Google’s Liability Decade: Why Google’s leadership ducks investors
April 20, 2010
The abrupt change, that Google’s CEO Eric Schmidt will no longer be accountable to shareholders on Google’s earnings calls, should prompt investors to ask why?
- Google claimed that they wanted to put more focus on Google’s strong financials, but they did not disclose any more than Google’s usual barest of minimum of information to investors.
- The most obvious reason for this abrupt change is the literal explosion of real franchise liabilities and risk overhangs to Google that reared their ugly heads this past quarter.
- Had CEO Schmidt been available to answer investor questions, Google’s exploding liabilities could have dominated the Q&A and the investment narrative coming out of the earnings call.
What has changed, and what Google has been not been open about, is the very serious ripening of three different types of going-forward franchise risks (antitrust, privacy/security, and intellectual property) that cumulatively herald a de facto change in Google eras: from the roaring “Growth Decade” of 2000-2009, to the more unpredictable “Liability Decade” of 2010- 2019.
- Long-postponed simmering problems are now beginning to boil over and threaten to potentially burn Google shareholders periodically going forward. The result for:
- Opportunistic Google investors is recurring and intensifying headline risk overhang; and
- Longer-term Google investors is the increasing need to discount for the growing and uncertain franchise liabililities/risks emerging from multiple directions.
What franchise liabilities now overhang Google?
The speed, breadth and depth of Google’s growing antitrust liability is unprecedented. And where there is this much smoke there’s fire.
- FTC: The FTC is preparing to litigate to block Google’s acquisition of AdMob arguing that Google, the #2 mobile app advertiser with 25% share is attempting to monopolize over 70% of the relevant market by buying #1 Admob, which has 50% share.
- If Google chooses to fight the U.S. Government in court it would put Google’s antitrust liabilities on the front page and also cause the FTC, DOJ and the EU to circle Government wagons for a broader antitrust war with Google.
- If Google walks away, it suggests to investors that Google has acquiesced to the notion that Google has hit an antitrust wall and that Google may no longer rely on acquisitions as a source for: preemptive competitive defense against first-movers, growth or innovation.
- The FTC appears to be making good on its promise in approving Google-DoubleClick 4-1:
- “We want to be clear, however, that we will closely watch these markets and, should Google engage in unlawful tying or other anticompetitive conduct, the Commission intends to act quickly.”
- On a separate but related antitrust matter, the FTC has forced Google CEO Eric Schmidt to resign from Apple’s board and Google Director John Doerr to resign from Amazon’s board.
- DOJ: According to Sandy Litvack, the DOJ’s special counsel on the Google-Yahoo ad agreement, the DOJ was literally hours away from filing a Sherman Section 1 & 2 monopolization case against Google if it did not stop attempting to collude with Yahoo to corner the search advertising and search advertising syndication markets.
- The DOJ has now twice opposed (here and here) Google’s proposed book settlement as a violation of three different areas of law: antitrust, copyright, and class action. The most likely outcomes are Google agrees to a court decree with permanent DOJ supervsion of the settlement’s market mechanism in order to gain court approval, or the settlement is disapproved and DOJ eventually sues in a broader Google monopolization case.
- Evidence of the building clamor in D.C. for a DOJ Section 1 & 2 monopolization case against Google is a Consumer Watchdog Google antitrust panel hosted by John Simpson at the National Press Club (at 10:00 EST 4-21-10.) The panel features:
- Gary Reback of the Open Book Alliance and Microsoft antitrust fame;
- Simon Buckingham, a mobile advertising entrepreneur who believes Google-AdMob is anti-competitive; and
- Joseph Bial, the Cadwalader, Wickersham and Taft counsel representing TradeComet and MyTriggers in two different private antitrust lawsuits against Google.
- EU: What may be the most dangerous antitrust threat to Google may come from the recently announced EU preliminary inquiry into Google. It is likely to bloom into a broader formal investigation of Google because the EU has a much lower legal and policy threshold to bring an antitrust action than the U.S, and because the EU has never been shy about using its power to bring a dominant American firm to heel.
- Three companies, the UK’s Foundem, France’s Ejustice.FR, and Germany’s Ciao, have all alleged that Google punishes niche search competitors, by discriminating against them in Google’s search results and anti-competitively favoring Google-owned content with top search rankings.
- Foundem’s filing to the FCC is the best source of evidence of Google’s anti-competitive behavior and it is compelling.
Now that it is public that Google’s vociferous indignance over China’s censorship of its search results was clever PR misdirection from the real story, that Google’s main password system was hacked and breached, Google now has an incalculable liability to all its users and business, government, and foreign government customers whose personal information and secrets have been made available to who knows who — and those users who have had no ability to protect themselves for the last few months since Google became aware of the breach.
As John Markoff of the New York Times reported:
- “…the losses included one of Google’s crown jewels, a password system that controls access by millions of users worldwide to almost all of the company’s Web services, including e-mail and business applications.”
Google could be liable for the largest identity theft in history, and/or one of the largest corporate breaches ever. And Google does not believe it material for the CEO to disclose to shareholders in the quarterly call that covers it? This is precisely the type of new material adverse information that SEC rules mandate that shareholders be informed of so they can protect themselves. This extended lack of disclosure to people and businesses at risk is also an invitation for class action lawsuits by shareholders and users.
