he told them they should go ahead and enter the search engine business, which would serve as the best way for them to continue to develop their technology and improve their chance of being able to license it in the future." 
  • p.50, "Planet Google," by Randall Stross.

Second, as background, Michael Moritz, of Sequoia Capital, was one of the two original venture capital backers of Google, funding $12.5m of the orginal $25m in venture funding in Google.

The best evidence of market power is when a company utterly disregards its customers' best interests -- because they know their customers have no real competitive alternative. 

• How Google designed its new Chrome browser, to tie its dominant search bar to the previously separate and neutral address bar, into one single 'Omnibox (see p.19),' is Exhibit I in how Google is anti-competitively leveraging its search dominance to its own advantage and to the serious detriment of its advertising customers.   

Advertisers/brand marketers who already are concerned that the Google-Yahoo ad partnership is anti-competitive, and that Google's auctions are anti-competitive because they are not in fact true auctions, should be triply troubled by the anti-competitive implications of Google's Chrome browser technology which efffectively disintermediates brands -- by design.

• Given that Google's Chrome gained about 1% share or roughly 10 million Internet users in the first two weeks of introduction, advertisers should have this new fast-growing trend on their radar screen and concern list.   

What is in the best interests of Google's advertiser/brand marketers?

Google continues to rapidly take revenue share of overall U.S. Internet advertising, per the latest released IAB industry figures.

As the overall Internet advertising growth rate slows from 26% in 2007 to 15% for IH08, Google is strengthening its relative grip  on the overall Internet advertising market in the United States, not just the search market that Google is well known to increasingly dominate with 71% share of searches per Hitwise.  

• What the IAB overall data show is that:
  • Google's market power and networks effects appear to extend more broadly into the overall Internet advertising market; and
  • If allowed to partner with Yahoo, Google-Yahoo, in one fell swoop, would dominate the overall U.S. Internet advertising market that IAB measures. 

Per the new IAB data on the overall U.S. advertising market:

Just when the DOJ is investigating if the Google-Yahoo ad partnership is anti-competitive, eBay bursts onto the antitrust stage with "investigate us too!" acquisitions of Bill Me Later and more classified ad businesses. (See NYT article  and post, and WSJ article for excellent background.)

Why are the eBay acquisitions relevant to the Google-Yahoo investigation? 

First, they spotlight how dominant and incestuously interdependent the primary Internet players are.

Google is on the wrong side of its customers -- as aspiring monopolists often are. Isn't it a hallmark of competitive markets that companies are responsive and solicitous of customers, especially their biggest customers? Isn't competition about supply meeting demand?

• A New York Times article reminds everyone that Google's customers are among the biggest critics of the Google-Yahoo ad partnership.  
  • “Google and Yahoo claim these are auctions,” said Robert D. Liodice, chief executive of the Association of National Advertisers. “Many of our marketers don’t necessarily believe that these are real auctions.”

In a customer-friendly deal that truly offered innovative benefits to customers, customers would be flooding the DOJ with support for it, not flooding it with opposition like they are. 

• The "innovation" that Google claims is in this deal is "unpopular" with customers precisely because the innovation does not benefit customers, but benefits Google and Yahoo by granting them more market power over customers.

Google's big problem is that they "have met with marketers to seek their support." However, "The Association of National Advertisers said it had not found the companies' arguments persuasive." (per the same NYT article.)  

I wrote a new white paper, Googleopoly III, to answer the core question in the Google-Yahoo deal: Would Yahoo compete as vigorously with Google Post Agreement?

• My detailed analysis concludes Yahoo would not compete as vigorously, because the deal would make Google Yahoo's single most important business relationship -- effectively making Yahoo financially, operationally, and strategically dependent on Google.
• I also describe the agreement as a "Hotel California deal" where Yahoo could check out but never leave...

I wrote this white paper now because, there are many indications that the DOJ will decide to bless or block this Google-Yahoo deal next week before the parties' October 11 review deadline.

The abstract of my 10 page White Paper is below: