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Is Google Too Powerful?


By Rob Hof COVER STORY PODCAST

It's the year 2014, and Googlezon, a fearsomely powerful combination of search engine Google Inc. (GOOG) and online store Amazon.com Inc. (AMZN), has crushed traditional media to bits. Taking its place is the computer-generated Evolving Personalized Information Construct—an online package of news, entertainment, blogs, and services drawn from all the world's up-to-the-minute knowledge and customized to match your preferences. And it's all collected, packaged, and controlled by Googlezon.

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Google's accelerating lead in search and its moves into software and traditional advertising are sparking a backlash among rivals. Do you think Google is too powerful?

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This is the future according to EPIC 2014, a faux documentary posted to the Web in late 2004 by young journalists Matt Thompson and Robin Sloan. Thanks to their slightly tongue-in-cheek, Twilight Zone-inspired tone, the short video drew as many chuckles as gasps of dismay from the legions of mainstream media types and Web digerati who viewed it. Today, nobody's laughing. Here it is only 2007, and already EPIC 2014's picture of an online landscape dominated by one ravenous, all-knowing corporation looks to many people like—well, a lot like Google. All by itself.

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That simple little search box we all use every day? As the place nearly 400 million people each month start on the Internet, it's the No. 1 gateway to the Net's vast commercial potential. With more data on what people are searching for, Google can serve up the most targeted and relevant advertisements alongside the results, drawing more clicks, more cash, more users—you get the idea. Consumers love Google's simplicity and results, which is why it draws 56% of all searches. No wonder eager advertisers shoveled some $10.6 billion into Google's coffers last year, up an astonishing 73% from 2005. If you can believe it, Google's $144 billion market value tops that of Time Warner (TWX), Viacom (VIA), CBS (CBS), ad agency giant Publicis Groupe (PUB), and the New York Times Co. (NYT) combined.

To the consternation of many of those companies and more, Google is now using that market cap, along with its $11 billion hoard of cash and investments, to storm a wide range of traditional markets. It's selling ads in newspapers, magazines, radio, and, in a trial program, television. In February it fired a torpedo at the software industry with a suite of online office software it is selling for a small fraction of the price of Microsoft Corp.'s (MSFT) Office. It's spooking the telecom industry with fledgling efforts to provide free wireless Internet access. Google's phenomenal ad machine, in short, has the potential to vaporize the profits of any industry that traffics in bits and bytes and to shift the economics to the advantage of Google, its users, and its cadre of partners. "It's Google's world," shrugs Chris Tolles, vice-president of marketing at Topix Inc., which makes money from running Google ads on its news aggregation site. "We just live in it."

Googlezon, GoogleWorld, just plain Google—whatever you call it, it's scaring the wits out of everyone from the power lunchers of Hollywood to Madison Avenue ad moguls to Silicon Valley entrepreneurs. Now, after years of hand-wringing and thumb-twiddling, some of them are pulling out the heavy artillery and firing one round after another on the Googleplex, the company's headquarters in Mountain View, Calif. The latest salvo: On Mar. 22, NBC Universal and News Corp. (NWS) announced big plans for a rival to Google's enormously popular YouTube video site that will run not only television show clips but even full-length movies on Yahoo! (YHOO), AOL (TWX), Microsoft's MSN, MySpace.com, and other partner sites.

JUST THE WEEK BEFORE, Viacom sued Google for a headline-grabbing $1 billion, charging YouTube with willfully infringing on copyrights by allowing users to upload clips of The Colbert Report, South Park, and other TV shows. A couple of weeks earlier, Copiepress, a group representing Belgian and German newspapers, won a copyright case that could sharply limit Google's usefulness if it sets a precedent. And get this: In the Valley and Washington, D.C., there's even cocktail party chatter about whether the search giant's power needs to be reined in by antitrust regulators. It's unlikely to happen but is an indication of rivals' growing trepidation about Google. Says Paul Martino, chief executive of the search service Aggregate Knowledge Inc.: "We're beginning to see the Anything But Google' backlash."

And something bigger. Google is ground zero in a battle among traditional media and tech industry leaders and startups alike for the hearts and minds of the world's consumers—or at least their eyeballs and wallets. To an extent that none of the first generation of dot-coms did, Google has come to represent all our hopes, dreams, and fears about the disruptive promise and dangers of the Internet. As this clash plays out over the next couple of years, the outcome could determine the way we'll entertain ourselves, shop, socialize, and do business on the Internet. The overriding question: Will the vast commercial landscape of the Net, like so many other tech markets in the past, condense to one dominant force for the foreseeable future? Will we just Google everything?

