Will Google Submit “The Power of Google Adsense” to Voluntary Oversight?

At the September 22 hearing of the U.S. Senate antitrust subcommittee (titled “The Power of Google”), Google rejected some good suggestions by the Chairman and members as to how the company could be more trusted.  These good suggestions should be reprised when the House takes up the PROTECT IP Act given Google’s important role in fostering the intellectual property infringement that threatens American jobs—starting with the company’s advertising sales group (Adwords, AdSense, etc.).

As Chairman Kohl told Google’s Schmidt: “…[I]n a large measure [Google is saying]  trust us that we  are going to do, and we do do, and we will do, quote, ‘the right thing.’   Is merely trusting Google to do ‘the right thing’ sufficient given your clear business incentives to maximize the value of your  company?  Shouldn’t we be guided by the words of a great president, Ronald Reagan, who said ‘Trust, yes, but verify’?”

The Chairman not only set the tone for the hearing—he described the fundamental problem with Google and the path to fixing it. What lessons can we learn from the Chairman regarding the PROTECT IP Act?

Copyright Alert System Addresses a Different Problem Than PROTECT IP

Some may be under the misconception that the Copyright Alert System fixes the problems covered by the PROTECT IP Act.  Nothing could be further from the truth.  The voluntary cooperation agreement announced earlier this year demonstrates good progress in cooperation among willing ISPs, motion picture and record companies with the Copyright Alert System.  However, that progress should not be understood as having addressed the public health, moral and economic  hazards presented by rogue sites to be covered by the PROTECT IP Act.  This is especially true of the provisions enhancing the responsibilities of companies like Google to control who profits from the advertising they serve to rogue sites.

It is well to remember that the Copyright Alert System (“CAS”) is a voluntary agreement by ISPs and content owners, large and small, to try to address the behavior of third parties who are committing bad acts.  CAS seeks to achieve this through an escalating series of notices to direct infringers, along with so-called “mitigation measures” if users continue to engage in infringing acts after receiving several notices.

CAS is an important evolutionary step in enhancing both corporate and individual accountability in the online environment. It is, however, only a partial response to the problem of  online piracy, and doesn’t address issues related to the operation of rogue sites–or to companies like Google that make deals with rogue sites to serve them advertising and split the profits.  Google is not a part of the voluntary agreement underlying the Copyright Alert System (just like it was not part of the voluntary agreement of the User Generated Content Principles industry group).

What Did We Learn About “The Power of Google”?

At “The Power of Google”, the subcommittee presented both Eric Schmidt and Google’s antitrust counsel with many opportunities to accept the idea—just the idea—of Google’s voluntarily submitting to review by a special master or other authority to verify that Google is not using its monopoly power to profit itself.  Google showed no interest in voluntarily submitting itself to that review and tried to employ  the “Skippy” defense—spreading blame for Google’s wanton and willful acts of mismanagement around the entire industry, even though only Google was prosecuted by the United States for promoting the sale of counterfeit drugs.

Of course, anyone who has ever dealt with Google was not surprised by this lack of interest or failure to take responsibility for its actions.  Take Google Books for one example—Google could very easily have submitted to a voluntary agreement at the outset, but preferred—preferred—to slug it out in court when they thought they just had a group of authors to roll over with Google’s bottomless litigation budget raised through monopoly profits (or “rents”).

It was only when the Google Books case was joined by the U.S. Department of Justice and several countries—Canada,France and Germany among them—that they began to back down a bit when confronted by four of the major world economies acting to protect the intellectual property rights of their citizens that were being taken without consent by Google.  There’s a word for that….

And even though Judge Chin ruled against Google in the Google Books case, Google still have not stopped scanning books.  Not surprising given the Judge’s opinion that “’[The Google Books settlement] would further entrench Google’s market power in the online search market.’”

Remember—Google Books is not even part of Google’s core business.  If you think they resisted doing the right thing with book scanning, just imagine what they will do when the Congress wants them to explain themselves—even a little—about the advertising income that is Google’s primary source of revenue, an unknown amount of which is derived from selling advertising on rogue sites but all of which would be affected by PROTECT IP.

The Need to Oversee Google’s Advertising Sales

Yelp!’s CEO Jeremy Stoppleman told the subcommittee that Google was very much like the schoolyard bully who feign innocence when the Vice Principal discovers him assaulting others: “…[N]othing happened [to stop Google’s anticompetitive behavior toward Yelp] until there was some interest on the government side [in an antitrust hearing].”

At the “Power of Google” hearing, at least two issues revealed themselves that have a direct bearing on PROTECT IP and Google.

First, Senator Cornyn demonstrated that Google’s advertising sales group is completely out of control.   When questioning Google Executive Chairman Eric Schmidt about the $500 million forfeiture Google just paid to the U.S. under a nonprosecution agreement to avoid indictment arising out of seven separate sting operations run against its advertising sales group, Schmidt acknowledged—under oath—that Google employees engaged in selling  advertising for counterfeit drugs in violation of the criminal laws acted  with his knowledge.

