Media Futures, Part 5/5: ARBITRAGE: II. Crisis

THE COMING INTERNET ADVERTISING CRISIS

Most economic cycles have key protagonists that connect multiple actors and in turn attract legions of capital.  One could argue that one of our most recent cycles, in addition to Housing, Commodities and China has been Google.  Google is the central actor in an Internet Advertising action adventure flick that began in 2002 with the dawn of Overture and AdWords into billion-dollar businesses, and came of age in Overture's acquisition by Yahoo! and Google's celebrated IPO.

Now the question is, “what might be the equivalent of the 1998 bond market crisis for Internet media?"

Aug. 29, 1998, Saturday, AP

Russia's Crisis Reveals the Ugly Side of Globalization

"If the current correction in stock prices turns into a full-scale bear market, meaning a retreat of more than 15 percent in the Dow, historians will almost certainly see Russia as the trigger. The reason, to use the buzzword of the mid-1990s, is globalization: the ugly version.

The good version was peddled right up until the current crisis erupted. It held that capitalism was spreading through the places where socialism once reigned. Tapping new markets and billions of new consumers, multinationals had already begun to earn big money abroad.

The ugly version is of more recent vintage. It goes like this: Currency crises can zip from one changing economy to the next, spreading deflation around the world and leaving recessions in their wake. No one, not the United States or the International Monetary Fund, has the power, or perhaps the will, to do much about it."

Here are two disaster scenarios:

1.  Spitzer continues to focus attention on requiring Internet companies to "issue an accounting of its installation of advertising, adserving, redirecting and toolbar programs."

He has started with Intermix, a relatively minor player in a network of adware companies.  Why is Spitzer tackling this?  Well, it's a question of legal rights for many of us here in NY, despite the fact that Intermix is Delaware-based and operates in Los Angeles.  According to Spitzer's office:

"Intermix has spread its advertising programs onto millions of consumers’ hard drives.  According to Intermix’s own figures provided to this office, this includes more than three million installations to New Yorkers."

That has got to be like 1/3 of the population of the entire state!  I am likely one of the victims, as I probably willingly downloaded a "free" Pokemon screensaver in the wake of a powerful affiliate marketing campaign from my 6 year-old son.  The lawsuit continues that,

"Intermix either fails to disclose these additional programs in any manner, or hides mention of them deep within lengthy, legalistic license agreements."

In fact, many of us victims did indeed agree to install something onto our computers; and frankly, speaking for the attention-deprived, overworked NY infoclass, I wouldn’t have bothered to read the disclosures even if they had been at the top of the "click here to download" window in short bold print.

As an injunction, Spitzer has asked [Intermix] "to issue an accounting of its installation of advertising, adserving, redirecting and toolbar programs."  Suffice it to say, these metrics will make for very interesting reading.  Now the real issue will be whether Spitzer stops with Intermix (highly unlikely) or in the spirit of his investigations of conflicted investment banking practices, he subpoenas all Internet companies who are engaged in installing "advertising, adserving, redirecting and toolbar programs." Intermix is such a small player compared to companies such as Google, Yahoo, IAC and others who have more than $5b in advertising revenue combined at stake in precisely these areas.  Gulp.

Kenneth Dreifach, chief of Spitzer's Internet Bureau, said the office is ``limited only by the bounds of creativity and diligence of our investigators which is limitless.''  And don't expect Spitzer to focus only on companies that make and distribute spyware, Dreifach said…. Spyware legislation typically defines it narrowly as surreptitious downloads that monitor a users' activity and could steal personal information.  Spitzer goes further--to include downloads of advertising onto hard drives that may or may not extract personal information.  Spitzer's spyware investigation recalls his successful national crusades against conflicts of interest among Wall Street stock analysts, dealers of mutual funds and insurance companies: A consumer concern is followed by a single lawsuit in an enforcement no man's land.

(If you haven't please read David Jackson's excellent series of posts in the past 2 weeks on implications of Spitzer's suit on the stocks.)

This is not to suggest that anybody other than Intermix is going to be served, but this does raises the specter that Google and others will be forced to account for how many different programs they have installed on their users' computers and what data they collect in exchange.

We also provide ways to access all this information without making a special trip to the Google homepage. The Google Toolbar enables you to conduct a Google search from anywhere on the web, while the Google Deskbar (beta) puts a Google search box in the Windows taskbar so you can search from any application you're using, without opening a browser.

The virulent anti-Google site, Google-watch.org, says the same thing with a different accent:

Google's toolbar is spyware:
With the advanced features enabled, Google's free toolbar for Explorer phones home with every page you surf, and yes, it reads your cookie too. Their privacy policy confesses this, but that's only because Alexa lost a class-action lawsuit when their toolbar did the same thing, and their privacy policy failed to explain this. Worse yet, Google's toolbar updates to new versions quietly, and without asking. This means that if you have the toolbar installed, Google essentially has complete access to your hard disk every time you connect to Google (which is many times a day). Most software vendors, and even Microsoft, ask if you'd like an updated version. But not Google. Any software that updates automatically presents a massive security risk.

