A Thought for the EU Antitrust Regulators: It’s More than a Label

As Google brings its snow cannon to bear on the European Commission’s antitrust investigation, a couple of suggestions for meaningful change that would increase competition in the market.  (These are also appropriate suggestions for US regulators.)

Sale of YouTube:  Google should be forced to sell YouTube for several reasons.

1.  Google has subsidized YouTube from the day it was acquired and the company could never stand on its own.

2.  Google’s subsidy has only extended to YouTube’s overhead costs and not content acquisition costs which it gets for free (by taking) or for a share of revenues that it has refused to have audited.  YouTube has perfected the “notice and shakedown” business model as a way of using the threat of Google’s vast litigation budget to keep smaller players from challenging YouTube and from imposing the “forced monetization” on artists and other rights holders.

3.  Google subsidizes YouTube from its monopoly rents derived from search and advertising, thus extending its monopoly from the search vertical to the online advertising vertical to the online video vertical (including video search), and now to the cable television vertical with Google Fiber in which YouTube will play a leading role.

4.  YouTube already has extensive clips, sometimes entire shows, from many of the cable channels that are not included in the Google Fiber launch (e.g., CNN, ESPN, AMC).  These clips will now be delivered straight to the home.  Just like the old Napster drove broadband penetration, Google is no doubt planning on its (nonunion) YouTube affiliate subsidy helping to drive penetration of its Google Fiber cable television.  And no one will be surprised if Google Fiber is also being subsidized from Google’s monopoly rents from search, advertising, video search and YouTube–a classic example of cross-subsidies.

5.  Got an iPhone?  You very likely have a YouTube app that came with your phone.  If you can figure out how to delete that app, please let me know.  So the cross-subsidy issue extends to mobile as well.

6.  Mr. Almunia may also choose to focus on how YouTube appears in Google’s search results.  Just like the litany of other Google products that it mysteriously seems to favor–and in at least one instance acknowledged it favored–YouTube is no different.  Try searching for 10 current hit songs on Google–especially Anglo-American songs.  I will lay you better than even odds that the only video search results that appear on the first page will be from YouTube (or Vevo, which is essentially dependent on YouTube).

How likely is that to happen all by itself?  Senators Blumenthal and Franken summed it up at the recent U.S. Senate Antitrust Subcommittee hearing:

Senator Richard Blumenthal from Connecticut [told Google’s Eric Schmidt:] “You run the racetrack, own the racetrack, you didn’t have horses for a while but now you do and your horses seem to be winning.” To which his colleague from Minnesota, Al Franken, joked: “Google might be doping the horses.”

When you consider that a senior Google executive acknowledges intentionally hardwiring Google products ahead of their competitors in search results, it should come as no surprise that Google would hardwire YouTube in Google search results.  There are also a number of other techniques they could be using under the hood to slow down competitors in search to favor both the Google service and Google’s advertising sales.

So you can see that when it comes to YouTube, there are tremendous competitive pressures at work.  You have to ask why?  What is so important about capturing the online video vertical with YouTube, a company that has routinely lost what must be closing in on a billion dollars (not to mention the legal fees defending the massive YouTube class action and lawsuit brought by Viacom in which Google recently lost an important appeal).

So why is YouTube worth all this risk?  There must be an answer–I think it’s because the “video” vertical that Google is really after is replacing broadcast television by means of what we now know will be Google Fiber delivered straight to the home.  That video might be worth the risk.  (Don’t forget to ask about any undisclosed product placements from the shadowy Makers Studios, too.)

It Doesn’t Matter What You Call It

It is important to understand that the fact that YouTube is a stand alone subsidiary does not change the fact that it is 100% owned and subsidized by Google and that Google is using it to drive its thirst for dominance to many other verticals.

I think that the course of action is very simple–order Google to divest itself of YouTube.  Google owes a special duty not to manipulate or distort the market because of Google’s dominance in web search.  They know this.  I would argue that you would struggle to find a clearer example of the intentional distortion and manipulation of search to favor its subsidized affiliate than YouTube.

These subsidies have created signifciant barriers to entry for any competitor in the online video space which has severe negative effects on entrants into the video space.  Indeed, in order for music publishers to participate in YouTube’s forced monetization they must sign a covenant not to sue–which publishers would likely only sign with YouTube because of YouTube’s manipulated and subsidized dominance in the online video market and fear of Google’s well known bullying tactics in litigation–including trying to force authors to sue Google individually and not through their union and predeliction for union-busting rhetoric.

As the self-described “biggest kingmaker on Earth”, there is really only one thing that Mr. Almunia can do to remedy the severe distortions in the market resulting from YouTube.  Don’t let them get away with just chaning a name or two.

Mr. Almunia’s best remedy is to take away Google’s ability to abuse its market position by forcing the sale of YouTube to an unrelated third party who will run it without the distortions of Google’s subsidy, search manipulaiton, and will stop bullying the very content owners on whom the service depends for its success in mobile and cable.  This forced sale would balance the forced monetization of content on YouTube and could help to repair the damage to competition that Google has wrought through what appears to be a classic case of patently illegal cross-subsidization.

How to Pay Fines

While it is public record, commentators on Google rarely mention the 10:1 voting advantage that Google insiders have over regular stockholders.  That means that Eric Schmidt, Larry Page, Sergei Brin all have 10 votes per share to every one vote per share by non-insiders.

Why is this important?  Take the Google no-indictment agreement with the U.S. Department of Justice under which Google paid a $500,000,000 fine to the United States.  Google paid the fine to avoid being indicted after a years-long grand jury investigation under which it produced millions of documents.  The U.S. Attorney prosecuting the case told the Wall Street Journal that Google’s involvement went to the highest levels including Larry Page.

Meaning that the senior management team at Google must have been operating outside the scope of their authority, an idea that is supported by the Wall Street Journal’s later reporting.  Yet instead of the management team paying the fine from their own vast wealth (or even a portion of the fine), it appears that Google paid the fine from its general accounts–that is, with the stockholders money.

That is–the insiders with the 10:1 votes used the company’s money to buy their way out of an indictment.

So another piece of unsolicited advice to Mr. Almunia.   If you are going to fine Google for the bad behavior of its executive team, take care about how Google pays those fines.  I recently heard that some of the banks involved in the LIBOR scandal are considering taking the fines out of the bank’s bonus pool.  That would be an excellent idea in Google’s case.

All Google employees should bear the cost of the executive team’s bad behavior whether it’s indiscriminately promoting the sale of drugs (to kids?) or manipulating search results.