Google’s Flash of Vulnerability Gives News Publishers Reason for Hope

(The Recorder)  For beleaguered U.S. news publishers, who have banded together in preparation for taking on internet giants Google and Facebook, last week’s financial headlines had to offer some rays of hope.

The $2.7 billion fine levied by European Union regulators gutted second quarter profits for Alphabet Inc., the parent company of Google. And that is just the tip of the iceberg in terms of potential further sanctions, should it fail to comply with the search engine adjustments the EU has demanded.

And separately, in a landmark 7-2 ruling that could have major ramifications, Canada’s Supreme Court upheld a British Columbia court’s ruling that Google must remove data from its global search engine, not just the Canadian version.

Google reported second quarter earnings and revenue, and earnings beat Wall Street’s expectations. But the record fine, the Canadian ruling and higher costs drove its stock down more than three percent in after-hours trading.

With a market cap of around $495 billion, Google will absorb the loss handily. But the potential for more fines, sanctions and suits and the prospect of facing global marching orders on how to maintain its search engines—or paying for litigation to fight them off—from multiple countries cloud the U.S. tech titan’s future.

And that’s where the National Media Alliance comes in.

The 2,000-strong coalition of newspaper companies—including the New York Times, Washington Post, and Wall Street Journal—last month announced its plan to ask Congress for an antitrust exemption so that its members can bargain collectively with Google and Facebook, or the “digital duopoly” as president David Chavern put it in a WSJ opinion piece.

“Google and Facebook’s duopolistic dominance of online advertising, which could do far more damage to the free press than anything President Trump posts on Twitter, remains largely unnoticed,” Chavern wrote two weeks ago. That may no longer be true given the storm that greeted his announcement.

There are two main reasons that newspapers and the content industry as a whole are not doing well, according to Jonathan Barnett, director of the Media, Entertainment and Technology Law Program at USC’s Gould School of Law.

“The first is a practical matter: It’s very difficult to enforce copyrights on the internet, and so there has been a devaluation of content. The notice and takedown procedures that were established as part of the DMCA (Digital Millennium Copyright Act) simply haven’t done the job.

“The second is the explosion in market shares of the companies that are distributing their content and taking an outsized portion of the ad space, which is at the point now where it should raise concerns for most people from an antitrust point of view,” he said.

Google controls as much as 88% share of the search market, and Facebook is used by almost 78% of smartphone users, according to figures cited in Barnett’s recent paper entitled “The Cost of Free: Commodification, Bundling, and Concentration.”

“The dominance of Google has reconfigured the realities of the news industry,” said Jonathan S. Kanter, a Washington, D.C.-based partner at Paul, Weiss, Rifkind, Wharton & Garrison and counsel for the National Media Alliance.

“The platforms have been given a tremendous amount of power, the enforcement hasn’t been there, and now the publishers are sending a lot of news and getting some clicks in return,” he said. “For publishers, it has become hard to justify what they’re doing.”

There’s little confusion about the problem then, but the solution is far trickier. Taking on Facebook and Google at the bargaining table with their collective clout is the publishers’ stated strategy now. But it won’t be easy to earn the exemption, much less make up ground at the table. Couldn’t they instead lobby Congress to take a hard look at just how dominant the two online behemoths have become and step in with an antitrust investigation?

Antitrust Exemption: It Won’t Be Easy

Since Republicans control both houses of Congress and the White House under President Donald Trump, who has made attacking the media a hallmark of his rhetoric, the chances are slim that legislation could be sponsored, clear both houses, and be signed into law anytime soon.

And did you hear about the massive march on Washington, D.C., by supporters of the First Amendment and the antitrust exception to help the newspaper industry maintain its highest standards of journalism?

No?  That’s because it didn’t happen (“Fake news!”). Most consumers are oblivious to or apathetic about the newspapers’ financial plight, and that won’t help them make their case for an exemption with Congress.

If the Media Alliance is able to claim an exemption for collective bargaining, there will still be a long way to go. They’ll be obliged to bargain in good faith and take on multiple sticky issues like copyrights, intellectual properties, rights of publicity, and re-use rights without the benefit of building on past contracts.

Even united, it’s questionable whether the publishers can bring enough leverage to the table to move Google or Facebook on major money issues, unless they are willing to walk away from the table and tell the two internet giants that they are going to withhold their content. Even then, the volume of available content could undercut such a move.

Some believe that newspapers are in the predicament they are because they relied too heavily on their regional monopolies—which enabled profit margins to peak at more than 20% in the 1990s—and failed to get out front in terms of transitioning to digital publishing.

