Wall Street Journal columnist Holman Jenkins has a terrific, wide-ranging interview with Google CEO Eric Schmidt in today’s paper that is well worth reading. One thing worth highlighting is Schmidt’s comments on the “economic disaster that is the American newspaper.”  He argues that, “The only way the problem [of insufficient revenue for news gathering] is going to be solved is by increasing monetization, and the only way I know of to increase monetization is through targeted ads.”

Absolutely correct. It’s a point that Berin Szoka, Ken Ferree and I tried to make in PFF’s mega-filing in the FCC’s “Future of Media” proceeding in early May, and Berin and I stressed it in even more detail in our piece on”Chairman Leibowitz’s Disconnect on Privacy Regulation & the Future of News.” The key takeaway: If Washington goes to war against advertising — and targeted advertising in particular — then there will be no future for private news. As we stated there:

The reason for the indispensability of advertising is simple: Information (including news and other forms of “content”) has “public good” characteristics that make it is very difficult (and occasionally impossible) for information-publishers to recoup their investments.  Simply put, they quite literally lack pricing power: Whatever they charge, someone else will charge less for a close substitute, inevitably leading to “free” distribution of the content, even though the content is anything but free to produce.  Advertising is the one business model that has traditionally saved the day by rewarding publishers for attracting the attention of an audience.

Thus an attack on advertising is an attack on media / news itself. And yet Washington is currently engaged in an all-out assault on advertising, marketing, and data collection efforts / business models.

Incidentally, Google recently submitted comments with the Federal Trade Commission in reaction to its Staff Discussion Draft about the future of journalism and laid out their views on many of these issues. More importantly, as summarized on pg. 30 (of the pdf) of this Newspaper Association of America filing to the FTC, Google has proposed an interesting monetization model that utilizes Google Search, Google Checkout and DoubleClick ad server, “to build a premium content system for newspapers.”  Worth checking out.  Kudos to Google for taking these steps and to Schmidt for again stressing the importance of targeted advertising for the future of media.

I just finished Ken Auletta’s latest book, Googled: The End of the World As We Know It, and I highly recommend it. Auletta is an amazingly gifted journalist and knows how put together a hell of good story.  It helps in this case that he was granted unprecedented access to the Google team and their day-to-day workings at the Googleplex. I’m really shocked by the level of access he was granted to important meetings and officials–over 150 interviews with Googlers, including 11 with CEO Eric Schmidt and several with founders Sergey Brin and Larry Page.  That’s impressive.

The book shares much in common with Randall Stross’s excellent Planet Google: One Company’s Audacious Plan to Organize Everything We Know, which I reviewed here earlier this year.  Both books recount the history of Google from its early origins to present. And both survey a great deal of ground in terms of the challenges that Google faces as it matures and the policy issues that are relevant to the company (privacy, free speech, copyright law, etc).

What makes Auletta’s book unique is the way we taps his extensive “old media” world contacts and integrates such a diverse cast of characters into the narrative — Mel Karmazin (former Viacom, now Sirius XM), Bob Iger (Disney), Howard Stringer (Sony), Martin Sorrrell (WPP), Irwin Gotlieb (Group M), and even the Internet’s “inventor”–Al Gore!   Auletta interviews them or recounts stories about their interactions with Google to show the growing tensions being created by this disruptive company and its highly disruptive technologies.  There are some terrifically entertaining anecdotes in the book, but the bottom line is clear: Google has made a lot of enemies in a very short time.

