scottcleland.jpgScott Cleland, Chairman of NetCompetition.org, a net neutrality forum funded by broadband companies, discusses Google’s rising power and what he sees as the ominous implications of it. Scott is also President of Precursor LLC, a Washington-based telecom research and consulting firm.


TRANSCRIPT

Chip Griffin:  Hi, this is Chip Griffin, and my guest today is Scott Cleland. He’s the President of Precursor, LLC, a Washington based telecom research and consulting firm. He’s also the Chairman of NetCompetition.org, an e forum on net neutrality funded by broadband companies.

He’s here today to talk about Google. And, let me just tell you, he has some rather contrarian views about that company. He’s not enamored with them, from a business practices standpoint, although he does certainly seem to like their products.

He’s not someone who’s new to controversy. Back in the telecom boom, he called out WorldCom. In fact, “Fortune Magazine” said that he was ahead of the pack in raising questions about that company. And, it led then, WorldCom CEO, Bernie Ebbers to describe him as ‘that idiot, Washington analyst’. So, he’s not afraid to express his views, and that’s what he does for the next 28 minutes. So, join me and listen in.

So, I think it’s safe to say, Scott, that Google is a fairly admired company in the blogosphere and the Internet space. But as they get bigger, they acquire more critics, and I guess it would be safe to say that you’ve been critical of them in the past. What’s your biggest concern?

Scott Cleland: 
Well, first of all, let’s put them in perspective. Google has an awesome search engine. I think it’s the best search engine. And, they have a lot of things that they’ve done right, and that they do extremely well. My point is that there are a whole lot of people out there fawning over them, and looking the other way as Google does a lot of things that should make everybody very, very concerned.

And, I think one of my main themes has been that people don’t appreciate that Google now has market power. I call it ‘Googleopoly’. You can find it in my analysis on www.Googleopoly.net. And, I also testified before the Senate Judiciary Committee on the Google DoubleClick merger.

So, I’ve been looking at this for a while, concerned that, essentially, Google is becoming the ultimate gatekeeper, or the bottleneck to the world information economy. Google is the world’s leading information broker and the amount of influence they have is staggering. They have virtually no accountability to virtually anyone.

Chip Griffin:  So, really you’re beef then isn’t with their products, it’s really more with their business practices.

Scott Cleland:  I am impressed with Google’s searchability and its products, and many of its services. I am deeply dismayed at the fact that they have virtually no accountability, third party checks or checks and balances, given the amount of power and influence they have over the world’s information. So, that’s my main concern, and that’s a big concern
.
Chip:  So, give me an example of this power that you’re talking about, and how you think there’s a risk.

Scott:  Well, let’s look at it several ways, and if I forget bring me back to it. But, let’s look at it from just one way that should caution everybody, especially in the journalism world.

Essentially, Google is so good that it is becoming the de facto ‘paymaster’ for online content. So, if we look at search, according to the FTC, it’s a unique segment, and they have an ever increasing share.

If it’s ComScore, it’s 60%, and if it’s Hitwise or Nielsen, it’s a little higher. But when you search online advertising revenue share, they’re in the 80 90% range, so they are close to being what’s called a monopoly. They’re clearly dominant. And in Europe, they’re already at 90%, so they are a monopoly of search there.

So, when journalists or content or bloggers seek to monetize their content online, increasingly, they have to depend on Google. You have are “New York Times,” “Washington Post,” “CNN, Chicago Tribune,” “USA Today,” and many publications powered by Google. And, as more and more content goes offline to online, two things happen: The value falls by 90%, and then the last 10% is collected, predominantly, by Google.

And so, there are all these folks that are out there concerned about media ownership, and too much media concentration in the physical world, and they’re totally blind and totally missing that Google is assembling more worldwide control over content in journalism, than any of the big content companies could ever dream of having. And so, because they have no restrictions, whatsoever, they’re achieving this on a worldwide scale.