It is clear that Google’s advertising group requires government supervision for the sake of public safety.  That may seem overblown, but how many more $500 million forfeitures will it take before the government “gets it”?

Second, in response to questions by Senators Franken and Lee, it became apparent that there was very little that Google could do voluntarily that the witness from Yelp! and others would be willing to trust.  There are so many examples of a lack of trust for Google in the market, but consider one—Google has been unable to secure any licenses for its still-unlaunched music service after a couple years of trying.

Why?  Basically because the music industry wants assurances that Google will not continue to nurture rogue sites and serve up access to infringing materials.

Yelp’s Jeremy Stoppleman identified the core problem:  “So what can Google do?  I think the key would be separating out distribution from its own properties.”

I wholeheartedly agree with Stoppleman’s statement regarding maximizing competition and consumer welfare by separating Google’s functional divisions. But because of the moral hazard involved, but I would start in a different place.

It is Google’s advertising group that continually causes problems for consumers. It appears that they will literally sell anything to anybody as long as Google makes its vig.

Google needs to voluntarily submit the oversight  of its advertising group to an independent review body.  Not because of the moral hazard—because of the criminal hazard.  This is the group that failed seven different sting operations by the Department of Justice.  This is the group that does business with rogue sites and suckles pirates around the world.  When Schmidt told the antitrust subcommittee that Google “gets it”, that’s exactly right—the “it” that Google “gets” is monopoly rents from its advertising monopoly and Google’s advertising group is the rent collector.

It is hard to know how much of Google’s revenues are made up of revenues from illegal activities.  As Santa Clara Law School Professor Eric Goldman told the New York Times, “’How much of Google’s overall revenues are tied to product lines that are questionable?’ he said. ‘For investors, I think they just got a little bit of a jolt that maybe Google’s profits are due to things they can’t ultimately stand behind.’”  These potential misrepresentations are certainly a core claim in the stockholder suit filed against Google in San Diego.

If it weren’t for the fact that Google was prepared to spend $500 million of their stockholders’ money to stave off an indictment by the United States, this is the group that would be the star witnesses of the forestalled criminal trial.

As Guiliani Partners noted in their study of online drug sales: “Initially, this debate was framed around “re-importation” – in other words, the importation (from Canada) of medicines manufactured under U.S. Food and Drug Administration (FDA) oversight and now available at a lower cost via Canada. Under such a system, a patient could reasonably assume that the medicine was safely and properly manufactured under FDA oversight without corruption in the supply chain….Instead, U.S. patients are receiving medicines from foreign countries (albeit ordered through Canada or sources purporting to be Canadian based) that were manufactured or repackaged without any oversight by the FDA or Health Canada (the Canadian FDA counterpart).”

The Guiliani report echoed the findings of the National Center on Addiction and Substance Abuse at Columbia University, crystalized in this quotation from the CASA director, Secretary Joseph A. Califano, Jr.:  “CASA [measured] the availability of controlled, dangerous and addictive prescription drugs like Percodan, OxyContin, Valium, Xanax, Ritalin and Adderall on the Internet. Our findings are alarming: these drugs are as easy for children to buy over the Internet as candy. Anyone–including children–can easily obtain highly addictive controlled substances online without a prescription from Internet drug pushers. All they need is a credit card.”

Secretary Califano directed this information to Google’s Schmidt in a 2008 letter–which CNN’s Dr. Sanjay Gupta reports that Schmidt ignored–and confirmed to Schmidt that the vile practice could be laid directly at Google’s door: “Although Google reports using [methods] to screen out rogue pharmacies, CASA was able to find prominent displays of ads for rogue Internet pharmacies in a Google search for controlled drugs in our analysis.  This suggests that Google is profiting from advertisements for illegal sales of controlled prescription drugs online.”

What kind of a person ignores such a plea from as reliable a source? 

After seven separate sting operations, there is little doubt that Google knew it was profiting from “corruption in the supply chain” and both endangering American children and promoting the infringement of American intellectual property to secure Google’s own profits.

Making money is clearly more important to Google than obeying the laws against the importation of controlled substances including counterfeit drugs sold to Americans indiscriminately online.   Do you really think they will care about any other intellectual property?

There’s nothing wrong with making money, but hopefully Google and its employees can do it in a way that allows them to hold their heads up with their own children and not at the expense of the children of others.

I would suggest to Chairman Kohl that he is spot on, and that the time has come to stop trusting and start verifying, particularly where the Google advertising sales group is concerned.  Or we could just wait until we find out how many consumers were harmed by Google’s support of the smuggling of counterfeit drugs.  Not to mention that denying rogue sites access to Google’s advertising would go a long, long way toward reducing the theft of American intellectual property and preserving American jobs.

PROTECT IP can go a long way toward giving law enforcement the tools to begin answering Chairman Kohl’s question.