Antitrust

Cracks are appearing in the foundation of the Google Book Settlement, which suggests some of it may end up crumbling under the current harsh weather of public scrutiny.

The most recent crack to appear was the Court's quick rejection of Google's preemptory proposal to extend the opt-out notice period for authors for another sixty days, and quick approval of the request by a small coalition of rights holders for four more months until September 4th.  

• This suggests that the court was not impressed with Google's effort to date to notify potentially affected authors, a key component of good faith in the proposed settlement.

An ITIF forum on the Google Book Settlement at the Library of Congress last week exposed some other big cracks in the foundation of the settlement.

Yahoo's announced earnings confirm that Google continues to take substantial search advertising revenue and profit share in the first full quarter of financial results since the DOJ blocked the Google-Yahoo Ad Partnership as anti-competitive.

• Yahoo's owned and operated search advertising revenues fell 3% compared to Google-site search advertising revenues which grew 9% -- a 12% differential -- signalling significant market share gain by Google at Yahoo's expense.
• Yahoo's affilitate (syndicated) advertising search revenues fell 16% compared to Google-site syndicated advertising search revenues which fell 3% -- a 13% differential -- again signalling significant and comparable market share gain by Google at Yahoo's expense.

Google's dominance of search advertising profit share is even greater than that of revenues because historically the only other publicly-traded search advertising players with significant search advertising revenues: Microsoft, AOL, and IAC/Ask.com all consistently lose money in this search advertising segment.

The crux of the Google Book settlement will be whether the Court effectively sanctions the creation of one de facto world digital book library, or whether it will facilitate the continued proliferation of many libraries of digital books throughout the world. 

• Put differently, will the legal settlement of the greatest alleged book theft in world history -- de facto concentrate control over access to digital books into the hands of only one entity -- Google (the alleged copyright violator)...
• Or will the settlement preserve the current longstanding competitive/cooperative system of  public, private, and academic libraries where control over access to books is dispersed among many independent and diverse organizations around the country and the world?  

The Internet Archive, a "non-profit library," recently petitioned the Court to try and ensure the diverse latter outcome and not the concentrated former outcome.

The main takeaway from Google's earnings is Google continues to take substantial revenue market share -- it is becoming increasingly dominant in search advertising and search syndication despite the economic downturn.  While Google's growth has slowed, its market share gains don't appear to have slowed as much -- evidence of Google's many network effects.  

• Google grew 6% overall, however when you break out the revenue mix one can see the network effects at work -- because there is a 12% differential within the Google model between direct Google site revenues, which grew 9%, and indirect Google Network revenues (from other website partners) which fell 3%.
• We will have to wait and see what Yahoo, Microsoft, AOL, Ask/IAC and others report in the coming days, but unless there is a major surprise they all will have negative search advertising revenue growth or at best very slow revenue growth that is less than Google's 6%. 
  • When those data points come in we will be able to better confirm how much more market share Google has taken in the first quarter of this year. 

In short, the strongest gets stronger, at smaller players' expense.  

The proposed seminal book settlement of the publishers/authors class action suit against Google, if ratified by Federal Court this June, has the potential to de facto legislate for the U.S. and much of the world, both the monetization mechanism and competitive trajectory of much of the digital books market -- a highly strategic segment of the world's digital knowledge base.

• The competitive stakes are high because books represent some of the highest quality searchable content available in the world.
• Moreover, the seven million books digitized by Google and covered by the settlement dwarf any other digital library in the world.
• Furthermore, the settlement would de facto grant Google exclusive control over the "orphan works" covered by the settlement, which comprise the vast majority of the seven million digitized books.

As an expert analyst on the future of Internet competition, the central question I ponder is whether the mechanism and trajectory that the Google book settlement would entrench -- is competitive or anti-competitive?

• More simply, is antitrust pertinent to the Federal court's disposition of this proposed copyright-infringement settlement?
• The facts and analysis show antitrust is highly relevant to this potential supra-constitutional, court-created, digital book marketplace.

First, the core facts suggest antitrust concerns are relevant to the ratification process of the proposed digital book settlement. 

How can free have a cost? Well a lot of different things are converging in Washington that could bring much more focus to -- "the costs of free" on the Internet.

• Last month's Revised Behavioral Advertising Principles from FTC Staff are largely about making more transparent the privacy "costs" of "free" Internet products and services funded by online behavioral advertising.
• This month's NYT news that House Internet Subcommittee Chairman Boucher now supports passage of new Internet privacy legislation requiring consumer "opt-in" permission in order to exploit consumer information, implicitly recognizes the substantial hidden privacy "cost" of behavioral advertising.
• This week's privacy and security-related complaint to the FTC filed by EPIC against Google's free cloud computing services, further brings to the forefront the hidden "costs" of free on the Internet.

NetMarketShare.com's latest survey of mobile search engine market share has the following market shares:

• 97.50% Google Global
•  2.03%  Yahoo Global
•  0.21%  Ask Global
•  0.09%  Microsoft MSN/Live Global
•  0.04%  AltaVista Global
•  0.03%  AOL Global

NetApplications noted that "Microsoft recently partnered with Verizon to make Live Search the default search engine of all Verizon devices in the next few months."

What are the big forward-looking implications for the broader Internet-related economy of Google's announcement it is launching a new variant of behavioral advertising, called "interest-based advertising."

• Analytically, this may be one of the most significant developments in the digital economy, Internet advertising and online privacy in a long time.
• Why? 

First, it is probably a major catalyst escalating and accelerating public discussion about behavioral advertising and online privacy.

Context is always important, and this announcement does not occur in a vacuum. It has broad implications because of the pervasive reach of the issue and the market leadership of the announcer. For example:

Who buys Twitter?     

By way of background, Twitter bought the search engine Summize in July of 2008, raised $35m more in capital last month, and reportedly turned down a $500m offer from Facebook.

Why is this notable?

If Twitter's future is similar to other fast-growing technology first-movers, Twitter will eventually be bought by a large player, sooner rather than later, like NewsCorp bought MySpace, Google bought YouTube, and eBay bought Skype.

While Google may be at the top of most people's minds as the most likely buyer of Twitter, given its value as a fast-growing originator of searches,   Google CEO Eric Schmidt's much-reported dissing of Twitter as a "poor man's email" struck me as strange, and prompted me to noodle about why Google is uncharacteristically talking down such a popular first-mover app?

Winston Churchill prophetically said: "history is written by the victors." This truism is timely now given Eric Auchard's great column "How the web devours history," that I built upon in my latest post: "Will history be the casualty of an 'ecommony?' If info is free who will pay to archive it for posterity?" 

Given the Internet's natural first-mover dynamic, global scale and scope efficiencies and powerful reinforcing network effects, which I have written extensively on, could the Internet's 'victor' effectively write history by deciding what information ultimately gets archived and found?

To answer that question requires establishing some important baseline points.