September 13, 2008
Stuck in Google’s Doghouse By JOE NOCERA
A few days ago, Dan Savage had his lawyer send a nine-page, 4,000-word letter to the antitrust division of the Justice Department. Mr. Savage, 59, runs Sourcetool.com, a business-to-business Web site that acts as a directory, listing — and ranking — hundreds of thousands of companies that sell industrial products.
Like many Internet entrepreneurs, Mr. Savage built his business model around Google when he started it in late 2005. Using Google’s AdWords program, he planned to make bids on specific search terms — “ball bearings,” say — that would ensure that a Sourcetool ad would be placed high on the right-hand side of the Google page whenever someone searched for places to buy ball bearings. That’s how paid search works.
But because his was a free site, he needed to generate his revenue from advertising. For that, he used Google’s other ad program, AdSense, which placed targeted advertising on the right-hand page of the Sourcetool home page whenever a user “clicked through” to Sourcetool to find a company that would sell him ball bearings.
Mr. Savage estimates that he was paid around 10 cents every time someone clicked an ad on his site. The difference between that and what he paid Google to advertise against search terms — usually around 5 or 6 cents —was his profit.
According to the letter Mr. Savage submitted to the Justice Department, Google at first gave him nothing but encouragement, even naming Sourcetool its AdSense site of the week at one point. By May 2006 — with the company barely six months old — it was making around $115,000 a month on $653,000 in revenue. According to Mr. Savage, his biggest expense was paying Google to advertise against search terms, which was costing around $500,000 a month.
In the summer of 2006, however, Google pulled the rug out from under him. Suddenly and without warning, Google raised Sourcetool’s minimum bid requirement from 5 or 6 cents to $1, and in some cases to as much as $5 or $10. Mr. Savage discovered this was happening only after he saw that Sourcetool’s traffic had dwindled drastically and began looking into the reasons. Because the new Google-mandated minimum bid was so much higher than the maximum he allowed for (usually around 10 cents), Sourcetool’s ads had disappeared from the Google search results page. That’s why his traffic had dropped off.
When Mr. Savage asked Google executives what the problem was, he was told that Sourcetool’s “landing page quality” was low. Google had recently changed the algorithm for choosing advertisements for prominent positions on Google search pages, and Mr. Savage’s site had been identified as one that didn’t meet the algorithm’s new standards. (As Google defines it, landing page quality includes a series of attributes — loading speed, user friendliness, relevancy, originality and dozens of other characteristics — that it deems appropriately “googly.”)
Although the company never told Mr. Savage what, precisely, was wrong with his landing page quality, it offered some suggestions for improvement, including running fewer AdSense ads and manually typing in the addresses and phone numbers of the 600,000 companies in his directory, even though their Web sites were just a click away. At a cost of several hundred thousand dollars, he made some of the changes Google suggested. No improvement.
When he pressed Google to explain why the changes hadn’t helped, he said, the company gave him the brushoff.
“Your landing pages will continue to require higher bids in order to display your ads, resulting in a very low return on your investment,” a Google executive named Nathan Anderson wrote on Jan. 2, 2007. “Therefore AdWords may not be the online advertising program for you.”
Two days later, in another e-mail message, Mr. Anderson told Mr. Savage to “please refrain from repeatedly contacting our team.”
As he stewed about his predicament, Mr. Savage came to believe that there was something more nefarious going on than a subpar landing page. Google, he believed, didn’t like his Web directory because it was a search engine itself — though much more narrowly focused than Google’s search engine — and Google found it a competitive threat.
What’s more, Sourcetool competed directly with business.com, which was one of Google’s “content network partners,” meaning it gets additional advertising revenue because Google directs AdWords ads to the site as well as AdSense ads. (The New York Times is also a Google content network partner.)
As Mr. Savage saw it, Google’s near monopoly in search ads (its market share is approaching 70 percent) put it in a position to decide which business models it would tolerate and which ones it wouldn’t. “Google can use AdWords to pick winners in every category,” he told me.
Mr. Savage is hardly in a position to sue Google for antitrust violations, of course. But he did feel there was one thing he could do: tell his story to the Justice Department, in the hope that it might help stop the Google-Yahoo advertising deal that was announced in June. Hence the letter. “Google’s conduct is plainly consistent with acts of monopolization and attempted monopolization,” Mr. Savage’s lawyer wrote in his letter to the Justice Department. He added that “Google has achieved and maintained its market share through anticompetitive exclusionary conduct.”
