When asked recently what the greatest threat facing Google was, Google CEO Larry Page answered: “Google.” While Mr. Page was specifically referring to the threat of Google becoming a slower, less nimble and less innovative company, his answer is on point generally as well.
The Top 10 Threats to Google
#10 Motorola Acquisition Risk: Motorola, an unprofitable, $13b revenue, 80 year old company, with 19,000 employees, threatens to transform Google’s consolidated financial statement, by: reducing revenue growth rates and profitability by roughly a third; weakening most every salient financial valuation metric substantially; and impeding growth of Google’s market capitalization.
Business-wise, Google-Motorola introduces a profound lose-lose strategic quandary. On one hand if Google does not provide Motorola special treatment, advantages, and synergies – the normal rationale for mergers — Motorola will continue to languish and drag on Google. On the other hand, if Google advantages its own Motorola key Android offering, Google could chase away key Android partners, threatening the universality and growth of the strategic Android platform.
Culturally, will Motorolans join the Google family? Will they come to enjoy the same outstanding compensation and legendary employee perks that other Googlers enjoy? If so, Motorola’s 19,000 employee cost structure would balloon, making Motorola much more unprofitable. If not, Google for the first time would create a Google employee caste system and a synergy-less un-integrated conglomerate, worthy of a much lower valuation multiple. Antitrust-wise, the DOJ is unlikely to block the Google-Motorola merger, but could restrict, via conditions, Google’s ability to use Motorola’s patents to defend its Android platform as planned.
#9 IRS Tax Audit and Sarbanes Oxley Financial Reporting Compliance Risk: Bloomberg reports the IRS is “auditing how Google avoided Federal income taxes by shifting profit into offshore subsidiaries” to generate the lowest foreign tax rate of its peers — 2.4%. This tax audit, combined with Google’s recent near-record $500m criminal forfeiture penaltypaid to the DOJ for illegally marketing prescription drugs into the U.S. over a period of several years, generates potential Sarbanes Oxley increased compliance risk about whether Google’s Board has adequate internal controls, management oversight and independent auditing to protect public investors – given the conflict that Google’s senior management and directors have majority ownership control of Google.
#8 Copyright Lawsuit Liability: Google Books & Viacom vs. Google-YouTube: Google has copied 15 million books without permission of the rights holders and continues to copy a few million a year, despite Federal Judge Chin’s rejection of the Google Book Settlement, which was based on the strong objections of the DOJ, the Register of Copyright, the Governments of Germany and France and others. After six years of continued contested copyright infringement, the case will go to trial in mid 2012. A loss in this case could involve: hundreds of millions to billions of dollars in damages; brand and reputation damage; and significant changes in how Google indexes and monetizes a wide range of copyrighted material going forward. It also could increase Google’s antirust risk of a Sherman Section 2 monopolization case from U.S. law enforcement given the DOJ’s Google Books antitrust objections.
Viacom sued Google-YouTube for $1b in damages for an “illegal business model” and willfully promoting copyright infringement of hundreds of thousands of copyrighted videos to build a dominant Internet video sharing site. Expect Viacom ultimately to prevail upon appeal because the Supreme Court ruled 9-0 in the highly analogous Grokster case, that willful copyright infringement is not protected under the DMCA safe harbor as Google claims. A loss in this case could involve: a billion dollars in damages; changes in how Google indexes and monetizes YouTube, its main generator of display advertising revenue; while also adding to the risk of a Sherman Section 2 monopolization case.
#7 Security Breach Liabilities: Security is Google’s Achilles Heel becausesecurity clashes with Google’s values, mission, philosophy and culture as Google favors speed, openness, and accessibility over privacy and property rights. Given that Chinese hackers breached Google’s security and stole their entire password system, and that Google could not meet the contracted security requirements of the City of Los Angeles, security remains a huge corporate weakness for Google and appears to be a disaster waiting to happen given that Google has more private information on more people than anyone in the world and has more illegal copies of more copyrighted material than any entity in the world.
