pay for—gets top placement.26
This formula often has served the interests of small firms better than large firms. Large firms can afford to waste money on advertising. Small firms must target their ads as carefully as possible. They don’t need to scream at millions of people that they should be buying some brand of weak beer. They need to attract the attention of potential consumers who have expressed interest in, say, Bavaria. For this reason, Google needs to understand how patterns of searches indicate behaviors. If Google can customize the placement of ads, giving a user results listing only local shoe stores or only Bavarian lager, then it can generate more clicks per advertisement. This maximizes revenue without necessarily pushing a small firm out of the advertising market or out of business. Google takes its money in small increments millions of times per day rather than by using the network TV model of taking millions of dollars a few times per day. In addition, Google can demonstrate to firms that these advertisements do indeed attract interested customers. There is no such clear feedback with expensive broadcast advertisements.27
Google’s method of generating and selling advertisement placement is brilliant. It uses an unusual auction system that ensures bidders do not overpay for their winning bids. The bidding occurs dynamically and instantly on the initiation of any search. The results—the order in which ad links get placed on the results page—are determined by a number of factors, including the preferences and Web habits of the individual user or population of users in the general area (thus allowing local results to show up). Google does not charge the winning bidder the amount it bid, but instead the amount of the second-place bid, so that bidders need not fear placing a needlessly high “sucker” bid; it thereby helps small firms compete with large ones. And earning the top place in a search for a term like “shoes” or “cars” is in part determined by the “quality” of the bidder’s Web page as well as the amount of the bid. In other words, Google ensures that firms bidding on terms such as “shoes” and “cars” actually offer shoes and cars. Thus customers do not fall victim to “bait-and-switch” tactics and lose trust in Google’s advertisements. This system not only enhances consumer satisfaction with Google’s service but also, as I state above, helps keep the Web clean. If a firm’s site does not say what it means and mean what it says, or if it installs malicious code onto users’ computers, or if it is just ugly and complicated, Google will not reward that site with revenue, no matter how high the bid. This system has generally kept firms happy, consumers happy, and Google’s stockholders very happy.28
Google has not abused its market position in online advertising in any obvious way. It has, however, kept raising the minimum bid levels for many popular search terms. Although Google’s contextual advertising and instant auctions often serve the interests of small firms, its freedom to set such rates at any level it desires allows it to crowd out some of the small firms that have grown to depend on Google for their most valuable advertising outlets—including small firms that are Google’s potential competitors. That’s mean, but it’s not illegal. If Google’s advertising dominance and revenues are a legal problem at all, it’s because of a touchy issue called cross-subsidization.
Google can use its prominence in people’s lives—the network effect—and its surplus revenues to support its other ventures—its online document business, for example, which is likely to lose trivial money for the company. This process is not yet a direct threat to Microsoft, which can withstand a few thousand customers sneaking off to the “cloud” instead of using Word on their own laptops. But it poses a serious threat to small, creative companies that offer Web-based word processors, such as Zoho, Thinkfree, Writely, and Ajaxwrite.
When I asked the New Yorker writer Susan Orlean why she uses Google Docs to compose her work, she replied that she found the cloud comforting. “I was starting a new book, working on two or three different computers, and finding it maddening to have different versions of work on each one, trying to remember which was the latest, etc.,” Orlean wrote to me. “I happened to look at Google Docs and realized it would keep the work synced on all computers, so I thought I would give it a try. I also liked that it was so simple and clean—more like a piece of typing paper than a fancy program.” When I asked her if she considered using Zoho, which is a superior service, she responded, “No, I haven’t, and I trusted Google Docs because I figured it would be around for a long time, where smaller services might disappear (along with my documents).”29
If Google uses its profitable ventures to subsidize those activities destined to lose money, and if that practice kills off innovative potential competitors like Zoho, Google has crossed the line into shaky legal territory. This is essentially what Microsoft did in the 1990s when it used its dominance in desktop software to subsidize and promote its Internet Explorer Web browser. Microsoft managed to kill off several innovative competitors, including Netscape, the original commercial browser. The only remaining major competitors for Explorer were Apple’s Safari (also subsidized by Apple’s profitable ventures) and Firefox, an open-source product released by the Mozilla Foundation. Explorer was for a long time the default browser on more than 70 percent of the computers in the world.30 Although it has been displaced by Firefox in recent years, Explorer is still installed along with Microsoft Windows, the operating system of choice for more than 90 percent of the world’s personal computers.
Competition, both fair and unfair, is but one point of friction between Google and other powerful interests. Increasingly, Google is the target of attacks from firms that provide content to the Web, largely because they are failing to make much money from the Web and Google makes so much.
THE FREE RIDE
Whenever we write blog entries, post reviews of products, upload photos, or make short videos for viewing by anyone who is using the Web, Google finds them. And it copies whatever it finds. All search engines must make a “cache” copy of material they find so that their computers can conduct a search. Then, when others search for content relating to their search queries, Google places revenue-generating advertisements on the margins of the search results through its Ad Words auction program, described above. In a sense, we could say Google is taking a free ride on the creative content of billions of content creators. But the ride is not free at all. Even though we don’t ever negotiate terms of a contract, we essentially agree (by not opting out or actively disagreeing) that search engines may copy our content and make money from the process of judging, ranking, and connecting people to it in exchange for the privilege of our content being found. After all, why would we put content up on the Web if we did not want people to find it? And clearly, opting out of all search engines (there is no simple way to opt out of one or two search engines but not others) is infeasible. So although we get a pretty good deal out of the relationship, it is hardly a fairly negotiated arrangement. But we have little to complain about. Google invests billions in its techniques and technologies to make the Web a reasonable and navigable place. So if we are in the business of trying to get people to notice our work on the Web, we should probably be grateful that Google treats us as well as it does.
Besides, what is so free about a free ride anyway? In basic economic terms, a free rider consumes more than a fair share of limited resources or shoulders too little of the cost of a product or service.31 Economists consider free riders a problem because their presence can lead to underproduction or excessive use of a public resource. If most people in the United Kingdom pay their television tax for over-the-air broadcasting, but a few watch without paying the tax, then the norm of paying for the tax could break down, and more people might be encouraged to be scofflaws. If too many people jump the turnstiles on the Lisbon underground, then too few fare payers will bear the burden of supporting the service. If free riding becomes the norm, the entire system could break down. If a labor union succeeds in securing a wage hike or benefit for all the employees of a firm, but some employees refuse to join the union and pay dues, they are riding for free on the efforts of the union.32
Another way of looking at a free rider problem, dealing with private firm behavior rather than unions, public goods, or public resources, is the argument that when firms provide services to the