All this might sound crazy given that we're talking about a nine-year-old company that wasn't even publicly traded until Aug. 19, 2004. Let's face it, there's a certain hysteria about Google, a presumption of unlimited power. A year ago, Google was rumored to be going into the personal computer manufacturing business, and last week stories about a Google cell phone ran rampant. Neither was true—nor, says Google, are a number of other assumptions. "We're not competing with newspapers, we're not competing with television stations, and we're not competing with the Viacoms of the world," insists Google Chief Executive Eric E. Schmidt. "We're trying to partner with them."

What's more, some of Google's initiatives, such as those in print and radio ads, have not taken the world by storm. Yet to justify that market cap, Google must expand into more densely occupied markets for continued growth when online advertising matures. "Google needs an Act II," says Jordan Rohan, an Internet analyst at RBC Capital Markets (RY). "Otherwise, the growth is going down to 30%" in the next few years.

The question now: Does the pushback against Google mark that turning point when a successful company's power starts to work against it? Could be. "Ecosystems always organize to curtail entities that get too powerful," notes Geoffrey A. Moore, author of The Gorilla Game: Picking Winners in High Technology and a managing director at corporate strategist TCG Advisors. As a result, Google may need to change some of its more aggressive tactics to ease the fear it engenders. Says Jeremy Crane, director of the search group at Web information service Compete Inc.: "A lot of people are rooting for others to provide alternatives."

But for now those alternatives, whether they be a struggling Yahoo or Microsoft or the new NBC-News Corp. video network, by all accounts pale next to the Google juggernaut. More than anyone else, Google is defining the new architecture of media and commerce in the digital world. The unruly expanse of the Internet and its opportunities cries out for a map, and that's what Google is building out of tens of thousands of server computers around the world that handle quadrillions of bytes of data. With each new search whose data refine that map, with each new business that links its own digital explorations to the search engine, Google gains more knowledge and more power. As a result, it's in a position not only to define what this new world looks like but also to chart where it goes and even determine which will be the prime destinations and which will become backwaters.

This awesome data-gathering capability seriously worries some thinkers. Tech historian George Dyson, author of Darwin Among the Machines: The Evolution of Global Intelligence, thinks Google actually might pose a national defense concern at some point simply by virtue of its singularly massive storehouse of data, the crude oil of the Information Economy. "That much money and power concentrated in one place can be dangerous," says Dyson, who sometimes advises the Defense Dept. on potential threats. While he doesn't think Google yet poses such a threat, he raises a more obvious concern: Google's vast network, now a substantial piece of the Internet itself, is "very quickly becoming vital national security infrastructure." Should anything happen to the company, he says—through market forces, terrorist attacks on server farms, or something else—that could compromise national defense.

If this talk of corporate dominance sounds vaguely familiar, it should. As firmly as IBM (IBM) ruled mainframe computing and Microsoft the personal computer age, so Google has the potential to rule the Internet. To some people, Google's position today, while clearly far from identical to Microsoft's in its heyday, nonetheless shares some striking parallels. "Google feels a lot like Microsoft in the mid-Nineties," says Silicon Valley startup adviser Dave McClure. "Right at the height of its power, getting a little arrogant, and challenged for the first time by some powerful people."

Even mighty Microsoft has been criticizing Google's power and ambitions. CEO Steve Ballmer last fall accused Google of suppressing competition in online ads. As rich as the irony of his accusation is, given Microsoft's own antitrust battles, the charge isn't unique. Google's mission to "organize the world's information and make it universally accessible and useful," so charmingly visionary in a startup, now sounds to some people downright predatory in a company of nearly 12,000 employees. Google even worries partners such as Time Warner, whose AOL unit in late 2005 took $1 billion from Google for a 5% stake and the right to run ads on the service. "Obviously, Google has a great deal of power, and it needs to be very careful not to leverage that power to stifle competition," says Paul T. Cappuccio, executive vice-president and general counsel at Time Warner Inc.

Naturally, none of this criticism sits well with Google executives. The company, they note, has a commanding position solely because users and customers like Google's services, not because they're forced to use them. "To say Google is too powerful implies that users are somehow making a wrong choice," says Schmidt, who calls the comparison to Microsoft "absolutely false." Unlike with Microsoft's software, anybody can click instantly to a new search engine if it's better—just as people abandoned AltaVista and Yahoo for Google years ago.

Few people, even Valley leaders who have faced the dominance of Microsoft firsthand, suggest that Google needs to be checked by government regulators. "Does ad-subsidized software threaten legacy businesses? Of course," says Jonathan Schwartz, CEO of Sun Microsystems (SUNW), "just like...eBay (EBAY) threatens Sotheby's (BID) and Amazon threatens Wal-Mart (WMT). But last I checked, these are all examples of competition, which we want in America. It's the heart of progress. It's good for consumers." And for Google's partners. Says Marc Benioff, the CEO of one such partner, customer management services provider Salesforce.com Inc. (CRM): "Google has really stepped up and defined what the future of our industry can be."

