Google and Searches

The idea of Google was formed in January 1998, when two PhD researchers at Stanford University, Larry Page and Sergey Brin, presented a paper describing an alternative model for managing web searches. The internet had grown so much that a search tool had become necessary. InfoSeek, Yahoo, and Excite already had their own search engines. Instead of searching keywords in web pages, as the existing search engines did, the Stanford students built an algorithm that would take into consideration hyperlinks to measure the relevance of a web page. The search engine was called Google, after the word googol, which represents the number 10100, or one followed by 100 zeros, coined in 1938 by the nine-year-old nephew of the English mathematician Edward Kasner.8 As the domain name with the word googol was taken, they settled for Google.

Google Inc. was incorporated on September 7,1998, with capital of $1 million provided by four investors: Jeff Bezos, founder of Amazon; Ram Shriram, a member of the executive team in Netscape (the first popular browser) and then vice-president at Amazon; and Andreas von Bechtolsheim and David Cheriton (professor of distributed systems and networks at Stanford and mentors of Page and Brin), who were both founders of SUN Microsystems. Sequoia, the well-known venture capital firm, joined during the next round to finance the start-up.

The search engine grew a large customer base of searchers. As of the beginning of 1999 it was managing half a million searches a day; by the start of 2000 this number had reached seven million searches a day, and then 100 million daily searches by the end of 2000, reaching a share of 40 percent in the global search market.9

Google would become the most popular search engine in the world, with a market share beyond 90 percent globally, except for China (where Baidu has a 70 percent market share) and Russia (where Yandex has a 36 percent market share). In the Western world, the only alternative search engine is Bing by Microsoft. Companies such as Yahoo now merely resell Google’s search results.10 As will be described, network effects in search seem to be so relevant as to tip the market to a near monopoly.

“Given the internet’s enormous breadth and constant evolution, establishing and maintaining a commercially viable general search engine is an expensive process. Google’s search index contains hundreds of billions of webpages and is well over 100,000,000 gigabytes in size. Developing a general search index of this scale, as well as viable search algorithms, would require an upfront investment of billions of dollars. The costs for maintaining a scaled general search business can reach hundreds of millions of dollars a year.”11

Google does not have a subscription fee or charge per search. Again we find a zeropricing service in a multi-sided market. The company’s founders were particularly averse to the advertising model followed by competitors like Yahoo and Excite, but in 2001 AdWords was launched. Google decided that it would not display advertising on its web page, as other portals did, and would not accept payments from companies to manipulate search results. On the contrary, revenue would be generated by a mixed service, in which companies would pay to have their ads introduced as results to searches, but separated from so-called “organic” results, and ads would be displayed as a result of a sophisticated evaluation that considered the relevance of the result and the fee to be paid by the advertiser, determined by an automated auction, and only when users clicked on their ads. The model of ad-financed services was extended to email in 2004, when Gmail was launched. Users received a free email account with a large capacity. Google would scan the content of the emails and would introduce personalized ads in the display of the emails.

Google has created an advertising category within itself - so-called search advertising -to be differentiated from more traditional display advertising up to the point of being considered a different product market for antitrust purposes. In search advertising, the ads are presented as paid results for a search, together with but separated from organic results. These ads are very effective, as they are directly connected to the consumer’s declared interest in a product. Consequently, search advertising produces more revenue than digital display advertising. For instance, in the UK in 2019, search advertising raised £7.3 billion in revenue, 90 percent of which was through Google. Google’s revenue was larger than that generated by all companies in the digital display market (£5.5 billion) as well as all TV advertising revenue in the UK (£4.9 billion).

Google is also active in the digital display market. Google displays ads in its email service (Gmail), its map service (Google Maps), and so on. Google’s acquisition of YouTube in 2006 was a natural extension of this business model (see Chapter 9). Google’s share in display advertising is also relevant; for the UK, it has been calculated that Google has a market share of close to 10 percent (Facebook has more than 50 percent market share).

Furthermore, Google provides intermediation services for publishers in the digital advertising market. AdSense was launched in 2002. Google’s business model became even more sophisticated as the platform was extended to consider content producers and benefit them in the form of the payment of a percentage of the advertising revenue generated by their sites. AdSense allowed small ads to be displayed in web pages, blogs, and other sites produced by third parties. Google would sell these ads to advertisers following the AdWords model and share revenue with publishers, as much as two-thirds of the fee paid by the advertiser.

Google creates indirect network effects like the ones we already know from newspapers, namely by connecting advertisers and eyeballs. In the words of the European Commission: “The indirect network effects stem from the link between the attractiveness of the online search advertising side of a general search engine platform and the revenue of that platform. The higher the number of advertisers using an online search advertising service, the higher the revenue of the general search engine platform; revenue which can be reinvested in the maintenance and improvement of the general search service so as to attract more users.”12

However, the scale of the indirect network effects created by Google has no precedent in the history of media. The largest TV audience in the US, the Super Bowl, reaches around 100 million people once a year. Google manages more than 5 billion searches per day, throughout the year. It is not surprising, then, that the advertising revenue of Google in 2019 was $134 billion, while the full-year revenue of the network broadcasting the Super Bowl (CBS) was around $15 billion. Worldwide combined TV advertising revenue in 2019 was approximately $166 billion. If Google keeps growing as much as it has in previous years, by 2021 it wouldattract more advertising revenue than all TV stations in the world combined.

AdWords and AdSense have grown to such a strong position that many advertisers and publishers rely on them for their business. Such dependence creates conflicts, as Google is not always clear about the rules; rules are often amended without previous notice and accusations of discrimination have often been leveled, including discrimination in favor of Google’s own services (self-preferencing). Regulators are putting increasing attention on platforms.

In June 2017, The European Commission imposed a €2.4 billion fine on Google for self-preferencing:13 in its general search results’ page, Google positioned and displayed its own comparison shopping service more favorably than the competing shopping services. This was one of the first cases on self-preferencing by a platform intermediating its own downstream services. Complaints against Google for self-preferencing were later filed by specialized travel search engines, against Amazon for self-preferencing its own products in Amazon Marketplace, and against Apple for self-preferencing its own apps in the app store. Self-preferencing is one of the main accusations against dominant platforms; the remedies are non-discrimination obligations, or even vertical unbundling.

In March 2019, the European Commission imposed a €1.49 billion fine on Google for abusing its dominant position in the commercialization of AdSense for searches. Google first imposed exclusivity on publishers and prohibited them from placing search adverts from competitors on their own websites. Exclusivity was eventually modified to allow the display, but only after written approval from Google regarding how rival ads would be displayed, reserving the most visible and most clicked parts of the websites for Google. Imposing exclusivity is becoming another common accusation against dominant platforms, with multi-homing defined as the remedy.

In December 2019, the French antitrust authority imposed a €150 million fine on Google for abuse of dominant position. A publishing company, Gibmedia, which charges users for weather and telephone information, had its account suspended without previous notice for violating Google’s rule about not displaying ads on sites that charge for services that are usually provided for free. The authority concluded that Google’s rules on advertisers are established and applied under non-objective, non-transparent, and discriminatory conditions. The opacity and lack of objectivity of these rules make it very difficult for advertisers to apply them, while Google has full discretion to modify its interpretation of the rules in a way that is difficult to predict, and to decide whether the sites comply with them or not. This allows Google to apply them in a discriminatory or inconsistent manner and leads to damages for both advertisers and for search engine users. The lack of fairness and transparency in the management of the multi-sided market is another common accusation against digital platforms.

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