So, that’s one concern, but the other concern is an anti competitive one. Whenever you have a monopoly that has no regulatory oversight, they can do two bad things. They can self deal, or they can front run. Now remember, Google is the world’s largest information broker and ad auctioneer. And, when I say self dealing, they get to see what all the supply and demand is, virtually, and they know what the prices are, and they can chose to do whatever they want, and there’s nobody that can check their work, or check their numbers.

And so, they can run that auction. They’re like a market maker in securities. And the CFTC, or the Commodity Futures Trading Commission would never allow a company to run a commodity market without oversight, but Google does it routinely. And then, they can also front run in the sense that if they chose to advertise against a competitor, they can, and no competitor can ever outbid the house. Essentially, if Google bids on AdWords, which it does, it can always bid more because it’s basically paying itself. Those are two really big concerns.

Chip:  I think you’ve made a compelling case that there are potential problems with Google’s power. Are there things they’re doing today that are already exhibiting the use of that power?

Scott:  I think there are lots of instances. You have trademark folks that are suing in court because Google is not very diligent in protecting trademarks, for like Geico, American Airlines, and Marriott. A lot of company brand names that want to find customers on the Internet, Google is not supposed to let those brand names be used in search terms or in search ads, and they end up used routinely.

So, those companies are feeling hurt. Advertisers that really have no other choice but Google, because Google reaches 700 million users and over a million websites and nobody else comes close to that.

Advertisers are hurt by click fraud. Google has no incentive to really route out click fraud, because it’s a revenue based business and if they route out click fraud, their revenues and profits go down.

Click Forensics, an independent provider, explains that 27% of all clicks are fraudulent. Advertisers are being fleeced and fleeced in a big way. I can’t think of another mainstream market that has that high a fraud rate that is tolerated.

And then the last one is content. Content folks are being ripped off. I think the last time I counted, there were seven different industries that were suing Google for infractions or infringement of their copyrights, whether it is news services, or publishers or authors, or Viacom, TV producers, movie producers, foreign press folk. There are a lot of people with a lot of legitimate beefs.

Google just kind of smiles and you say, we’re the number one brand. We work for users, which they don’t. A lot of the stuff is awful.

Chip Griffin:  Certainly I think that some of those examples, some of those lawsuits, are pretty strong, particularly in the image arena. But aren’t of those lawsuits also just from companies that are scared of the Internet and don’t understand technology? It’s sort of mixed a bag, isn’t it?

Scott:  Well, we can look at the motives and we could say that some of them may be worried about the Internet, but they are actually on it. Marriott and American Airlines all the companies they mention on trademark, they’re spending huge amo

unts on the Internet so they’re there and they are feeling like they are being ripped off.

A lot of content are trying to find ways to make money. I think Viacom is trying to find ways to make money on the net. It says that there is Viacom’s content that’s been downloaded and watched 1.5 billion times over YouTube. So they feel like they’ve been harmed in a big way. And so these are not trivial concerns. I have many more, but those are three kind of buckets of where people have legitimate beefs today.

Chip:  I guess the obvious question here is what is the solution? You make a compelling case that there’s a problem, but how do we deal with it?

Scott:  Well, what’s really ironic is that Google also is one of the most proactive companies now in Washington, trying to slow down, restrict or manage its competitors through the regulatory process. Google has argued that Microsoft shouldn’t have to get out from under its antitrust decree.

They are pushing net neutrality, which is basically would freeze the business model to Google’s advantage to potential broadband competitors disadvantage. They have done the same thing with open access. They are very strongly promoting copy left, which is reform of copyrights so that they won’t have to pay for the content that they use.

So, there’s down the road I think Google will increasingly get wrapped around the axle in Washington and in the EU, because they have been… they have enormous amount of market power. They are abusing that market power in multiple ways, in multiple directions and they have virtually no accountability by any third party or government.