MOREOVER, THERE'S LITTLE EVIDENCE that users have any problem with the company's power, even if they don't all take its informal motto, "Don't be evil," at face value. These fans might be excused for tossing back their own question to the whiners: Too powerful at what? Helping me find things, get work done, connect with friends? Bring it on!

For most of us, then, complaints about Google's power might smack of sour grapes, or at least corporate power politics. Fact is, a couple of Stanford University nerds, Sergey Brin and Larry Page, devised a much better way for people to find things online, stealing a march on media and tech companies too busy or too dumb to notice the transcendent power of Internet search. By charging advertisers only when people click on their ads, Google gave advertisers a good chunk of the 50% of ad spending wasted in traditional media. Indeed, a huge swath of small businesses that never could afford to advertise nationally or globally—the majority of Google's customers—now can, through search ads.

Those aren't Google's only friends, either. It enables thousands of small Web publishers to make a living by paying these publishers, to the tune of $3 billion last year, to run syndicated ads. Cincinnati's AskTheBuilder.com pulls in more than $1 million a year, says founder Tim Carter, thanks largely to income from Google's syndicated ads that run on his home how-to site. He understands why Google worries Viacom and others, because when people are looking for almost anything online, "they go to Google first. You bet those companies better be terrified." But as long as folks like Carter get a free lunch from Google, they don't much care if it's eating everyone else's.

Google maintains a glow of goodwill among many for yet another reason: Since its founding at Stanford in 1998, it has become one of those rare icons of the tech business, like Apple (AAPL) or Hewlett-Packard (HPQ). Google's success is helping to drive a whole new round of technology innovation and wealth creation, including hundreds of so-called Web 2.0 companies whose business model is revenue from running Google ads. In the process, it confirms the Valley's creation story: Anyone has a chance to change the world and get fabulously rich. "Google, with its Do no evil' mantra, its democratic values, its employee benefits, attention to the culture, and two decent co-founders, is the new HP," says Jeffrey Pfeffer, a professor of organizational behavior at the Stanford Graduate School of Business. "At least in people's dreams."

But Google's dreams are the stuff of nightmares for some folks in the worlds of media and technology. Most of all, they're uncertain about what Google will become next. It doesn't help that Google itself has long fed those anxieties with its lofty aspirations. Indeed, its embrace of the primacy of data over human judgment, in everything from its search algorithm to its attempts to turn hiring into a science, gives some people the creeps. Listen to a talk that Page, Google's co-founder and president of products, gave in 2002 at Stanford. He said Google aims to turn the technology behind its search engine into a true artificial intelligence that could "answer any question, which means you can do basically anything." The audience laughed tentatively, perhaps thinking of the ai in the movie The Terminator that tries to wipe out humanity. If Google succeeds in its mission, Page added with a grin, "then we're doing everything."

The fear factor first came into public view over copyright issues, when Google began digitizing millions of books at various libraries starting in 2004. The company built scanning machines from scratch and hired workers to run them. Still in test mode, Google Book Search, which includes both the library project and separate agreements with publishers, lets users search for words within the books it plans to scan. Searches bring up a table of contents and snippets containing the words; publishers can agree to make sample pages available.

The problem was, Google chose not to ask publishers' permission before it launched the library project, claiming that copying books to provide snippets of text in searches was fair use under copyright law. And it took few pains to ease publishers' concerns: Why would people buy a whole book when all they need is a few paragraphs from a simple search? If that's what potential buyers end up doing, Google destroys their whole economic model. As a result, the Authors Guild and a group of publishers, including BusinessWeek owner The McGraw-Hill Companies (MHP), each filed lawsuits in 2005 against the library scanning project, charging that it violates their copyright. Sheryl Sandberg, Google's vice-president for global online sales and operations, concedes that "maybe we didn't realize some people were scared." Google is now making overtures at publisher gatherings.

STILL, GOOGLE, LIKE OTHERS such as Amazon.com Inc. that also are scanning books, contend that their main impact is to expose to the public books they never knew existed, which they believe will prompt more sales, not less. In any case, Google isn't backing down from its position that its scanning is simply creating a digital library. "We're willing to fight for end-users consistent with the way we believe the law is written," says Schmidt.

It's in the advertising business that Google's presence causes the broadest concern. That's because it has been hugely successful in refining the idea of targeted advertising so far beyond conventional media and even direct marketers. What really raises Madison Avenue's hackles is the potential for Google to become Universal Advertising Inc.: a sprawling presence that brokers highly targeted ads across all media. By reading the intentions of hundreds of millions of consumers—not just from its search engine but from, say, cable set-top boxes that can gather similar data—Google could become the most efficient aggregator of ad dollars. The fear is that in the end, a Procter & Gamble Co. (PG) will simply turn over its annual ad budget to Google, which will dole it out to wherever the most lucrative consumers are. Essentially, Google becomes the nexus of all advertising and media.