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In the three months since the Google-Yahoo deal was announced, there is very little doubt that the Justice Department is seriously examining whether to block it. As you may recall, the deal was not a merger, but rather a cooperation agreement. Still, it would give the two companies a staggering 90 percent of the search advertising market, a market share figure so high that even the notoriously lax Bush antitrust department can’t look the other way.
Earlier this week, the department hired a widely known antitrust lawyer, Sanford M. Litvack, to help it decide whether to oppose the deal.
And gadflies like Mr. Savage aren’t the only ones pressing Justice to oppose it. The Association of National Advertisers, which includes Procter & Gamble and General Motors, is also on record calling for the deal to be blocked. “We think advertising prices will be higher as a result of the deal,” said the association’s president, Robert D. Liodice. “Concentration of power becomes an issue.”
I have no idea whether the Justice Department will try to block the deal, or even whether it should. As I learned a decade ago covering the Microsoft trial, there are few areas of the law more complicated or more ambiguous than antitrust law.
Google’s opponents may fear its monopoly power, but the company insists that everything it does is aimed at “enhancing the customer experience” — a claim that harks back to Microsoft’s claims once upon a time. And like Microsoft, Google built its near monopoly in rather exemplary fashion: by building a better mousetrap.
Still, the more I dug into Mr. Savage’s complaint, the more I came to think that it offers a nearly perfect example of why antitrust issues are so difficult to sort out. Listening to Google executives explain how the company’s algorithm works, I came away largely convinced that Google was operating in good faith.
“Our quality score system is an impartial algorithmic score that is designed to enhance the experience of the user, and the vast majority of advertisers benefit from it also,” said Nicholas Fox, Google’s product manager for ad quality. In addition to rewarding sites that have the qualities Google and its users like, it also tries to weed out, and punish, bad apples.
For instance, it doesn’t want companies that buy search terms and then play some form of bait and switch. The imposition of high minimum bids is Google’s way of weeding out the bad guys.
But it is also true that people like Mr. Savage, who are demonstrably not bad guys, find themselves in Google’s doghouse and then can’t even get the company to respond to them. Is it any wonder that they feel treated unfairly by a ruthless monopolist? What makes it worse is that Google simply refuses to acknowledge that its algorithms could ever be wrong. Could Google really treat its own customers so shabbily if it faced true competition?
So what is Google’s problem with Sourcetool? One likely possibility is that Google views Sourcetool as an example of a practice called ad arbitrage, which it frowns upon. Those are sites that bid on search terms not to provide a service, but simply to con people into clicking through the ads on its site. Though nobody at Google would say so directly, I got the distinct impression that Google thought Mr. Savage was practicing a form of ad arbitrage with his site. He did, after all, bid on search terms and make his money on advertisements on his site.
But Mr. Savage is clearly offering a real service: his directory. Indeed, in many ways, the look and feel of his site resembles that of Google’s partner business.com. The ways Sourcetool differs from business.com are what Mr. Savage views as his competitive advantages. They include the way he ranks companies, and a directory page that gives information about each company.
When I pressed Mr. Fox about Sourcetool, he refused to tell me why the algorithm had problems with the site. When I asked him why the business.com site was in the algorithm’s good graces but Sourcetool’s wasn’t, he wouldn’t tell me that, either. All I got were platitudes about the user experience. It wasn’t long before I was almost as exasperated as Mr. Savage. How can you adapt your business model to Google’s specs if Google won’t tell you what the specs are?
Google also told me that it never made judgments of what was “good” and “bad” because it was all in the hands of the algorithm. But that turns out not to be completely true. Mr. Savage shared with me an e-mail message from a Google account executive to someone at another company who had run into the same kind of landing page problem as Sourcetool. The Google account executive wrote back to say that she had looked at the site and found that “there seems to be a wealth of valuable information on the site.” Consequently, her team overruled the algorithm.
The problem with monopolists, of course, is that they just can’t help acting like monopolists, even supposedly benign monopolists like Google and even when they are not consciously trying to rub out the competition. They are always right and everybody else is wrong. They have disdain for their own customers, knowing those customers have nowhere else to turn. They tell small fry like Mr. Savage to stop bugging them.
That is how Microsoft acted a decade ago, and that, increasingly, is how Google is acting. Half the time, the company doesn’t even realize how egregious its behavior has become, which is why it feels so misunderstood when it is criticized.
Maybe Mr. Savage’s experience proves that Google has become a company that abuses its monopoly power, and maybe it doesn’t. He is just one small example, and as Google likes to point out, thousands of advertisers are thriving using AdWords and AdSense.But his story gave me pause, and nothing Google said in its defense defused my alarm. As Mr. Litvack reviews the Google-Yahoo deal, I hope it gives him pause as well.
It could be déjà vu all over again.