Australian Misadventures

I’m a believer that mixing investing with politics doesn’t make a for a successful strategy (a bit like mixing investing and religion) so I’m going on the limb to argue the case against Australia’s ongoing attempt to introduce legislation that will force the dominant digital advertising platforms in Australia, namely Google, and Facebook, into a government-mandated payment scheme for displaying Search links to the local news content and for users sharing the news links on their platforms. For full disclosure, I hold shares in Alphabet (Google’s parent).

The legislation has teeth, for example, If the parties cannot agree on the appropriate price for the content, digital platforms will be subject to the binding arbitration process by a government appointed body. It is expected that 75% of cases may end up in arbitration as newspaper publishers will be encouraged to pursue inflated claims given a no-downside scenario and cost-plus reimbursement mechanism regardless of the actual value of the news article to the end-user. Not only would Google be barred from deliberately removing news content to avoid paying such fees but Google will also be required to inform the handful of privileged newspaper publishes weeks in advance of any changes to the Search algorithm that may impact the search ranking of their content, presumably to give them time to object and/or to game the search algorithm.

The proposed legislation (News Media and Digital Platforms Mandatory Bargaining Code) asserts that Google and Facebook together control 80% of the digital advertising market in the country and therefore local newspaper publishers are unable to negotiate a fair and equitable arrangement without government involvement.

It is noteworthy that Australia has a high newspaper industry ownership concentration with Rupert Murdoch’s News Corp controlling 57% of the newspaper market by circulation.

The proposed legislation is seemingly supported on a bi-partisan basis and will no doubt be bringing joy to Mr. Murdoch and other Australian publishers. Having that said (and despite my unchecked tendencies for facetiousness) the intent behind the legislation, namely to safeguard local Australian journalism, is noble and just. I am personally delighted to read and pay for Wall Street Journal, New York Times, Financial Times, Barron’s, and Wired subscriptions (all conveniently accessed and read through Google News app). I loathe to imagine going a day without reading newspapers, they are informative, entertaining, and bring a tremendous value beyond the cost of the subscription. Recent FT article on the increasingly desperate state of US local newspapers brings me anguish and a concern for the future of quality journalism and civic discourse. Google agrees and is prepared and willing to pay license fees for news content. Google has launched a $1 billion Google News Showcase and has already struck deals with over 450 publications globally to pay for the news content. Compromise certainly seems feasible – as the saying goes where there’s a will there’s a way.

Unfortunately, confrontation recently escalated when Google justifiably argued that the legislation as currently drafted is unworkable and may lead to suspension of Google Search services in Australia and politicians saw the opportunity to practice patriotic chest-thumping. Mr. Morrison, the Australian PM, seems to relish the opportunity for a Churchillian display of defiance (although a more fitting analogy here would perhaps be the one about cutting off the nose to spite face). Google did state that if they are unable to comply with the legislation (and the current draft appears to be pretty unworkable indeed) they may be forced as a matter of last resort to suspend their Search services so as not to fall foul of the law. Google Australia had USD 3.3 billion revenue in 2019, of which only A$10mln was related to Australian news (0.2% of the total – if this was a measure of alcohol in blood content, it’ll be the tipsy zone) so I doubt Google would be happy to walk away from USD 3.3 billion on the principle ‘protecting’ A$10 million.

Brinksmanship aside and looking past the headlines, the legislation, whilst well-intentioned, is misinformed and misguided in how it’s going about it. The central tenet of web Search is free and frictionless access to the world’s body of knowledge. In the Open Letter, Mel Silva, Managing Director, Google Australia, rightly pointed out the absurdity of the draft legislation which would force Google to pay publishers for a list of newspaper links, regardless of whether the user clicks on any. There is an old saying attributed to Prince Bismarck that “to retain respect for sausages and laws, one must not watch them in the making.” Oh, and did I mention that each click from Google to newspapers website generates millions of visitors for newspaper publishers, which they already duly monetize through their own advertising.