Chip:  You touched there on net neutrality, that’s obviously been one of the hot button issues in the blogosphere over the past couple of years. Where do you come down on that? I know that you have done a lot of work on that area, as well.

Scott:  You know, with full disclosure: I’m chairman of Netcompetition.org, which is a net neutrality forum, funded by broadband companies. I am a free market advocate. I don’t like government regulation that is unnecessary, certainly economic regulation. So, we and I are very opposed to net neutrality.

Basically, what I look at: this issue didn’t exist until Google put it on the map. It basically funded the lobbying campaign to make it a big issue. The new term wasn’t even thought up until 2002. It is a term that we have brought forward by Google and it advantages Google in a huge way.

It says, if we have a one tier Internet or there can’t be any discrimination, basically, those who have a good situation now will have one forever. Google, it’s a huge corporate welfare scheme, a multi billion dollar welfare scheme, where they want users to pay for the bandwidth that Google uses.

Frankly, I find that offensive. Google is one of the most profitable companies on the planet and to take a pro active public policy position, which says, I want to pull a reverse Robin Hood. I want to rob from users and take it to me, take it to Google, which are the rich.

It’s outrageous that they want to shift their costs to the American consumer. It’s outrageous!

Chip:  What do you say to the argument amongst some that consumers will want and need low cost, fixed rate access to multi media content and that it needs to be kept really inexpensive in order things to blossom. I know, for example, just this week there was some discussion about Time Warner, which I guess is experimenting with a metered broadband usage in, I think, it’s in Beaumont, TX.

There is some concern if that spread that that would really put a squeeze on things like YouTube and other applications that really depend on bandwidth.

Scott:  Well, this is the kind of Silicon Valley dream la la land where they, because they are cool, and they have owned the word innovation, that the rest of the world should shovel money at them to subsidize whatever cool idea they come up with.

While that might be great, we don’t say that, look, any entrepreneur should be able to have unlimited electricity. Any entrepreneur should be due unlimited water. Any entrepreneur should be given unlimited land that they need because all three of those things: electricity, and water and land are necessary for innovation.

When you look at it that way, it’s preposterous. I mean, just because Silicon Valley wants cheap bandwidth in order to subsidize their R&D and their product development, doesn’t mean that the average American should just roll over and say, oh, yeah, I think Google and eBay and Amazon, they aren’t profitable enough and we should subsidize their 90% gross profit margins.

And we should subsidize Silicon Valley entrepreneurs, because they wouldn’t make any money unless we give them unlimited free bandwidth. It’s preposterous, but it’s conventional wisdom in much of the country.

Chip:  So would you characterize net neutrality then as government price control?

Scott:  Oh, definitely. Basically one size fits all price regulation, hiding behind a slogan. It’s basically saying we should socialize the net and it should be neutral. Every bit should be treated the same. And that’s preposterous, because we know that voice calls or voice over the Internet calls require, if they were delayed, you would have a lousy connection.

Everybody agrees that voice calls should be prioritized above others. And if you slow an email by a few nanoseconds, no one is going to notice. Or if a P2P, even a download may be delayed for a few seconds out of a few minutes, the earth is not going to stop rotating on its axis.

So, there’s prioritization used everywhere in virtually every business that has ever existed, because the world has different things that they demand. There are different types of supply. Net neutrality implying one size fits all, to different technologies, different types of demand, is preposterous.

Right now we have free WiFi. We have low price dial up. We have low price broadband. We have higher price broadband as you get more and more speeds.

That’s because that’s what users and consumers want. That’s what a market produces. It doesn’t produce all of the same of one kind. It provides diversity and variety for users. That’s what makes a marketplace.

Chip:  I would imagine with some of the views you have expressed, I know where to go with this, but what’s your observations on the potential on a Google Yahoo deal on advertising?

Scott:  Well, I think if Google didn’t have market power it wouldn’t be an issue. But Google has, at the low end, 60% search share and probably below an 80% of search advertising revenue share. Yahoo is the strongest number two with 20% of the search share and about 10 to 15% of the revenue share.

