Google Proves Crime Does Pay – If You Have Enough Market Power

Google, in settling with authors/publishers for $125m over their copyright infringement lawsuits, has cleverly leveraged its market power to tip, and lock in, another Internet segment to de facto Google monopoly control – access to most of the world’s books online. The untold story here is how this settlement:

·         Enthrones Google as the de facto gatekeeper to access most of the world’s books online;

·         Establishes a “new model” for online content distribution;

·         Attempts to set precedent that leveraging market power to extract monopoly rents in an adjacent market is OK; and  

·         Positions Google to become the world’s omni-platform for media distribution that will wipe out traditional media competition, unless antitrust enforcement ensures media distribution competition survives.

Why does crime pay for Google?

In 2005, authors and publishers collectively sued Google for stealing their property in digitizing their books and making parts of them available on line with no compensation to the creator of the work. After the suit was filed, rather than ceasing and desisting as other competitive digitizers did, Google brazenly accelerated its theft, digitizing about seven million books, and making parts available for free. Google understood its negotiating leverage in any settlement negotiation would increase dramatically if Google were able to become the only provider to achieve critical mass in the market for digital books.

As the only book digitizing competitor willing and able to flout the law and weather the increasing legal liability -- given its $14b cash horde, Google shrewdly created a scheme to legitimize its ill-gotten gains -- by paying the equivalent of a fine while more importantly creating a new model to handsomely profit off its brazenness going forward with monopoly rents. 

Simply, it was Google’s unique willingness to aggressively and continuously break the law that enabled Google to capture such a dominant position in the book digitization market -- and to extract monopoly rents going forward on the backs of authors and publishers. Crime does indeed pay -- if you have Google's willingness to break the law and their market power to profit off of their law-breaking.

Enthroning Google as the World’s Online Book Gatekeeper:

The current market reality is that Google is the only significant provider of digitized books on the Internet, with seven million digitized and tens of millions more planned to be digitized by Google.

• (Microsoft, the only significant competitor, announced it was shutting down its book digitization effort in May of this year, after digitizing 750,000 books. Planet Google p.106)

Google prohibits competitive search engines from crawling or accessing the world’s only digital library of millions of out of print books.  

• As Rick Prelinger, Board President of the Internet Archive, said in the New York Times: “…When you start to see a single point of access developing for world culture, by default, it is disturbing.”

Google’s 'New Model' Means Old Models Will Die.

Google’s Chief Legal Officer, David Drummond coyly admitted this was a “new model” for Google for online media distribution. Competitors take note. Google understands the long term business implications of the settlement much better than the publishers.  

The settlement essentially makes Google the largest electronic publisher/distributor of digitized books in the world, and ensures competitors will have little chance of catching up. As physical book publishing follows the economics of newspaper publishing, publishers will less and less be publishers and more and more agents and editors for authors. Like movies bypass the theatres and go directly to DVD or online streaming, most books will bypass physical publishing and go directly to Google Book search.  In other words, this agreement formalizes the path for the demise of book publishing and the rise of e-book distribution.

Setting Precedent Leveraging Market Power into Adjacent Markets is OK:

How did Google extract such a high 37% sales commission for all digitized book sales or views? It certainly was not based on cost competition, because if it was cost-based, it would have had two rates, one for recovery of fixed costs and the second for marginal costs which in e-distribution is almost zero. Google was able to negotiate a flat 37% commission/monopoly rent going forward, because there was no competition or alternative for authors or publishers. 

Google the World’s Omni-Platform for Media Distribution:

Google, the company which controls the largest audience the world has ever seen by far, is now openly admitting through the settlement that it is a vertically-integrated media conglomerate.

• With Google Book, Google Knol, and Blogger Google is the omni-platform for Internet publishing going forward.
• With YouTube and its 44% market share that is rising monthly, Google is also the omni-casting platform for the Internet for all things video.

Bottom line:

Google understands that a "free" Internet is an Internet Google can dominate because it controls by far the largest Internet audience and because Internet economics are driven by audience scale. 

Google also understands that being more willing to steal the property of others than competitors is a surefire way to win first mover advantage and to establish dominant market share in a new segment. Google Books and YouTube are two glaring examples of this scofflaw competitive advantage -- or should we say scofflaw anti-competitive advantage?

Lastly, Google understands that the Internet is not a competitive market, it is at core a winner take all market -- given its natural network effects of network effects. Riding that winner take all wave, Google is positioning itself to the the market leader in all digitized content: from Google Maps to Earth to Blogger, to News, to Knol , to Books, to YouTube etc.

• The supreme irony of this extreme new media concentration dynamic, is that the people who purportedly are very concerned about ill effects of traditional media concentration, have not even noticed that the winner take all economics of the Internet is hurtling us toward one omni-platfrom of media distribution -- the ultimate in new media concentation -- Googleopoly.

In a word, an Internet without antitrust, would be an Internet with little competition long term.