Google has by far the best Search engine in the world that serves the function of organizing the world data and linking people with questions to the most relevant and helpful answers. The proposed legislation is messing with this very principle of how web search works. It is effectively creating an information tax levied on Google but economically paid for by Australian consumers and Australian businesses (advertisers) for the benefit of few newspaper publishers, Mr. Murdoch’s NewsCorp chiefly amongst them.

The inventor of the World Wide Web, Tim Berners-Lee, agrees and has raised concerns that Australia’s proposed News Media and Digital Platforms Mandatory Bargaining Code could fundamentally break the internet as we know it. The underpinning of the modern knowledge economy is the effective and efficient transfer of information and knowledge to get on with the tasks of the day. Whether it’s high school students searching answers to the homework assignment, mum researching the safest and the cheapest car seat purchase, business analyst conducting market surveys, or programmer trying to find a fix for a bug in the code, Google is essential and indispensable. The irony that the proposed information tax on Australian internet users (meant to say Media Bargaining Code) is introduced by the so-called Consumer Protection Regulator for the benefit of a billionaire media mogul with residence outside Australia doesn’t go unnoticed.

Consumers Do Not Pay to Access Google’s Ecosystem (Advertisers Do)

Google invested $27.5 billion in Research and Development in 2020 vast majority (~70%) to improve the quality of the Search Engine and Search results. The innovations range from Artificial Intelligence and Machine Learning to better e-commerce and communication tools so essential during the Covid-19 pandemic, to pushing the boundaries on the foundational Computer Science research.

Google’s index of the web is the most comprehensive, and Google Search contextual understanding of the intent behind users’ queries is superior, leading to more relevant and more helpful answers to users’ questions, including those between Australian business advertisers and their potential customers. Google. The country with better access to better information will do better over time than those that do not. The ability to access Google’s search is foundational to this objective. Newspapers are useful, but Google search is essential. It gets better, the direct cost to the user to use Google’s technology is nil, nada, zilch. One would hope that despite his recent political grandstanding Mr. Rod Sims, Australian Competition and Consumer Commission Chairman (ACCC), would understand that it is in fact in the interest of Australian consumers to pay zero direct cost to access Google’s Search. Nobody, to my best knowledge, has as yet requested Australia to pay for non-Australian news content either. PS. If news links come at the price, why stop at the news? I sure like to be paid for Search links to my crappy blogs that nobody clicks on. Alas, unlike NewsCorp, consumers, unfortunately, do not have access to lobbyists and political donations.

Why would any government in their right mind, barring the authoritarian ones, want to introduce friction in the way its citizenry accesses the world’s body of knowledge? Isn’t there a value to the consumer to be able to access information, even dare I say, local news free of charge? I like news links, with article excepts, they are efficient to read and informative. Surely there is value in giving Australian citizenry unimpeded access to local news through Search without erecting artificial pay-walls. An informed citizenry is an empowered citizenry. Why would a government mess with a perfectly fine Google Search tool used by virtually every connected Australian free of charge just to line the pockets of a few media moguls, the most important of whom is not even residing in Australia?

Search Works by Giving Free Access to World Wide Web

Let’s talk about that chestnut that is asking Google to give advance notice to a handful of newspapers on search algorithm changes. Anyone that knows anything about Search understands that Google (and others) make hundreds of changes to algorithms every day, with the intent to improve the search quality, surface the most helpful and relevant results, and keep harmful content and spam away from users. The results are deterministic or predictable at the level of individual links. The overriding objective is to surface the best results for users, not the most convenient ranking results for incumbent websites. Giving early advance notice is akin to invite gaming of algorithms ahead of everyone else, ultimately harming the end-user by not displaying the most helpful search results.

The legislators who write the laws really ought to educate themselves on the technical aspects of how the Search Engine (and by extension the modern knowledge economy) work. This 1 hour YouTube in-house Google documentary brilliantly illuminates the Computer Scient and technology behind the search: Trillions of Questions, No Easy Answers: A (home) movie about how Google Search works.