So what you are talking about is a deal between number one and number two, in order to fend off the weak number three, which has about 9% and probably 5% of the revenue, when Google already has a deal with number four and number five.

So if a deal between Google and Yahoo occurred in the unique segment according to the Federal Trade Commission of Search Advertising, they would have control of number one, number two, number four and number five, which those five contribute to like 95%+ share of the market.

It’s a problem. I believe it will be considered collusion when it is investigated closely.

Chip:  So were you a fan of the potential Microsoft acquisition of Yahoo?

Scott:  Well, I think it’s sad that the FTC punted and made such a big mistake by letting Google and Double Click get together. Because if they were going to try and maintain a competitive marketplace, they should have blocked that transaction, as I testified before the Senate on.

I mean, basically what it did is it combined the two larg

est world wide audiences on the Internet with the two largest advertising networks of advertisers and the two largest reaches to website publishers. It tipped the market so that no one is going to have a chance or catch Google after this.

With that bad predicate and that bad situation, because the government blew it, now, where do we go from here? Having a stronger number two is better than having a weak number two and weakening number three.

And so, while Yahoo and Microsoft, in a perfect world, would you prefer that Yahoo had remained independent? Probably. But it isn’t a perfect world. It’s a damaged, imperfect world because of how much market power Google now has and because the government blew it on Google Double Click.

Chip:  You have talked a bit about Google almost in media esc terms, as far as being more of a content company than I think most people envision it as, even though they do host a lot of content. One of the areas where they do host a lot of content is YouTube. I know that has come under a lot of criticism of late for some videos there that have some homeland security implications.

Scott:  Yes, we should talk about that, but let’s put in perspective Google is definitely a media company. With YouTube they stream over 30% of the streaming on the Internet and that’s nine to ten times more than number two. So, if anybody thinks that Google is just a search company, it isn’t in the media business, they just don’t understand the facts.

They also don’t understand that Google is cached more of the world’s information on its computers, potentially digitally copied it and multiple copied it, that it is the world’s largest library right now, digital library. So, it is in the information content business. It is the world’s largest information broker and probably going to be the most powerful global media company going forward in the years ahead.

So, now you ask the question, which is a legitimate one about homeland security. This is a very interesting thing, is the chairman Leiberman of the Senate Homeland Security Committee in the Senate, and his ranking member in a bi partisan request ask Google to take down al Queda or other terrorist sites and content that Google was allowing people to search for.

The argument that the chairman and committee said, this isn’t free speech. The United States Supreme Court historically and just affirmed a couple weeks ago that there is no free speech protection for inciting harm to others. And if terrorist content, basically spreading and trying to promote terrorism against Americans and other democracies around the world, if that is not inciting harm or violence to other people, nothing is.

Google refused to take down al Queda branded content. I mean, this is stuff just like there is an NBC or Google logo or other things on different wherever you go, these terrorists groups put logos on their content to brag that, yes, this is al Queda content or whatever. And the fact that Google will not take that down is outrageous. It underscores the point they don’t think they’re accountable to anybody.

They are probably one of the most moralistic, arrogant and sanctimonious companies that has ever existed, where they basically make up their own rules. And they don’t expect to follow law. They’ll follow California Privacy law. They’ll follow industry standard procedures on privacy.

They have something they call “Innovation without Permission, ” which basically means we shouldn’t have to follow by normal internal controls. We shouldn’t have to vet things legally before we do them. We just do whatever we want because innovation is such a cool word and such a cool thing that people will forgive us later if we produce a good product.

So this is a company that inherently thinks they knows what’s best, in that they don’t believe they really should be subject to almost any kind of accountability or responsibility to anybody. It’s even remarkable they don’t even think they’re accountable to their shareholders. When they went public, they gave themselves ten votes to every public shareholder vote and they basically said in their ITL letter that investors are going to have very little say over how we run this company.

