Google's Regulatory Outlook 2008

The big question for investors is why?

• Why has Google felt the need to rapidly build up a new lobbying operation in D.C. (rivaling Microsoft's in size) and why did Google just unveil, with great fanfare, its new cutting-edge office space in DC with a party that attracted 650 people and many VIPs?
  • What does Google know that investors may not?

Google's Regulatory Outlook:

Federal Trade Commission: 

Antitrust:

• In gaining the 4-1 FTC approval of the DoubleClick acquisition, Google earned a probationary warning from the FTC: "We want to be clear however, that we will closely watch these markets and, should Google engage in unlawful tying or other anti-competitive conduct, the Commission intends to act quickly." 
• Both the Ranking Democrat and Republican of the Senate Judiciary Committee overseeing the FTC now believe: "Antitrust regulators need to be wary to guard against the creation of a powerful Internet conglomerate able to extend its market power in one market to adjacent markets, to the detriment of competition and consumers."  
  • Many in Washington now fear Google may be becoming the next Microsoft. 
• The EU still must approve the Google-Doubleclick merger by spring. Google's market concentration is much greater in Europe than in the US and the EU has much more legal latitude to block or condition a merger than the FTC does. The EU approval hurdle is more difficult than the FTC was.
• Overall, this is not a good predicate for Google to enter 2008. It is especially not good, if there is a Democratic Administration in 2009, because Democrats generally believe that this Administration has been too lax on competition and antitrust matters.   

 Privacy:

• In 2007, Privacy International ranked Google worst in the world on privacy in their survey; that bottom ranking has increased U.S. scrutiny of Google's privacy practices and policies.    
• But for the Google-DoubleClick merger review, there would not have been sufficient process focus on the issue of privacy to prompt FTC consensus to propose new "Behavioral Advertising Privacy Principles." These principles advocate an "opt-in" obligation on companies collecting private information online for the first time -- among other privacy protection obligations.
  • These principles, if applied, certainly would encroach on Google's current business model and would at a minimum crimp Google's extensive arbitrage of user's privacy.
  • Privacy advocates also have filed still-unresolved privacy charges in the DoubleClick investigation that Google's privacy practices constituted "deceptive trade practices."  
  • In addition, the merger prompted consumer groups to call for a "Do not track" registry and rules (like the FTC's  "Do Not Call" rules), which would limit Google and others from stalking users clicksteams across the web. 
    • Such rules, or even the threat of them, could also crimp Google's business model, especially when combined with the easy technological availability of ad blocking software, which removes any online ads from displaying on one's computer screen.
  • In short, arbitraging users private information for profit is the core of Google's targetting algorithm and special sauce. Privacy is only growing in focus and concern in Washington and will increase even more if there is a new Democratic Administration.

Click Fraud:

• This may be Google's and the industry's biggest dirty little secret.
• According to Click Forensics, the click fraud prevention company, 28% of all clicks are estimated to be fraudulent!
  • That is a much higher fraud rate than any other mainstream American industry.
• This is relevant and important because Google is the market leader in getting paid by-the-click, and since Google has little financial incentive to root out fraud against advertisers. 
• Such rampant fraud threatens Google's most valuable asset -- trust. 

Federal Communications Commission:

Video Programming regulation of Youtube.

