Google Overestimating Own Economic Impact, Hurting Competition, Researcher Says
Google is drastically overvaluing its economic impact, said a soon-to-be-published economic analysis from Allen Rosenfeld, a senior vice president and economist at M+R Research. Google estimated it generated $111 billion in 2013 economic activity (http://bit.ly/1dw69hE). “Wishful thinking,” Rosenfeld told us. Google’s methodology flies in the face of commonly accepted economic theory, he said. Rosenfeld’s best guess is $8 billion in economic activity.
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Such a “massive over-inflation” allows Google to charge 50 to 90 percent more for advertising than competitors like Yahoo search and Microsoft’s Bing, Rosenfeld said. It also could make regulators approach with trepidation any action against such a market-dominant company, he said. FairSearch -- backed by companies like Expedia, Hotwire, Microsoft and TripAdvisor -- commissioned Rosenfeld’s research.
The research may not take into account the full picture, countered Interactive Advertising Bureau (IAB) General Counsel Mike Zaneis. “It would be difficult to find a more competitive pricing model than Google’s auction process,” Zaneis said, saying he hadn’t seen the study. Expedia, Google, Hotwire, Microsoft, TripAdvisor and Yahoo are all IAB members. Zaneis added: “It’s also true that there are more media and advertising platforms today than ever before, so any analysis should examine the plethora of offline and online marketing alternatives available to marketers.” Several economists and antitrust lawyers we contacted declined to comment on the study because it’s not yet published.
For five years, Google has published an annual economic impact study. Rosenfeld has scrutinized two of the studies -- 2010 (http://bit.ly/WP1AH2) and 2013. He found both lacking. “In most cases nobody’s peeling back the onion,” he said. “I think they're just assuming that Google’s technically savvy and is going to put out something’s that’s credible.”
Rosenfeld narrowed in on several of Google’s assumptions, particularly its assumptions that the businesses generate $2 for every $1 spent on Google AdWords, the company’s online advertising program. Google’s report backed up the assumption, citing the work of Google Chief Economist Hal Varian, who “developed this estimate based on observed cost-per-click activity across a large sample of our advertisers; his methodology was published in the American Economic Review in May 2009” (http://bit.ly/1qNQr4j). Google called this is a “conservative assumption."
"We didn’t question that assumption,” Rosenfeld told us. “The problem is they take credit for every bit of those $2 dollars in revenues as if nothing but the search engine was driving consumption by the consumers,” he said. “That’s completely contrary” to current economic literature. Myriad factors drive a consumer purchase, Rosenfeld said. Companies spend to hire consultants, establish their brands, differentiate their products, he said; Google ignores these costs. Rosenfeld’s research found Google should be taking credit for only $1.29 in revenue for every $1 spent on Google AdWords. Google had over $50 billion in 2013 advertising revenue (http://bit.ly/1upkim4).
"Frankly I've never seen anything like what Google has done over the last five years,” Rosenfeld said. “Google essentially concocted its own methodology.” The motivations for doing so are clear, he said. “Reports like this would position the company in a favorable light.” It drives up advertising prices and curries favor on Capitol Hill, he said.
Advertisers are overpaying Google, Rosenfeld said. “Google’s high prices-per-click, financial indicators, and market shares suggest that search engine advertising costs may be higher than they would be if there were more competition,” he said. “If so, the stakes for the U.S. economy are huge given the tens of billions of paid search clicks that occur every year, and Google’s net impact on the economy could turn out to be negative.” But, he cautioned, “That’s beyond the scope of the study we did."
And policymakers and regulators might be loathe to heavily regulate such a large economic driver, Rosenfeld said. “It gives you pause.” The FTC has taken action against nearly all major tech companies in recent years. Apple, Amazon, Facebook and Microsoft, not to mention Google, have all faced FTC scrutiny. In fact, Google has settled with the FTC several times. In 2012, Google settled for $22.5 million in 2012 on charges it misled consumers about whether it was placing cookies on Apple’s Safari browser (http://1.usa.gov/19VRGcD). In 2013, it agreed to change business practices in a settlement of charges it was inhibiting competition among electronic device manufacturers (WID Jan 4/13 p1) (http://1.usa.gov/1uciE9v). And just last week, Google agreed to refund at least $19 million over charges it allowed unauthorized in-app purchases by children (WID Sept 5 p1).
Rosenfeld said the study should be seen in context, and encouraged researchers to go further. “I think the bigger question here, given Google’s market share, is what about the negative impacts on the economy?”