The internet reduced subscription revenues, while eBay and Craigslist took away classified ad money, leaving newspapers with only display advertising to bank on, and the dominance of Google and Facebook on that front is why we’re discussing an antitrust exemption.

The most devoted free market advocates believe businesses which had the foresight to adjust to technological advances should be rewarded (i.e., survive), and that those who didn’t don’t deserve a bailout. How will things play out if the government stays on the sidelines?  British political and economic expert Tim Worstall, in a Forbes analysis piece, said Britain offers a good indicator.

“I would expect there to be many fewer first-line newspapers staffed by many fewer people in much the way that the U.K. market has worked for near a century now. I would also expect to see them using political stance as a differentiator just as in Britain,” said Worstall, who believes that’s how it should work. “Suffering through disruption should not qualify these companies to engage in collusion.”  The newspapers industry’s last attempt to resolve a problem when government intervention didn’t go well.

Decades ago, in 1970, the rapidly consolidating newspaper industry lobbied hard for the Newspaper Preservation Act on Capitol Hill, and Congress listened, allowing for Joint Operating Agreements (JOA).

The legislation was meant to preserve two voices in towns that could really support just a single newspapers and prevent the failure of the No. 2 paper. They allowed rival papers to merge non-editorial departments like circulation and advertising but maintain distinct editorial voices.

With nearly five decades of hindsight, we see now that they wound up saving neither newspapers nor jobs, with a minimal impact on the news. Of 28 JOAs that once existed, five remain. That’s an object lesson in not letting government near newspapers and their troubles.

One of the signs of a monopoly is that innovation is stifled, but attorney Kanter is convinced that doesn’t apply here.

“I think the idea that Google and Facebook are so dominating that innovation is being stifled is out of touch,” he said. “Innovation is more than creating new technology or producing it in a different way. For publishers, innovation might be a new way to cover legal trials or to help providing for communities or a way to go into a war zone and cover it without getting killed. You have to respect all different kinds of innovation.”

How about finding a way to make money when your distribution partner holds most of the cards?

What Looks Like a Monopoly . . .

Google has been walking a fine line on antitrust for years, and Joseph Saveri, founding partner of Joseph Saveri Law Firm in San Francisco and an antitrust expert, thinks it might have crossed it this time.

“There is an increased appreciation of their dominance, and because of that and the failure of antitrust enforcement, it’s become evident that it’s broken and something needs to be done,” he said.

Google came out of an earlier Federal Trade Commission antitrust probe relatively unscathed in 2013. It was at that time that the EU began the investigation that culminated in the record fine and sanctions that put the hit on its second quarter profits.

“There has always been a lag between regulation here and in Europe,” said Saveri.

“You can certainly make the case that the FTC should have been, and should be, more active. But a lot has to happen for antitrust regulators to step in. Beyond the question of competition, there’s the politics of the FTC and the Justice Department, so it’s hard to predict.”

Even without the FTC stepping in there are legal remedies, he believes.

“This is where you look to private antitrust litigation to protect the economy and the principles of consumer welfare underlying the antitrust laws,” Saveri noted.

The Public Interest Gambit

Newspapers have always had a bit of an identity crisis. Their best investigative reporting does, indeed, provide a valuable public service, but newspapers have always been exclusively privately owned and staunchly for-profit.

First-rate journalism has always been a loss leader rather than a profit engine for newspapers, and delivering it is not going to give them enough chips to match the massive distribution platforms and advertising bases of Google and Facebook and their data-driven targeted marketing.

Most publishers and journalists recoil at the idea of an alliance or any subsidy from the government, but when your survival is at stake shouldn’t it at least be on the table?  Could there be some sort of hybrid nonprofit designation?

“Newspapers have always received special treatment in the legal system,” said Saveri, who doesn’t think the nature of the coverage has much to do with it, and that while “important” journalism may keep politicians on the up-and-up, it doesn’t necessarily translate into bargaining clout.

“Who’s to say what’s important? Consumers vote with their feet,” he said. “William Randolph Hearst sold a lot of newspapers, and I don’t think it was with ‘first-class journalism.'”

Saveri saw some irony in the fact that some of the business who are complaining about a monopoly are the ones that used to be accused of it themselves, and he believes any sort of special considerations, including an antitrust exemption, should be approached with caution.

“Think about airlines. There have been regulations that have permitted coordinated practices free of antitrust scrutiny and that has caused some problems,” he said.

“The same is true with professional sports and the insurance industry where there have been antitrust immunities. Generally, you have to be very suspect of explicitly providing antitrust immunities and realize that to solve one problem, you shouldn’t create others.”

(Reporting by Todd Cunningham)