THAT FEAR ISN'T ENTIRELY rational, of course. Schmidt insists that Google is neither seeking nor will capture a lion's share of the ad business. "There's always this assumption that somehow Google will now take over all of advertising," he says. "It's clearly false, because if you're an advertiser, you're going to go to all of the people, not just the No. 1 player." But the fact remains that a disproportionate amount of the riches go to the No. 1 player. Says Kevin Lee, executive chairman of Did-It Search Marketing: "Half a million or more Google advertisers are ready to give them more money."

Google's riches are yet another competitive weapon that rivals fear. For startups, Google and its nearly unmatched financial might is the yin and yang of Valley entrepreneurship. The company is an inspiration and a potential buyer. But it also can close down a nascent market niche with the merest rumor that it might jump in.

With that kind of influence, coupled with a lack of an obvious, significant failure to date, it's not surprising that Google and its employees exude an air of arrogance. Yet this posture is also becoming more of a liability. Last fall, for instance, it looked as if the wrangling over commercial clips appearing on YouTube without permission would be quickly solved by Google greasing some Hollywood palms. But according to people close to the talks, potential deals soon broke down on multiple fronts. Those sources say that Google offered several hundred million dollars over five years to license a broad range of content. But Google kept reducing its offer, they say, and insisted on controlling ad sales, including getting a third of the proceeds. Finally, Google refused to filter YouTube for copyrighted content. Google declines to comment on negotiations.

Soured talks may have led to Google's getting left out of the group of initial partners in the new online video network coming from News Corp. and NBC—which NBC Universal CEO Jeff Zucker calls the biggest new advertising platform in the world. Google may be in the unaccustomed position of having to crawl back to Hollywood with hat and checkbook in hand to get access to the content. A source close to the situation says Google will probably be forced to accept a far smaller cut of advertising revenues than what it initially asked for.

Even some of Google's advertising customers complain that the company sometimes appears cavalier about their concerns. That's partly because of the very technology on which it's built. Its search-ad business runs on a pointedly opaque set of complex mathematical formulas that give high placement to ads based not simply on which marketers pay the most but on how many people click on them and other factors. That prods advertisers to create better ads and more relevant Web pages to which the ads send them. But such a system leaves advertisers to guess which ads work best and how much to pay for top placement, and the ranking can change without warning. "Yeah, they say they're not evil, but you have to trust them," says Anil Kamath, chief technology officer at Efficient Frontier, which helps advertisers run search ad campaigns. "It's difficult for advertisers to figure out what's going on."

The secrecy surrounding the "black box" of search advertising remains particularly galling to some advertisers when it comes to the issue of click fraud. That refers to an array of schemes by which nefarious Web site operators generate fake clicks on Google ads to make money or hurt competitors. Until recently, Google said only that it believed the incidence of click fraud was very low. Some advertisers believe Google ignored their claims. In early March the company released more data on click fraud and said it would offer more tools to combat it.

Between the company's growing power and influence and the perceived attitude problems, Google may face stronger opposition as it expands its horizons beyond search. "Google's power and size and profitability and prosperity have hurt them as they go out and negotiate with these entertainment companies," says Jeff Lanctot, senior vice-president of media and general manager at Avenue A/Razorfish, the ad agency unit of digital marketing firm aQuantive Inc (AQWT). Perhaps as a result, Google seems to be trying to strike a more conciliatory tone of late. In its most recent earnings conference call with analysts, Schmidt and other executives mentioned the words "partner" or "partnership" more than 50 times. It may be working to some degree. Some TV networks, such as CBS, and other media outlets have found ways to work with Google. It has also sealed deals with Dell Inc. (DELL) to install Google software on computers and even with sometime rival eBay Inc. (EBAY) to run ads on the online marketplace.

Ultimately, Google must grapple with the essential paradox it embodies. As a corporation, it's often a cipher, its intentions and methods concealed by algorithms that look impenetrable and impersonal. Yet the search engine and the blockbuster business built atop it utterly depend upon millions of people sharing through searches their most intimate desires, and upon thousands of businesses willing to open their data storehouses to feed Google's voracious digital maw. It may be that the data-driven culture that got Google this far needs to get a little more social in its dealings with the outside world. "It's not just about click-through on an ad," notes Steven E. Marder, CEO of Eurekster Inc., a search services provider that uses online communities to refine results. "It's about humans."

With Ronald Grover in Los Angeles, Peter Burrows in San Mateo, Calif., and Tom Lowry in New York


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