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June 13, 2008

If US newspapers resemble the Irrawaddy delta, is Google’s Eric Schmidt planning an airlift?

By Peter Kirwan MM blog

Eric Schmidt, the chief executive of Google, is not what you’d call a loose cannon.

This is a man who, in previous incarnations, became an arch-enemy of Microsoft’s expanding monopoly during the 1990s. Now, at the top of a company surrounded by anti-monopoly moaning, this poacher has become a extremely adroit gamekeeper.

So it’s been fascinating to watch Schmidt talking with apparent compassion about the plight of US newspapers twice this week — once in Washington DC and once in San Francisco.

In Washington DC, he said:

“We all care a lot about this. Newspaper demand has never been higher. The problem is revenues have never been lower. So people are reading the newspaper they’re just not reading it in a way where the newspapers can make money on it. This is a shared problem. We have to solve it. There’s no obviously good solution right now.”

In San Francisco, he said:

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“It’s a huge moral imperative to help here.”

To the best of my knowledge, this is the first time that Schmidt has talked in public about Big Media’s plight in the same way that the boss of Oxfam might talk about the need to get aid into the Irrawaddy delta.

Perhaps Schmidt had read the news earlier this week about Gannett’s £3bn write-down — and found his heart melting with pity for the content companies that supply Google with so much valuable raw material.

Perhaps. But it seems equally likely to me that Schmidt’s plaintive outburst was prompted by reading advance copies of the European Commission’s 100-page report on Google’s acquisition of Doubleclick. (The full monty was published yesterday. You can download it in PDF format here.)

The Google-Doubleclick combination is highly controversial. By some accounts, Google already controls around 70% of the paid search ad market, which in turn comprises slightly less than half of all online advertising. By acquiring Doubleclick, which has a big market share in online display, the company could extend its dominance from search to the serving of what we might still call banners and buttons.

In the event, the Commission approved Google’s acquisition three months ago. But the retrospectively published report will have made grim reading for Schmidt.

Among other things, the report says this:

‘Many advertisers depend on Google’s search ad services and. . . the revenues derived from Google’s search ad intermediation make it an almost irreplaceable source of income for many publishers.”

The report also suggests that Google’s rivals “do not seem to be a real alternative”. That’s because — in the Commission’s eyes — Google possesses a “sufficient degree of market power to be able to foreclose rivals in the ad serving market”.

Irreplaceable source of income? Power to foreclose rivals? No real alternative? This is monopoly talk.

Just in case you were in any doubt about that, a Brussels-based lawyer called David Wood has been giving Business Week the benefit of his views on the document.

Wood believes that the European Commission has put Google “on effective notice that its behavior will now be measured as that of a dominant undertaking”. He adds:

‘This has always not been about whether the transaction would be cleared but what would happen afterwards. The next phase is looking at the behavior of these companies [Google and Doublclick]; let’s see if their behavior is allowed by competition law standards.”

In passing, it’s worth noting that Wood works for a lobbying outfit called The Initiative for a Competitive Online Marketplace, or ICOMP for short.

ICOMP is an anti-Google lobbying front funded by Microsoft and run on a day-to-day basis by Burson-Marsteller, the PR agency.

Don’t let that make you too skeptical about Wood’s comments.

Instead, ask what exactly was going through Eric Schmidt’s mind when he decided to make nice with the ailing US newspaper industry this week.

As Eric Schmidt knows well, ICOMP represents Microsoft’s effort to use against Google exactly the same lobbying tools that he and his allies used against Microsoft in the 1990s.

With the insight of a poacher turned gamekeeper, Google’s boss knows precisely where this particular road leads. In Microsoft’s case, it led to the company being tied down by anti-trust actions that started in 1998 and continue to this day.

Not coincidentally, Google’s monopoly has been the subject of comments by interested onlookers such as Rupert Murdoch, Sly Bailey and Paul Myners in recent weeks.

For the moment, however, ICOMP’s list of supporters mostly remains a rag-bag of obscure European names, including hotel groups in Spain and ad agencies in Austria.

This is not yet the kind of broad front that creates big waves in Brussels. In the name of shareholder value, Google would to keep it that way — for as long as possible.

Better than anything else, this explains the paroxsym of pro-newspaper sentiment that seized Mr Schmidt this week.

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