So, Google has set out to not be accountable and I have always known that when somebody is unaccountable, what they say about power corrupts, and absolute power corrupts absolutely. Well, they’re getting enormous amounts of power. And there is an incredible deficit of how much accountability is offsetting that power.

Chip:  I just want to circle back a minute. What was their objection to removing this al Queda content?

Scott:  Oh, they said it was free speech. And it’s preposterous! They’re basically saying that Google has its own definition of free speech and it’s not respecting what the Supreme Court has consistently define as what free speech is.

Chip:  Right and they do frequently police content in other ways, obviously for copyright violations and such. I mean, in the past thought they have been helpful in some areas, right? I believe weren’t they one of the ones that turned over a list of searches to the government when they were looking for information on I think it was child pornography, was that correct?

Scott:  No, actually they fought that.

Chip:  Oh, they fought that.

Scott:  They fought that very aggressively and they like to run that around as part of their privacy bonafides because they have a horrible… Privacy International, which we found ww.privacyinternational.org ranks Google as the world’s worst on privacy.

One World Trust, the world’s worst on accountability. These are independent organizations that have basically tagged Google as not very friendly in privacy and not accountable.

Chip:  I mean, I think that come as a surprise to a lot of people, because the perception is that the Silicon Valley companies are sort of the guardians of privacy.

Scott:  And the thing about Google is you have to admire them and I do. They have built the world’s best recognized brand and one of the best loved brands. Basically people find great utility in the search, but they don’t have a clue that Google’s basically stalking them across the net.

And basically that when they say when we do targeted advertising, it isn’t that great. We only send ads to people that they would want to see. They treat the average user as a target. How they, why they consider them targets, is they stalk them as they go from website to website.

Remember, Google works with over a million websites. They deal with. So, they can watch you wherever you go. They also read, if you are a Gmail user, they read your email and they are tracking where you are searching. If you use the 411 service, they are making a voice print of your voice.

People don’t have a clue. Oh, and street view, they take pictures of people’s houses and the “New York Times” story, how somebody was really offended that you could read the books and see the cat in the window. They found that that was a huge violation of privacy.

And so, a lot of their products enable stalking of Americans. They make it efficient. The problem with and there have been Pew studies and other studies, which have shown that people don’t understand what Google is doing with its information.

Chip:  So, how did you come to be involved with it? Obviously you know a lot about Google at this point, but what brought you in your career to this point where you are interested in focusing that much on this issue?

Scott:  Good question. In a previous iteration of my career, I ran the top independent investment research firm called “Precursor Group” not Precursor All Fee, and worked for industry and for companies. But in 2004 and 2005 I was CEO of the number one ins

titutional investor, Independent Research company on Tech Intellicom. And in that, I have been watching and following, as an analyst, Google from its inception, since the way it was described before it went public, we were watching it and kind of amazed about it.

So I have found that to be one of the most interesting companies I have ever seen and so, and then as I got into working for Precursor and became chairman of NetCompetition.org, it became clear that the whole net neutrality and copy left movement that’s trying to overturn copyright, was really kind of funded and driven by Google, this upstart.

So, they are such a dominant force, have such an amazingly ambitious agenda in Washington and around the world. Just their mission, I call it a megalomanical mission, in the sense that they want to organize all the world’s information and make it universally accessible and useful to Google.

But so, I have been intrigued by them and they have been front and center. If any analyst wants to understand the convergence of the tech and the communications sectors and I am a tech com analyst, you have to understand Google. They are the big dog. They are the leader.

They are the one that is changing things the most, disrupting things the most, and the one that has the most aggressive public policy agenda to hamstring their competitors.

Chip:  Great, Scott. I appreciate you taking the time to join us today. You’ve certainly offered some great insight and some interesting perspectives and I appreciate it.

Scott:  Thank you very much, Chip.