One grows old and poor prognosticating about the imminent collapse of one high flying stock or another.  And so I am not going to predict whether Google will run ashore in the next few months.  What I will go out on a limb with, however, is the forecast that should Google be required to provide an open accounting of their toolbar installations or any other key usage metric, that they will look arrog-awkward.  Remember the very mortal Bill Gates during his testimony during the Antitrust trial?  Do you think that Sergey will charm the judge and jury by bouncing into the courtroom on his gymnastic spring sneakers?

(Please refer to my August 2004 post entitled Google, Show Us Your Clicks!)

2. Justice department investigates Google for monopolistic behavior.

We are constantly reminded of how fickle technology can be and how quickly companies can emerge out of products that can emerge out of features and surprise an incumbent.  Still, Google has established a strangle-hold over key avenues of the information highway:  first and foremost they continue to grow search market share and remain, by far, the greatest source of volume for any advertiser looking to generate qualified clicks.

The power of Google as society’s search engine of choice has already inflicted significant harm on a number of companies, including EBay.  Since January, Google’s stock is up more than 20% while EBay’s is down almost 40%. 

I do not think that this 60% divergence between Google and EBay’s valuation in the past 6 months is independent.  Google has taught consumers that they can find mostly everything they want without using any other Internet service.  Often repeated by Google’s management and the first sentence of its corporate overview,

“Google's mission is to organize the world's information and make it universally accessible and useful.”

Why shouldn’t this information include auction listings on EBay?  Actually, EBay buys Google AdWords for the right to bring Google searchers to their sellers.  In a way, EBay pays to get f&%$?ed by Google.

Meg Whitman responded innocently to  Google-as-competitor in 2003:

Right now, we view Google as a very cooperative and helpful partner with us. We are one of Google's largest advertisers, not only here in the United States but in most of the countries of the world in which they operate. What we do is we buy Google keywords on behalf of our community of sellers. So, in other words, if you are interested in buying the word "surfboard," we can help our buyers get placement on Google by effectively helping them on their behalf buying those keywords.

It would be enough if Google were simply the dominant source of consumer attention on the Internet for global advertisers.  That alone would establish the company as a critical exchange.  But Google set a broader agenda with its AdWords program, which is the only broker authorized to sell access to this liquidity.  Sort of like if Goldman Sachs were the only one authorized the sell stocks on the New York Stock Exchange.  Hmmm… bad example…

Although Google’s hallmark is stupid easy self-service for advertisers, don’t confuse this with a level playing field.  Google limits the information it shares with advertisers, who are entirely dependant upon Google’s own ad brokerage unit for flow (both that of their competitors and that of themselves).

In the past, both Larry and Sergey and the rest of the Google corps have celebrated the elite complexity of their Internet solutions.  As their audience has swelled, they have even managed to hide one bit of information that they need no fancy algorithm for, namely the number of worldwide Google users.  Go ahead, search for “total # google users” and see  what you get in return.
Even if you read through the Google timeline, there is curiously little if anything in the way of the number of users.

I believe that the combination of Google’s massive volume of search queries, combined with the manner in which it hides its metrics, gives it an unfair advantage over potential competitors.  And we haven’t even touched on AdSense, Google’s set of trading technologies for brokering attention on other people’s liquidity pools (in particular AOL).  Many analysts suggested that for 2005 Google will likely represent more than 40% of total Internet advertising revenue.  Do no evil.

And so, the question emerges as to when might the justice department decide to investigate Google for anti-competitive practices. Should this happen, the combination of Google’s misfit clunkiness at being open, combined with the uncertainty of legal proceedings would introduce enormous volatility into its stock.  It would be mild if Google were only to suffer a 50 point drop, followed by a perhaps even larger gain.  We could assume that such extremes would whip the Nasdaq into a frenzy and, for a moment, challenge our own unconscious addiction to the populist, conservative and above all white Google search interface.

Comments

[anon]

I am enjoying your (remarkably intellectual) set of posts on this "arbitrage" formulation. I never dreamed I would have a chance to satisfy a jones for the Frankfurt school and ordinary language philosophy with the economics of search and advertising (Although, have you ever read Marcuse on advertising? That would make an interesting riff on Google and "cultural hegemony". In a sense, search engines and the way they shape our consumption of information are a distillation of some of the Frankfurt School ideas on capitalism's role in the "culture industry".)

In any case, shouldn't you be able to make Google transparent (esp. in terms of the number of users, but certainly also in terms of less obvious metrics) by using panel data from comScore or NetRatings?

Looking forward tothe rest of your series...

[Frank Ruscica]

No need to regulate Google, as disruptive biz models are coming to market. Details coming online at:

http://landof.opportunitv.com/businessplan.html

Short story: Opening up the ad markets will give rise to the adbitrageurs who will, via their trading, deliver the information that will, in turn, make possible a deeply liquid market in customized education and career services -- the mother of all global markets...

[fred]

i wonder if the most anti-competitive part of google's business is their near dominance of the pool of text ads. i know that overture is also a supplier of them, but it seems like google controls like 75-80% of the supply of them.