Google: Why lobbying is important

The Google ad deal with Yahoo is in serious trouble.

The Deal reports that the proposal is, effectively, dead.

The Justice Department's Assistant Attorney General Tom Barnett met on Oct. 17 with lawyers for the parties for the second time in two weeks. The outcome of the meeting, which took place just ahead of an expected DOJ challenge to the agreement, was grim, said a lawyer who asked not to be identified.

"Nothing good came from it," he said.

Google is denying the rumors of the deal's death. Reuters reports that CEO Eric Schmidt says the talks are ongoing.

What people seem to be forgetting is that the ad deal was designed to save Yahoo, which is in serious trouble. Yahoo desperately needs this deal. Without it, it may end up being acquired, or selling its search engine, to Microsoft. There will then be one less competitor in the market.

How is that going to help competition? Google is trying to do the right thing, giving Yahoo a boost and keeping competition alive. Google is not trying to buy Yahoo. It's offering a deal to boost Yahoo revenues by placing some of its own, more effective, ads with Yahoo.

Generally, the Justice Department wouldn't even get involved unless this were a merger. Google voluntarily presented the deal to DOJ in order to fend off criticism.

Google is a lousy lobbyist. And guess who is doing the most effective lobbying?

Wired blogs reports that Microsoft has even gotten the National Latino Farmers and Ranchers Trade Association to come out against the deal.

Huh?

According to the New York Times, Microsoft paid lobbying firm the Raben Group $30,000 this spring to work against the deal.

The Latino Farmers listen to organizations like that. Reports Meghan Keane in a Wired blog:

“Obviously, we can’t cover all the issues, so we rely on our allies to keep us informed,” said Rudy Arredondo, the chief executive of the Latino Farmers and Ranchers.

But Google also has itself to blame. Through a combination of self-righteousness and arrogance, it has failed to lobby Washington effectively. Again from Wired:

“(Google is) renowned in this town for not returning phone calls and not showing up to political events,” said one lobbyist.

Google seems to feel that because it's on the right side, in law and in intent, Washington will fall in line. That's not the way Washington works.

And Google is right on this one. This is not a merger, which is what DOJ would normally scrutinize. It's a temporary deal to boost Yahoo revenues. And, keep in mind that a monopoly is not illegal. It's only illegal to obtain a monopoly through illegal means, or to abuse the monopoly through such tactics as tying the sale of one product to another.

The big complaint from advertisers is that the deal will raise ad prices at Yahoo. This is nonsense, since ad prices are set by auction. Advertisers can measure the results they get, and bid accordingly.

But nobody believes Google on this point, because it won't release its proprietary information about how the bidding process sets prices. The process was designed, to a significant extent, by economist Hal Varian, who now works at Google.

So, reports Andrew Ross Sorkin at the New York Times:

“Google and Yahoo claim these are auctions,” Robert D. Liodice, chief executive of the Association of National Advertisers, told The Times. “Many of our marketers don’t necessarily believe that these are real auctions.”

The big complaint is that Google sets minimum bids on some ads, so it pollutes the auction.

This isn't as insidious as it might sound. Google sets minimum bids (now "first page bid estimates.") You can bid lower and still have the ad show up if it is relevant. The bid estimates are designed to keep advertisers whose ads are notoriously irrelevant from getting to the first page so easily.

Google explains this in its ad blog. But not very clearly.

The point is, if you have proven your ads are relevant, they are shown even if you bid lower than someone with irrelevant ads. If your ads are not relevant, you have to bid the estimate.

This does make it harder for first time advertisers, because they have no history to prove relevance. But the deal does not prevent them from placing ads with Yahoo at a lower price.

The lesson here is that, even if you're certain you're doing something good, you need to know how to lobby and explain yourself clearly.

Google is learning that the hard way. Microsoft learned it long ago.