Indeed, the book is as much about the decline of old media as it is about Google’s ascendancy.  What Auletta has done so brilliantly here is to tell their stories together and ask how much old media’s recent woes can be blamed on Google and digital disintermediation in general. “If Google is destroying or weakening old business models,” Auletta argues, “it is because the Internet inevitably destroys old ways of doing things, spurs ‘creative destruction.’ This does not mean that Google is not ambitious to grow, and will not grow at the expense of others. But the rewards, and the pain, are unavoidable,” he concludes. Google is essentially just the tip of a giant wave of digital disintermediation that is tearing through the media landscape, Auletta argues. But because it is the biggest and most visible part of this wave, it invites greater scrutiny and scorn.  And then there are more profound questions about Google and the digital disintermediators: “What we don’t know is whether the new digital distribution systems will generate sufficient revenue to adequately pay content providers.”  Auletta isn’t just talking about old media giants, but about content creators in general. It’s the “digital sharecropper” concern that Nick Carr has articulated in his book about cloud computing, The Big Switch. [reviewed here]  In the relentless pursuit of greater efficiencies, do digital disintermediators destroy the cross-subsidization methods that have traditionally funded the creation of news, information, and entertainment? If so, are we better off because older, “less efficient” ways of doing business are replaced with better ones. Or are we instead left with less high-quality journalism and entertainment because of funding streams are drying up or being siphoned off by the new digital disintermediators?

Those are heated question frequently debated by Internet optimists and pessimists. It’s a great debate, and one that will no doubt continue to rage for many years to come. The problem for Google — as the interviews Auletta conducts with others in the book makes clear — is that it will increasingly become the scapegoat for every problem under the digital sun. “To blame Google is to prescribe a cure from the wrong illness,” Auletta notes.  Nonetheless, as the biggest and most visible of the digital disruptors, it’s clear the company will have a target on its back for many years to come.

Worse yet for Google, Aulleta states, is that the company is “waking the government bear,” not just because of its growing size but also because of the sheer amount of information it collects and puts at the world’s disposal.  Privacy, child safety, defamation, and copyright are just a few of the concerns raised by Google’s mission “to organize the world’s information and make it universally accessible and useful.”  Google has gone to great pains to address these concerns, but it’s unlikely to ever be enough to satisfy government officials, who will be fielding increasing complaints from disgruntled competitors and activist groups at the same time.

These concerns could play into the hands of those who think antitrust action against Google is needed. Indeed, I fear that’s on the way given the myopia of Washington. As I pointed out in my lengthy review of Gary Reback’s ode to antitrust regulation, Free the Market: Why Only Government Can Keep the Marketplace Competitive, the static competition, fixed-pie mindset that rules Washington leads many to support antitrust crusades against the tech giants of the day.  In the 70s it was IBM. In the 90s it was Microsoft.  In the next decade it will likely be Google.

“Today, Google appears impregnable,” Auletta notes, “But a decade ago so did AOL, and so did the combination of AOL Time Warner.”  Indeed, I have written extensively about that deal and many others that critics predicted would bring on a techno-apocalypse.  Of course, we know how the story ended in those cases. Markets and technologies evolved while the old giants rested on their laurels. Dynamic competition and innovation are the rule; the static mindset crowd that pretends today’s giants are the end of the story just don’t have history on their side.

But that doesn’t mean Google will be able to avoid a massive regulatory onslaught. In fact, I have pending bets going right now with several friends that, before the Obama Administration leaves office, it will launch the biggest, most costly antitrust jihad in U.S. history against Google.  I can’t tell you how much I am hoping to lose those bets.

P.S. I have enjoyed many of Auletta’s earlier articles and books, especially Backstory: Inside the Business of News (2003),  but I highly recommend that you check out the latest essay he posted on his blog about “Media Maxims.”  Outstanding insights.

