September 14, 2008

Playing Monopoly With Google Talking Business

By Joe Nocera

A few days ago, a lawyer representing an entrepreneur called Dan Savage sent the U.S. Department of Justice a nine-page, 4,000-word letter. Savage, 59, runs, a business-to-business Web site that acts as a directory, listing - and ranking - hundreds of thousands of companies that sell industrial products.

Like many Internet entrepreneurs, Savage, who started his company in 2005, built his business model around Google. Using Google's AdWords program, he proposed to make bids on specific search terms - "ball bearings," say - that would ensure that a Sourcetool ad would be placed high on the right hand side of the Google page whenever someone searched for places to buy ball bearings. That's how paid search works.

But because his was a free site, he needed to generate revenue from advertising. For that, he used Google's other ad program, AdSense, which placed targeted advertising on the right hand page of the Sourcetool home page whenever a user clicked through to Sourcetool to find a company that would sell him ball bearings. Savage estimates that he was paid around 10 cents every time someone clicked an ad. The difference between that and what he paid Google to advertise against search terms - usually around five to six cents - was his profit.

According to the letter, Google at first gave Savage nothing but encouragement. By May 2006 - with the company barely six months old - it was earning around $115,000 a month on $653,000 in revenue. According to Savage, his biggest expense was paying Google to advertise against search terms, which was costing around $500,000 a month.

In the summer of 2006, however, Google, suddenly and without any warning, raised Sourcetool's minimum bid requirement to $1, and in some cases as much as $5 or $10. Savage discovered this only after he saw that Sourcetool's traffic had dwindled dramatically and began looking into the reasons why. Because the new Google-mandated minimum bid was so much higher than the maximum he allowed for (usually around 10 cents), Sourcetool had disappeared from the Google home page. That's why his traffic had dropped off.

When Savage asked Google executives what the problem was, he was told that Sourcetool's "landing page quality" was low. Google had recently changed the algorithm for choosing ads that got prominent positions on Google search pages, and Savage's site didn't meet the new standards. (As Google defines it, landing page quality includes a series of attributes - loading speed, user-friendliness, relevance, originality and dozens of others - it deems appropriately "googly.")

Although Google never told Savage what, precisely, was wrong, it offered suggestions for improvement. At a cost of several hundred thousand dollars, he made some of the changes. No improvement. When he pressed Google to explain why the changes hadn't helped, the company gave him the brushoff. "Your landing pages will continue to require higher bids in order to display your ads, resulting in a very low return on your investment," wrote a Google executive named Nathan Anderson on Jan. 2, 2007. "Therefore AdWords may not be the online advertising program for you." Two days later, in another e- mail message, Anderson told Savage to "please refrain from repeatedly contacting our team."

As he stewed about his predicament, Savage came to believe that there was something more nefarious going on. Google, he believed, didn't like his Web directory because it was a search engine - though much more narrowly focused than Google's - and Google found it a competitive threat. What's more, Sourcetool competed directly with, one of Google's "content network partners" - meaning it gets additional advertising revenue because Google directs AdWords ads to the site as well as AdSense ads. (The New York Times, whose parent company owns the International Herald Tribune, is also a Google content network partner.)

As Savage saw it, Google's near-monopoly in search ads - its market share is approaching 70 percent - put it in a position to decide which business models it would tolerate and which ones it wouldn't. Savage is hardly in a position to sue Google for antitrust violations, of course. But he did feel there was one thing he could do - tell his story to the Justice Department, in the hope that it might help stop the Google-Yahoo deal that was announced last June.

That "cooperation agreement" would give the two companies a staggering 90 percent of the search advertising market - a figure so high that even the notoriously lax Bush antitrust department can't look the other way. This week, the department hired a well-known antitrust attorney, Sanford Litvack, to help it decide whether to oppose the deal. The Association of National Advertisers is also on record calling for the deal to be blocked. "We think advertising prices will be higher as a result of the deal," said the association's president, Bob Liodice.

I have no idea whether the Justice Department will try to block the deal, or whether it should. As I learned a decade ago covering the Microsoft trial, there are few areas of the law more complicated, and more ambiguous, than antitrust law.

Google's opponents may fear its monopoly power, but the company insists that everything it does is aimed at "enhancing the customer experience" - a claim that harks back to Microsoft's claims. And like Microsoft, Google built its near-monopoly in rather exemplary fashion: by building a better mousetrap. Still, the more I dug into Savage's complaint, the more I came to think that it offers a near- perfect example of why antitrust issues are so difficult to sort out.

Listening to Google executives explain how its algorithm works, I came away largely convinced that it is operating in good faith. "Our quality score system is an impartial algorithmic score that is designed to enhance the experience of the user, and the vast majority of advertisers benefit from it also," said Nick Fox, Google's product manager for ad quality. In addition to rewarding sites that have the qualities Google - and its users - like, it also tries to weed out, and punish, bad apples. For instance, it doesn't want companies that buy search terms and then play some form of bait and switch. The imposition of high minimum bids is Google's way of weeding out the bad guys.

But it is also true that people like Savage, who are demonstrably not bad guys yet find themselves in Google's dog house - and then can't even get the company to respond to them - feel that they have been treated unfairly by a ruthless monopolist. What makes it worse is that Google simply refuses to acknowledge that its algorithms could ever be wrong. Could Google really treat its own customers so shabbily if it faced true competition?

So what is Google's problem with Sourcetool? One likely possibility - though nobody at Google would say so directly - is that Google views Sourcetool as an example of a practice called ad arbitrage, which it frowns upon. Those are sites that bid on search terms not to provide a service, but simply to con people into clicking through the ads on its site.

But Savage is clearly offering a real service: his directory. And in many ways, his site resembles one of Google's partners, But when I pressed Fox about why the site was in the algorithm's good graces but Sourcetool's wasn't, he wouldn't tell me. All I got were platitudes about the user experience. It wasn't long before I was almost as exasperated as Savage. How can you adapt your business model to Google's specs if Google won't tell you what the specs are?

Google also told me that it never made judgments of what was "good" and "bad" because it was all in the hands of the algorithm. But that turns out not to be completely true. Savage shared with me an e-mail from a Google account executive to someone at another company who had run into the same kind of landing page problem as Sourcetool. The Google account executive wrote back to say that she had looked at the site, found that "there seems to be a wealth of valuable information on the site" - and consequently, her team overruled the algorithm.

The problem with monopolists, of course, is that they just can't help acting like monopolists, even supposedly benign monopolists like Google, and even when they are not consciously trying to rub out the competition. They are always right and everybody else is wrong. They have disdain for their own customers, knowing they have nowhere else to turn. They impose rules unilaterally. They tell small fry like Savage to stop bugging them. That is how Microsoft acted a decade ago, and that, increasingly, is how Google is acting.

Maybe Savage's experience proves that Google has become a company that abuses its monopoly power, and maybe it doesn't. As Google likes to point out, there are thousands of advertisers who are thriving using AdWords and AdSense. But Savage's story gave me pause, and nothing Google said in its defense defused my alarm. As Litvack reviews the Google-Yahoo deal, I hope it gives him pause as well. This could be deja vu all over again.

Originally published by The New York Times Media Group.

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