#6 Sovereignty Backlash from Foreign Governments Risk: With 55%of revenues Google revenues coming from overseas and with non-U.S./UK revenues growing almost twice as fast as U.S. revenues, Google’s growth is at risk from a growing backlash of foreign governments over Google’s unique sovereignty intrusiveness. Google’s mission, which involves organizing all of other countries’ information, property, private information, government information and culture — without permission — greatly threatens the perceived and actual sovereignty of many foreign countries. Since it became public that Google worked with U.S. intelligence services, Google’s legendary intrusiveness has increased suspicion of Google overseas. For example: thirteen countries have investigated Google StreetView’s WiSpy recording of emails; several countries’ companies have filed antitrust complaints, including U.K, France, Germany, Italy, South Korea, and others; and both the Governments of France and Germany opposed the Google Book Settlement.
#5 Anti-Piracy Legislation Franchise Risk: Google self-spotlighted this major threat when Google Chairman Eric Schmidt most strongly opposed the pending Senate PROTECT IP bill last spring. Google’s deep piracy liability was laid bare this summer when Google paid a near-record $500m criminal forfeiture penalty to settle criminal charges that Google willfully knowingly and repeatedly violated Federal criminal laws prohibiting the “unsafe and unlawful importation of prescription drugs into the U.S. over a period of several years.
Google opposes anti-piracy legislation as a big threat to its franchise because: first, its mission is all about promoting free and easy access to information; second its business model is inherently anti-IP as Google assumes content has no value until it is requested, found, and clicked on; and third facilitating piracy with a DMCA get-out-of-jail-free-card can serve as an effective competitive advantage as it kneecaps subscription-paid models for news, video, books, etc. while advantaging Google’s dominant ad-based model.
#4 Android Franchise Risk from Patent/Copyright Liabilities:Google itself spotlighted this threat in blogging that there is a “hostile organized campaign” attacking Android via “bogus” patents. Google knows this is a big threat. In Steve Jobs by Walter Issacson, the late Apple CEO Steve Jobs said about Android: “I’m going to destroy Android because it’s a stolen product… They are scared to death, because they know they are guilty.” Apple has already convinced the International Trade Commission that Android has violated Apple patents and is blocking some Android imports.
Last year, Oracle sued Google for billions of dollars for “knowingly, directly and repeatedly infringed Oracle’s Java-related property.” There are incriminating Google emails that expose Google’s liability here and show that Google’s leadership knew Google was infringing. Also in 2010, Skyhook Wireless sued Google for infringing several of its WiFi location patents that enable most Android location-driven mobile applications. There are many incriminating emails in this case too. In a word, the Android platform is legally skating on extremely thin ice.
#3 Privacy Legislation Franchise Risk: Private information is the currency and users are the product that Google effectively sells to advertisers. Central to the success of Google’s ad-based model is unfettered latitude to comprehensively track and collect more private information on more people in order to provide the most “relevant” individualized advertising. The FTC’s Google Buzz settlement last March against Google for deceptively promising privacy and then reneging on that promise without notice or choice, underscores how far Google’s privacy practices differ from user expectations.
The EU is on track to require next year that non-EU companies abide by Europe’s stricter rules on data collection and user control over their private information, including a “right to be forgotten.” This creates substantial business risk for Google as Google strongly opposes segregating and storing EU information in only EU data centers and enabling EU users to remove negative information on them from search engines — on cost and philosophical grounds. Because the EU law is intended to protect EU users in whatever jurisdiction their private information resides, it could become the de facto privacy standard that Google and others must abide by.
In the U.S., privacy legislation to establish a consumer privacy bill of rights is very unlikely to pass in this congressional session, but long term it is likely to pass eventually as privacy protection is strongly bipartisan. Google’s greatest potential U.S. privacy risk would be if a Senator offered a floor amendment to require establishment of a simple Do Not Track list, modeled after the wildly popular FTC Do Not Call List. Such a simple targeted amendment that empowered users to decide for themselves if they want to be tracked online or not, would likely attract huge bipartisan support. As the only entity capable of tracking most everyone most everywhere they go on the web, a Do Not Track list would create the simplest way for U.S. users to opt out from unauthorized personalized tracking and advertising.