• The biggest Google regulatory story flying-under-the-radar of investors and the press is that Google's YouTube is subject to the FCC's MPVD regulations for "Multi-channel Video Programming Distributors -- contrary to conventional wisdom.
• This means Google eventually will be in the heart of an FCC regulatory proceeding to declare YouTube a regulated MVPD. 
  • It will be very difficult for Google to escape being classified as a non-cable multichannel video programming distributor, because video regulations are not in the Title II rules that declare the Internet and broadband an unregulated service. 
    • Just like the telcos were captured by Title VI cable  and MVPD rules, and had to seek local franchises to offer cable, Google-Youtube is similarly subject to Title VI non-cable MVPD rules (not cable franchise rules) because being in Title VI they are separate and distinct from Title II telecom/broadband/info service rules.
  • Politically, it will be even more problematic to escape non-cable MVPD regulations because they include: Equal Employment Opportunity requirements; closed captioning for the hearing impaired, prohibition of obsene programming; reciprocal good faith bargaining; retransmission consent; program carriage; among other requirements. 
    • It also would be unseemly for Google to argue that Google should not be subject to regulatory parity for such rules.
  • In a word, investors didn't appreciate that Google bought their way into a regulated business in YouTube, and as any old Washington hand will tell you, once the regulators get the proverbial "camel's nose under the tent" there is a lot more that can follow.

Net Neutrality

• Many investors may not know that the much talked about FCC net neutrality principles are technology-neutral and apply not only to networks, but also to applications and to content providers (see principle 4).
  • What this means is that Google's new lobbying operation has to "thread the lobbying needle" in pushing for net neutrality regulation/legislation, because it wants the rule to only apply to its competitors and not to Google itself. 
    • This will be a difficult Houdini trick to pull off, because most all of the legal and policy precedent at the FCC -- is for technology-neutrality and regulatory-parity. 
  • This puts Google on the horns of a dilemma. Google wants legal protection from having to pay the full amount of the cost of their world-leading bandwidth consumption. They seek a "neutral" Internet, which means that low-bandwidth users would subsidize high-bandwidth users like Google.
  • On the other hand, they also do not want to have net neutrality regulations/legislation apply to Google, because a principled non-discrimination requirement would not allow Google to innovate and do cloud computing, because cloud computing would require prioritization, scheduling and managing of broadband traffic to work. 
    • Simply, Google would have to earn an exemption from Net Neutrality to do cloud computing.

700 MHz Auction:

• Google publicly pledged to bid over $4 billion dollars in the 700 MHz auction.
  • Google is seriously flirting with becoming an even more regulated company, if they win the auction and become a wireless operator.
• This is particularly problematic in that Google has advocated that wireless broadband be much more regulated inthe future than it is now.
• In addition to pushing for wireless open access, Google unsuccessfully lobbied for wholesale price regulation and rules for all 700 MHz wireless winners (see the open services point in the previous link).

Internal Revenue Service:

Google.org Tax Treatment?

• Nothing is simple or conventional with Google.
• The most interesting issue with Google's decision to fulfill its philanthropic pledge through a for-profit division of Google itself, and not through a legally-separate not-for-profit foundation like most everyone else does, is the tax treatment.
  • It appears as if Google founders penchant for "innovation without permission" may also extend to tax treatment.
  • The whole reason why non-profits are set up the way they are is a bright-line in the tax code and IRS regulations.
    • For-profits are taxed, not-for-profits are not taxed.
  • At a minimum, Google's novel approach or corporate/financial engineering innovation will have to be fully vetted by the IRS to be determined if it is legal or not. 
    • I raise this prospect, because on the legal issue of intellectual property and others, Google has leapt before it looked.

Tax treatment of Google's unprecedented employee benefits.  

• In naming Google the number one company to work for in the U.S. in 2007, Fortune documented in detail the lavish, extravagant, and extensive benefits that all Google employees enjoy, including unlimited free gourmet meals like roast quail; subsidized massages; full concierge service; free washers and detergent; the list goes on and on.
• The tax question is who bears the tax liability for these unprecedented and extraordinarily lavish employee benefits for ~16,000 people: Google shareholders? Google employees? or the American taxpayer?  

This is meant to be an illustrative list of many of the top regulatory issues facing Google in Washington, not a comprehensive one. There are many more cats and dogs issues out there.  

• Moreover this outlook does not include Congressional issues or court lawsuits like Viacom's $1 billion copyright infringement suit against Google-YouTube, which is just one of many intellectual property suits pending against Google.