What Do DOJ's Google-Book-Deal Views Signal?

DOJ's 28-page Statement of Interest to the Court responsible for deciding the fate of the Google Book Settlement speaks volumes. 

First, it ensures the current proposed settlement is effectively dead.  

• It is hard to conceive a U.S. Federal District Court Judge approving a settlement, which the United States Government indicates may be illegal under three completely different bodies of law (class action, copyright and antitrust), and also may be per se illegal in multiple different ways.

Second, despite the DOJ's encouraging tone in the press release, the DOJ statement itself set a very high bar for the parties to overcome. Substantively, the DOJ is insisting on radical changes in the settlement that practically would gut the unique and self-serving going-forward public benefits of the deal for the parties.   

• In a nutshell, the DOJ's is effectively urging the deal be radically pared back from covering:
  • ~All books -- to just books-in-print (a fraction of the seven million books Google has copied);
  • U.S. and foreign works -- to just U.S. works;  
  • Scanning and all derivative uses -- to just scanning and snippets;
  • Retrospective and prospective impacts -- to retrospective and heavily-scaled-back prospective impacts; and  
  • Just the parties who get special public benefits -- to enabling most outsiders to share equally in the settlement's public benefits. 

Third, it raises the question if there is still a basis for the parties to settle, because the DOJ recommended fixes fundamentally and substantially limit what the parties can extract from the settlement.

• At core the proposed settlement set up a "marketplace" that largely and permanently benefits the parties to the competitive disadvantage of most everyone not party to the settlement.

• DOJ's implied strictures would take away the special competitive advantages that Google sought to gain from copying seven million books and getting an "MFN" arrangement from the settlement. What it leaves is basically just a settlement with the parties, and it forces Google back to square one in negotiating copyright uses for a very large part of "the world's information."   

• In addition, the DOJ's recommended strictures would effectively eliminate the special competitive benefits and advantages that come at expense of others not party to the settlement.

• Moreover, in tectonically shifting the balance of the settlement from retrospective with a heavy prospective benefit, to primarily a restrospective settlement, one wonders if the $125m settlement amount to creators is now in the right solar system given that Google can't offer to split the vigorish of the proposed self-serving, going-forward pricing-power framework and business model?

• Furthermore, what we now know is that the parties were able to reach a settlement in the first place because they were essentially "paying" the other side with the concesssions and rights of people not party to the settlement. In other words, much of "the glue" of this settlement are benefits that the parties attempted to self-grant themselves at the expense of competitors.

  • If this settlement was hard to negotiate when they were essentially "spending" other people's money and rights, think how hard it will be to renegotiate when the parties have to "pay" their own freight.

• Lastly on this third point, the DOJ's suggestion that Google should have to track down and find many copyright owners to get their permission to use their work, does not "scale" in Google parlance. Google assiduously avoids any effort that is not easily automated, because if it does not automate it does not "scale" -- it simply costs too much in time and money. Google is loathe to concede to anything that it can't automate.   

Fourth, this is the second major worldwide commercial agreement in less than a year that Google has proposed and that the DOJ has found fundamentally illegal and anti-competitive.  

• The DOJ blocked the proposed Google-Yahoo Ad Agreement as anti-competitive and according to the DOJ's special counsel on the deal, the DOJ was hours from filing a Section 1 & 2 Sherman Act monopolization case against Google.
• With DOJ indicating much in the proposed Google Book Settlement was likely per se illegal, the DOJ evidently has discovered and documented a broader pattern of anti-competitive behavior by Google. That anti-competitive pattern of behavior has going-forward implications for this deal and beyond.

Finally, this Statement of Interest document also includes some ominous going forward signals for Google.

• In its statement, the DOJ used key terms that were very broad and inclusive, strongly suggesting that DOJ views the Google antitrust problem much more broadly than just this settlement.
  • DOJ used the term "copyrighted works" and not "books" because the DOJ understands that the settlement implicates not just books, but all types of works that can be copyrighted, video, audio, news, art, music, photos, design, documents, software code, etc.
    • (This is relevant because it suggests the DOJ appreciates the central thesis of my Googleopoly IV analysis that Google is anti-competitively leveraging its search advertising market power as monopsony power over many types of information producers/distributors.)
  • Equally important and significant is how DOJ chose to very broadly characterize potential competitors harmed by the settlement as "other digital distributors." "Other digital distributors" could effectively incorporate most all websites and Internet businesses that Google "discovers" for others through search and that Google monetizes. 
    • (This is also relevant to the Googleopoly IV premise that consumers are harmed with less quality information if Google anti-competitively undermines competitive information producers/distributors.)         
• DOJ ominously had a subject heading: "Potential foreclosure of competition in digital distribution" and also stated "other digital distributors may be effectively precluded from competing with Google" (p.19). This suggests the DOJ understands the core antitrust problem with Google's monopoly/monopsony power is its ability to foreclose competition in digital distribution generally. (See Googleopoly II for the five strategies Google employs to foreclose competition.)
• Another ominous signal in the statement was DOJ's interest in a DOJ-supervised Consent Decree. 
  • Page 19 of the DOJ statement said: "...no actor here has its market power constrained by a consent decree with the Department of Justice..."
  • This strongly suggests that the DOJ expects if the parties can satisfactorily renegotiate the settlement and get court approval, that approval will include ongoing DOJ supervision of Google and the other parties.
• Yet another ominous signal for Google is that the DOJ views Google's book database as a type of essential facility/bottleneck that competitors need equal access to if they are to be able to compete.
  • "...the settlement could be amended  to provide some mechanism by which Google's competitors could gain comparable access to orphan works..." p. 25. 
• Most ominous of all for Google, in my opinion, is that the DOJ understands this essential and powerful point:
  • "The seller of an incomplete database... cannot compete effectively with the seller of a comprehensive product." p.24   
  • DOJ obviously understands that all the many efforts Google makes to preclude competitors from using information Google controls, reinforces its monopoly/monopsony power and potentially forecloses competition in digital distribution.

In sum, this DOJ Statement of Interest puts Google on notice that the Christine Varney Antitrust Division, like the Thomas Barnett Antitrust Division before it, has very serious and broad antitrust issues/concerns with Google.

• The DOJ's encouraging tone that Google could rework the settlement to pass antitrust muster also appears to be a veiled warning -- satisfactorily address these multiple per se illegalities -- or the DOJ will address them in another manner. 
• The open question is whether Google understands its precarious position having tried to implement two illegal agreements in less than a year... or whether they continue to believe they have done nothing wrong and they are being unfairly impugned.