#2 Antitrust Franchise Risk: Currently, Google’s business practices are under antitrust investigation by the FTC, DOJ, Texas, California, New York, the European Union, and Korea. Expect the EU to charge and sanction Google first, possibly before the end of the year, because the EU’s investigation is several months ahead of the FTC’s, Google’s market share is highest in Europe, over 90%, and the EU’s law is stricter.
Google is particularly vulnerable to the FTC’s Sherman Act monopolization investigation, because unlike the DOJ, the FTC has Section 5 authority which prohibits “deceptive and unfair” practices, in addition to the FTC’s Sherman Act authority. Given Google’s many serious undisclosed conflicts of interest, it will be relatively easy for the FTC to establish consumer harm, which Google had long assumed was the strongest part of its antitrust defense. Google is also especially vulnerable because the representations Google made to the FTC to secure approval to acquire DoublClick and AdMob appear to have been at least partially untrue.
In addition to the FTC Sherman Act monopolization case, the DOJ is also very actively investigating and overseeing Google antitrust issues. Currently the DOJ is investigating the Google-Motorola acquisition with particular emphasis on whether or not Google has anti-competitive plans for Motorola’s huge patent portfolio. DOJ is also overseeing: Google’s interest in investing in Yahoo, given DOJ threatened to sue to block the proposed Google-Yahoo ad agreement three years ago; Google Books given the DOJ twice opposed the Google Book Settlement on antitrust grounds; and Google-ITA given Google is operating under a restrictive DOJ Consent Decree.
Overall Google’s antitrust risk is arguably much greater and more extensive than Microsoft’s was over a decade ago, because the Microsoft competition issues were contained in the tech industry. However, with Google, the competition issues here spider-web out to capture most all of the consumer online economy.
#1 Criminal Liability: Google’s founders’ letter promised: “Google is not a conventional company. We do not intend to become one.” A top Google lawyer admitted in Stephen Levy’s book In The Plex – that “Google’s leadership does not care terribly much about precedent or law.” The Rhode Island U.S. Attorney who led the DOJ criminal prescription drug probe of Google’s business practices said the evidence was clear current Google CEO “Larry Page knew what was going on. We know it from the investigation. We simply know it from the documents we reviewed, witnesses that we interviewed, that Larry Page knew what was going on.”
In September, Google Chairman Eric Schmidt recently testified under oath before the Senate Judiciary Subcommittee that: “I’m not sure Google is a rational business trying to maximize its own profits.” Foundem, which has filed an antitrust suit against Google, has challenged publicly the veracity of Mr. Schmidt’s testimony under oath before the Subcommittee and his written follow-up responses.
Never has there been Fortune 100 corporate leadership that, as a matter of corporate policy and business plan, built-in a systematic disregard for others’ property rights: Android patents; book, song, TV and movie copyrights; and trademarks; in order to shortchange content suppliers billions of dollars in payments under the rule of law. And never before has there been a corporation with broader ambition and capacity to rapidly enter and eventually dominate such an exceptionally wide variety of currently competitive markets.
In sum, there is copious evidence that Google lords over the Internet like a21st century robber baron which believes it can do as it pleases with little fear of, or regard for, the rule of law. No other Fortune 500 company has ever self-generated so many serious diverse and far-reaching liabilities/threats as Google has. Google CEO Larry Page was painfully right in recently admittingthat the greatest threat to Google — was “Google” itself.
Scott Cleland is President of Precursor LLC, a consultancy serving Fortune 500 clients, some of which are Google competitors; he is also author of Search & Destroy: Why You Can’t Trust Google Inc..
Via: Forbes
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