Maybe Obama should invite Google CEO Eric Schmidt and Microsoft CEO Steve Ballmer over to the White House for a beer to settle the two companies’ differences!

http://www.youtube.com/v/Q0umKaGxkkE While he’s at it, Obama might want to invite Apple CEO Steve Jobs, too, since the common cause Apple and Google once made against Microsoft now seems to be giving way to increased rivalry between the two titans of Internet cool. Or how about Facebook CEO Mark Zuckerberg, given Facebook’s growing challenge to Google? Yahoo!’s Carol Bartz seems to get along much better with everyone than the boys in the group, so she’d probably help Obama keep things under control. The Internet industry’s war-of-all-against-all is reminiscent of Tom Lehrer‘s classic 1960s satire “National Brotherhood Week”:

Google recently experienced failures of its core services — a phenomenon that quickly spawned the hashtag “googlefail” on the popular social networking platform Twitter.  These failures show that a company once thought of as the odds-on favorite for dominating the global market in all things web — the monolith of Mountain View — is looking more and more like a search-only player.

Big firms consistently fail to use their “market dominance” to take over adjacent markets, something that should give antitrust warriors in the Obama administration reason for pause.  The renewed call for tough antitrust enforcement comes at a time when Google, a poster-child for market dominance, simply can’t leverage its position at all.

Google Apps Google’s most recent outages, along with past outages of Google’s “GMail” email service, show that Google is not yet in a position to use its popularity in search to take on the likes of Microsoft Office and other productivity suites.  Only last year outlets such as USA Today, ABC News, and PC World speculated that we may see a war between the GooglePlex and Redmond over the productivity space.  Continued outages, not to mention the failure to improve Google Apps functionality, makes this seem very unlikely today. #dominancefail

Streaming Video YouTube was also part of today’s #googlefail.  When Google bought YouTube in 2006 the purchase had to be approved by the FTC.  Looking back, this seems just silly.  Not only has YouTube failed to become a money-making behemoth, it’s failed to make a money at all.  It seems clear now that while consumers absorb a lot of YouTube clips, the real money — the only money — is in premium content such as Hulu’s ad-supported video, iTunes’s piecemeal sales, or Netflix’s  subscription model.  While Hulu’s profitability is unknown, none of these competing video sites seem to be as incredible a loss-leader as YouTube.  The FTC may have approved the Google-YouTube merger more quickly had it known YouTube would turn into a video money pit — one that could be seen as a competitive disadvantage to Google. #dominancefail

Smart Phones While not part of the recent #googlefail problems, the G1 phone has failed to become a strong competitor to RIM’s Blackberry line or the iPhone.  Granted, RIM has been around for years and the iPhone has been on the market for nearly two full years, yet the G1 has still experienced dismal sales considering Google’s considerable clout and credit with the tech set.  Piper Jaffrey projects that iPhone sales will top 45 million units this year.  Compare that to the G1 — heralded as the first of many phones using Google’s Android operating system — which is trailing at a distant 5th in the smart phone sales rankings. #dominancefail

Google’s failures aren’t the result of failings specific to Google, but rather evidence that companies that become excellent in one field aren’t necessarily capable of achieving excellence in another.  Rewiring even a portion of a multi-billion dollar company to provide a totally new product is a near impossible task.  The incentive structures, hiring practices, corporate culture and myriad other factors necessary to be world-class in one endeavor may be very different for another.  In short, market advantage is not much of an advantage in today’s economy, but instead can prove to be an incredible hindrance to expanding into new markets.

This is especially true in the tech industry where barriers to entry are low, investor eagerness is high, and new competitive spaces are opening constantly.  This is why big players emerge so quickly — like Google — and fade so fast.  Think AOL, AltaVista, Compuserve, etc.

So, rather than focus on how to punish big players in a given market, the Obama administration should focus on how to free up capital markets to allow money to flow to the best technologies so that competition remains vibrant.  Repealing onerous regulations like Sarbanes Oxley that make it harder for companies to go public would be a good start.  Refraining from locking-up capital markets further by layering on morepseudo-accountability rules is also key.  Additionally, as the Cato Institute’s Jim Powell points out, allowing venture capitalists to do their jobs — something Mr. Obama’s budget discourages — is key for competition and furthering innovation.

If any additional evidence is needed that big firms don’t always stay big and can even fail, members of the administration need only visit Google News…if it’s up.