How Much Value Is the Government Messing With?

Using Fermi’s problem-solving approach, if Google had $3.3 billion revenue paid for by advertisers, the economic surplus should exceed that (advertiser only spends money on advertising is it bring profit excess of the cost), let’s say that advertisers generated $1.5 of profit for every $1 of advert spend so that’s about $5 billion of GDP contribution. More than 95% of all searches are free (i.e. Google doesn’t generate any revenue), but even when they are free, these searches are still valuable and thus generate consumer surplus. Conservatively, the consumer surplus associated with zero-revenue searches is 10x-20x the volume of searches that generate revenue for Google. Going with the low number of 10x yields about $33 billion of economic surplus (based on 2019 numbers so likely higher in 2020). So in total, about $40 billion of economic value-add being potentially disrupted. Even if the proposed information tax (err I’m sorry Media Bargaining Code to protect consumers) generates $100mln of remittances to local newspapers (10x of Google revenue from Australian newspapers) vs $40 billion of economic value-add (3% of Australia’s GDP), the economic math (upside benefit vs downside loss) simply does not make any common sense.

Arguably, the economic benefit would not disappear altogether and even in the worst-case scenario of complete country exit for Google others might step in to mitigate the losses. Still, losing even 10% of that economic value-add is a loss too much.

Politicians’ Misguided Solution

Australian Prime Minister reported that he held constructive meetings with Microsoft’s CEO Satya Nadella on bringing Microsoft Bing search to replace Google in case Google is forced to withdraw. Microsoft would not be subject to the information tax (Media Bargaining Code goddam it) because they are not dominant. Google has a 94% market share of searches in Australia and for a good reason. The next set of players after google are Microsoft Bing, Yahoo, Baidu, Yandex, DuckDuckGo. Exaggerating slightly (but you’ll get the drift), using Bing, Yahoo, and DuckDuckGo is like only using the 2nd page of Google results. People just don’t do it and for a good reason. Apple realized this too and adopted Google for iPhones (alongside generous revenue sharing payments). Using Baidu and Yandex is nice if one wants to research the virtues of Chinese and Russian propaganda and censorship. So if the Australian Prime Minister thinks it’s constructive to relegate Australians’ searches to Bing to protect Mr. Murdoch’s newspapers, I’ve got a bridge I’d like to sell to him.

There is a solution in fact

Local newspapers deserve support. For many smaller publications, the business is broken. Finding a sustainable model to maintain quality newspaper journalism is a worthy cause that deserves attention and a solution. Nothing less than the plurality of opinions, robust public discourse, and ability to hold those in power accountable is at stake.

Charlie Munger has called newspapers the ‘Fourth Estate’ and extolled the virtues of quality journalism and unbiased editorials that worked for the people by providing accurate information, holding those in the office accountable and countering the misinformation tendencies. However, breaking the business model of Google Search (and Search in general) won’t fix the economic dynamics of the newspaper industry.

There are four proven models to sustainable safeguard quality journalism:

  1. The likes of New Your Times and Wall Street Journal created a compelling digital subscription business model (with the help of Google Search engine). Enough readers are willing to pay for quality journalism in rich countries like Australia to sustain 1-2 leading newspapers.
  2. Google, Facebook, Apple, Microsoft, and others have a moral duty to support journalism. Google is taking this seriously and is already working towards privately negotiated license agreements with newspaper publications worldwide. Government has no role in such arm’s length commercial transactions.
  3. Wealthy benefactors with civil sensibilities proven to be great guardians of journalism. Jeff Bezos in Washington Post and Laurene Powell Jobs have done a great job.
  4. Whilst less common with newspapers, UK’s BBC or USA NPR have proven that government can play a constructive role, whilst safeguarding editorial integrity. If quality journalism is a public good, and I believe it is, governments can and should play a role in preserving and protecting it (if perhaps they could avoid messing up perfectly good solutions like Google Search tools that work)