- Google has particularly large liability here to its users because, as I have written extensively in my “security is Google’s Achilles heel” research series, security has not been, and is still not a high public corporate and engineering priority for Google. Moreover, Google’s “publicacy” business model means that Google has collected much more private information on users than most any of them appreciate. (See my House testimony on Google privacy weaknesses.)
- Simply, Google has huge potential liability now because of Google’s longstanding low priority for security and Google’s anti-privacy “publicacy” business model characterized by CEO Schmidt’s cavalier statement on CNBC: “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place.”
Google’s CEO also ducked disclosing the new massive liability and threat to Google’s international business, which represents 53% of Google’s revenues. The Washington Post lead story that Google was working with the National Security Agency (NSA) on the China cyaber-security issue will make foreign governments and foreigners much less comfortable using Google’s products and services going forward.
- The liability for Google’s pervasive invasion of privacy norms around the world coupled with the news that Google is working with America’s top spy agency, means that nations around the world will be cracking down on Google more, or blocking their products, services and monetization more.
- This backlash is not hypothetical:
- Google blogged today that: “Google products — from search and Blogger to YouTube and Google Docs — have been blocked in 25 of the 100 countries where we offer our services.”
- Today a broad group of the data protection heads from many major countries have written an open letter to Google and other online companies asking that Google better safeguard private information. The countries included, Canada, France, Israel, Netherlands, Spain, Germany, Italy, Ireland, New Zealand, and the UK.
- Google’s privacy-security liabilty is real, material and growing/spreading fast. It is material and should be discussed in an open investor forum so shareholders can hear from Google the extent of Google’s liabilities. It will be interesting to what extent Google discloses these new exploding liabilities and risks to the SEC in their quarterly filings. (It should be of no surprise that the forensic accounting firm Audit Integrity characterizes Google’s accounting and governance as “very aggressive” and ranked in the top 3% for most risk.)
All these new privacy-security risks/liabilities are on top of:
- The disastrous launch and consumer privacy breach of Google Buzz that:
- The FTC’s potential mandate of new consumer privacy safeguards for behavioral advertising that could hem in Google’s very aggressive tracking of most all Internet users web behavior. (See Google’s reply to the FTC urging they go slow.)
- The increasing potential for bipartisan comprehensive privacy legislation in the House that for the first time would give consumers more control over what private information Google could collect on them without their meaningful consent.
III. Intellectual Property
Viacom: Now that key documents have been made public in the Viacom vs. Google-YouTube copyright infringement trial, it is clear that Google has employed a deliberate business model/strategy to infringe copyrights to dominate traffic share.
- Anyone that reads the key Google documents in the case will come away with the concern that Google has deep legal, monetary and brand liabilities for serially infringing copyright to grow its business to dominance. Read the quote summary first here, then review the copious evidence/history in the 86 page Viacom Statement of Facts here, then review Viacom’s Summary Judgement memo of law here, and finally see the several new Google documents here.
- Google’s copyright infringement liablities will not end with Viacom. If Viacom prevails, which is likely, it will embolden all the other IP owners to redouble their efforts to gain restitution and a changed business model from Google. Those include, but are not limited to, news wires, newspapers, publishers, authors, songrwriters, studios, programmers, photographers, etc. (See Googleopoly IV at www.googleopoly.net)
Apple’s Trade Secrets Suit against HTC (Google):
Apple’s patent infringement suit against Google Nexus One manufacturer HTC, puts Google CEO Eric Schmidt, a former long time Apple Director, in potentially very hot water with Government officials. The suit looks like a very clever “carom shot” at Google CEO Schmidt as it allows Apple to legitimately discover CEO Schmidt’s emails involving any communication that Schmidt had with his mobile team concerning the development of Google’s Android operating system and Nexus One handset, especially after Schmidt returned from Apple board meetings. It is apparent that Apple believes that Google stole its intellectual property and trade secrets involving the iPhone and iPad, especially the multi-finger screen pinch control patent.
- This is a serious liability for Google’s CEO. Mr. Schmidt had a fiduciary duty to Apple shareholders not to harm them by lifting trade secrets for Google’s and Mr. Schmidt’s financial benefit.
- It also creates a strategic pincer situation/problem concerning Mr. Schmidt’s email practices. The Viacom case unearthed that Mr. Schmidt has a Quatrone-esque, “clean-up-those-emails” personal practice of deleting all his personal emails. This is particularly ironic and ineffective with a company that copies and stores most everything and deletes hardly nothing that it collects on people.
- It is also a big red flag for any investigator, because it strongly suggests that one knows they have something to hide, encouraging the investigators to examine everyone else’s emails that communicated with Mr. Schmidt at those times. At a minimum, Mr. Schmidt’s email deletion practices preventing any discovery creates a serious perception problem for Google as it goes before multiple court and policy fora.
In sum, the litany of exploding major liabilities to Google’s business model, growth and value — from the slew of real and worsening antitrust, privacy-security, and intellectual property problems — are not going away.
- These liabilities will increasingly overhang Google’s stock and brand, especially if Google continues to “turtle” and avoid public accountability to Google shareholders.
- Uncertainty and distrust are bad company attributes to allow to fester and grow.
- This past quarter certainly has been a fast start to “Google’s Liability Decade.”