Google Needs to Tell the FTC: Log on and Learn, or Shut Up

Today Google (GOOG) released their response to a rather ill-informed discussion document the Federal Trade Commission published in May. As new media thinker Jeff Jarvis has said, Google does an excellent job taking "the FTC -- and the news industry -- to school on the First Amendment, copyright, fair use, antitrust, media history, business, and technology." But the search giant doesn't go far enough in explaining why the FTC's most fundamental assertions are wrong.

The Google document (which is embedded below) overshoots its mark, aptly divorcing legal issues (which fall within the FTC's purview) from economic ones (which fall within the market's purview). But the problem is not that the FTC doesn't know where its jurisdiction starts. It's that it doesn't understand what, exactly, underpins the "problem."

Statements like this one, pulled from Google's paper, do little to inform regulators:

[T]he current challenges faced by the news industry are business problems, not legal problems, and can only be addressed effectively with business solutions. Regulatory proposals that undermine the functioning of healthy marketplaces and stall the pace of change are not the solution.

The reason that the FTC doesn't learn much from boilerplate statements like this is because their underlying assumptions won't let them. If Google wants traction in its fight against undue regulation, they'll need to correct some of the silliness that the FTC says it's basing its recommendations upon. Some misguided excerpts from the FTC's paper follow:

Advertising paid for the vast majority of the news produced in the twentieth â€¨century in the United States. For most newspapers, about 80% of revenues came fromâ€¨ advertising and 20% came from subscribers. Advertisers paid newspapers... to bring together audiences to viewâ€¨ advertisements. As an ancillary benefit, consumers received news about a wide varietyâ€¨ of topics, including important public affairs.

News is not an "ancillary benefit," not even in an economic sense. News is the service being provided. Is it true that magazine and newspaper companies are essentially database companies that sell information to advertisers? Yes. But placing primacy upon the advertising model suggests that the rest of the business should change around it -- not visa versa.

In the new Web-newspaper model, which appears to be headed for a pay-wall model, ads can be hyper-targeted. Better yet, they can be actionable; ads that lead to purchases or other buying activity can be tracked, giving them the potential to earn lucrative click-through rates. Video ads have proven to be worth several times as much as textual ads, and more news outlets are including more multimedia in their most salient reporting every year (check out the Washington Post's series on "Top Secret America" for one example.)

For those that don't believe that pay-walls can work, I admit, things do look bleak. The Times (UK) has reported a 90% loss in readership since it instituted its pay-wall several weeks ago. But that should come as no surprise, thanks to its awful implementation. One day, Times readers arrived to find their free content could now only be had for pay -- many of them, understandably, left the page rather than punch in credit card numbers.

A more viable model, as I've argued before, leaves some content free, but provides premium content -- breaking news, interview material, extensive multimedia, access to journalists -- for a substantial fee. Those that pay will be the ones that make their break off breaking news, most of which is still generated by newspapers. Cable networks, for-profit blogs, academic institutions and the occasional news junkie would be happy to shell out a few bucks a month to get access to the most cutting edge material. And if, as the FTC is arguing, the blogs are using Google News to disseminate newspapers' "hot news" already, why not make them pay for early access?

Here's another misguided assertion from the FTC paper:

Newspapers' revenues from advertising have fallen approximately 45% since 2000. For example, classified advertising accounted for $19.6 billion in revenue for newspapers in 2000, $10.2 billion in 2008, and is estimated to be only $6.0 billion in 2009.

No doubt this is true. But what's it got to do with Google? Why doesn't this paper place any blame on Craigslist or eBay (EBAY) for cannibalizing newspapers' other revenue engine? Those companies aren't even mentioned. More from the FTC:

It appears unlikely that online advertising revenues will ever be sufficient to replace the print advertising revenues that newspapers previously received.

Maybe. Maybe not. But the chances of ad-value parity increase once those ads are targeted enough to actually make conversions to purchases, as I've said above. Ads -- especially ones that use systems like Facebook's Like button -- are actually excellent barometers of what people want to (or do) buy. And as I've argued before, that is some of the most valuable data in the history of the Web, which is why everyone from Amazon (AMZN) to Facebook to Swipely are fighting for it. Newspapers used to be caches of names and addresses; now, with their users logged in and their social profiles linked, they can be vectors for data collection on what topics users are reading about, where they are working and living, and what kind of content they like. And knowing those interests is half the battle to knowing what they're more apt to buy.

Here's another misguided FTC point:

Staff downsizing has caused significant losses of news coverage. For example, coverage of state houses and state perspectives on news from Washington, D.C. has declined, as has coverage of local government issues, foreign affairs, and specialty beats such as science and the arts.

Some coverage has declined: notably, generalist coverage. For every local paper that has stopped covering science, there are a dozen science-oriented blogs written by experts in their fields. No offense meant to the business reporter on the beat in, say, Tulsa, OK, but his readers may actually prefer submitting their questions to expert blogs like Becker/Posner or MarginalRevolution. If coverage is declining but readership interest is not, then someone, somewhere will figure out a way to tap that audience and monetize it. There's no need to keep legacy operations intact just for the sake of preserving the old guard.

Another FTC gem:

Because free riding is usually easy in these circumstances, it is often difficult to ensure that producers of public goods are appropriately compensated.

This is the case in all media, but the problem is actually least severe in news, because news is time sensitive. Take music as a counter-example: if Lil Wayne releases an album, it inevitably gets pirated. Some listeners will buy it, sure, but others will wait around until they can burn it from friends or download it illegally.

But news works differently. Once it's out of the gate, it is a depreciating asset: it gets less and less valuable as time goes on. So it stands to reason that the organization that is first out of the gate should -- if they are engineering their SEO correctly, and if they are using all the modern tricks -- get the primary flood of traffic, and the accompanying ad revenue. If a newspaper breaks a story, and it only goes viral once it's picked up by some blog, then obviously there is a misalignment in the way the paper presented that breaking news. The newspaper's job is to only release the skeleton of the story; the blogs and other outlets who want to flesh it out and add value must pay through the paywall to get that information as quickly as possible.

What's frightening about the FTC's meddling is that it might actually end in some kind of misguided regulation, which would be preemptive (at best) and destructive (at worst). This industry may indeed need regulation, but it's far too early to tell what, exactly, the guidelines must be. It's no wonder that publishing companies are struggling; they are operating upon antiquated business models, and using quick-and-dirty cost-cutting measures (like layoffs) to try to salvage their bottom lines. The only real solution: top-line innovation, and plenty of it.

Oh, and an apology to Google might also be in order.

Google's Comments to FTC 20 July 2010

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