Google's Risky Business

Will Google (Nasdaq: GOOG  ) lose focus as it grapples with YouTube's potential legal woes? What is "Google bombing," and what does it say about Google? And when it comes to stirring up political opposition, is Google the next Wal-Mart (NYSE: WMT  ) ? I recently put these questions to Pulitzer Prize-winning business reporter David Vise, a senior commentator with breakingviews.com and the author of The Google Story.

Risky business
Mac Greer:
When we spoke in the fall, it was shortly after Google had announced that it was acquiring YouTube. You said you thought one of the most significant risks was that Google management would have to spend so much time and energy making the Google-YouTube deal work, they might lose focus on their core search business. Are you starting to see signs that that is happening?

David Vise: I don't see a sign that that is happening. I think Google is very focused on its core business as search, and I think it is trying to integrate YouTube into video search and combining Google video with YouTube in various ways. I do think, though, that management is having to spend an increasing amount of time as a result of the YouTube acquisition on copyright issues.

When you get every major media company out there that wants to be compensated for any content that belongs to it that appears on Google, everything other than homemade videos that appears on YouTube is a candidate for compensation to someone else. Google likes to keep those monies for itself when it can monetize videos through ads, or when it gains an advantage in enhancing its brand name. I think it is heading for a serious political problem down the road if it doesn't change its ways.

Two wrongs don't make a copyright
MG:
Looking specifically at those copyright concerns on YouTube, Google has said that it will fix the problem. What does that mean exactly?

DV: Well, I think it means that, from the point of view of the media industry, Google would fix the problem by entering into agreements to license content that is protected by copyright and to share proceeds and profits with the producers of that content. Or it means removing ... material that is protected by copyright.

Don't forget, Google is not always as good as the Wizard of Oz. Sometimes, Google looks a little bit like the man behind the curtain. Let me give you an example. For a very, very long time, if you typed the words "miserable failure" into Google, the first thing that popped up was the official White House biography of President Bush. That was because people had gamed the system in various ways, and Google did nothing about it, saying it wasn't going to tamper with its algorithms and its financial equations that produce search results. Well, obviously, this was a distortion. Obviously, the White House hated this. And obviously, it was a manipulation of the system.

It was only in the last few weeks that Google, after a period of years, actually went in, made a change, and said that to protect its image ... it had found a way to prevent the White House website from popping up when you typed "miserable failure." Now if that isn't low-hanging fruit that the company failed to pick a long time ago, I don't know what is. That goes right to the top. It took Google way too long, and it showed its political naivete in not addressing that issue sooner. It took a very high-handed view, and the company itself became perceived by many people to be anti-Bush or anti-Republican.

MG: And I had read where people were doing that with "waffle" or "waffling," and you would get John Kerry's website. ... so I didn't necessarily think that there was a political agenda.

DV: Well, you know, some of those things were temporary. But when you have the president of the United States and the official White House website, and you have the company that claims to give you the best search results of all, and you can type in something pejorative and negative like "miserable failure" and have it take you straight to the White House website, you know that the search engine is subject to manipulation and that the company is being blind to the political risk it faces.

MG: And someone is allowing that to happen, and they are allowing it to happen for some sort of reason.

DV: Right, and part of the reason is that [Google is] so successful. Google has to guard against the risk of arrogance and hubris. Other companies faced with a similar situation would have corrected it immediately, the same day, even if they had to do it by hand. Google likes to do things mathematically. Google likes to do things in a way to take advantage of technology, and it really doesn't like solutions that involve human intervention directly. As long as it sticks to that strategy, it has the business advantage of scale, but it also entails enormous political risk -- like allowing something like this to go on for so long.

Is Google the next Wal-mart?
DV:
I think that Google does have an enormous amount of momentum. You look at the market-share statistics, and they are stunning. Over 90% of the searches that take place in parts of Europe, such as Spain, are on Google. The market share exceeds 70%-80% in major countries like the U.K. and France and Germany. The market share is well over 50% in the United States. So, you see, there is a parallel here, too, between Google and Microsoft (Nasdaq: MSFT  ) , in the sense that the kind of monopoly power that ... flows from that kind of market share in both the U.S. and Europe could lead to political backlash.

I would also compare Google -- in certain respects, as a disruptive technology that faces political risk -- to Wal-Mart. Why? Because there are plenty of other retailers out there, so it is hard to claim that Wal-Mart is a monopolist. On the other hand, it is so big and so large that when it sets up shop and when it cuts prices, it faces political opposition because it tends to drain all the business from smaller retailers in the area -- from supermarkets and from other places. This has caused Wal-Mart to face tremendous political opposition to opening stores as time has gone on.

Google has a similarly disruptive technology. It is growing larger. It is getting the kind of power that opponents of Wal-Mart have organized against. And we haven't seen yet the kind of political grassroots effort against Google, because of what it offers to consumers for free, that we saw against Wal-Mart. But it does face a Wal-Mart-type political risk. I would call that "headline risk."  It fails to address this, as it grows larger and more powerful, at its peril.

MG: And talking a bit more about the Microsoft comparison -- how long before we hear calls to break up Google?

DV: Best thing I can tell you is to do a Google search and see what you can find in terms of an answer to that question. (Laughter.) That is as hard as knowing when its rate of growth will slow. What I can say is that as Google's power grows, its political risk mounts and the number of enemies it creates increases, and the political risk rises. That is not a good formula for the success of a business in the long term.

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Mac Greer is an avid user of Google and likes to Google "Ruth Buzzi" in his spare time. He does not own any shares of the stocks discussed. The Motley Fool has a disclosure policy.


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