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Why “final offer arbitration” is Russian Roulette for Google

February 20, 2021 - 19:37 -- Admin

The ACCC’s proposed bargaining process between digital giants and media companies – such as Google and News Corp – is unmoored from reality.

Rupert Murdoch

He’s loaded the gun

In the debate over the federal government’s news media bargaining code, a rather strange thing has happened: the actual news media bargaining has been mostly ignored.

That’s odd. Because the new law employs an interesting and unusual mechanism for resolving disputes: final offer arbitration.

And its most interesting feature is that it looks thoroughly, disastrously, 100 per cent ill-suited to this situation. It essentially asks Google to play Russian Roulette.

OK, let’s back up

So what’s final offer arbitration? It’s essentially a game-theoretic solution to the question of how much search engines should pay to post links to the websites of News, Nine and other media organisations covered by the code. In a negotiation between News Corp and  Google, say, each side makes one offer. Then an independent arbitrator chooses the offer he thinks is closer to being right. Bang! We’re done.

In the right situation, this seems a neat solution. It encourages both parties to make a reasonable offer. Ideally, the two final offers end up very close together.

Now, it can certainly work well in situations where there’s a lot of market data pointing towards an appropriate settlement – price data, existing case law, a long history of prices and conditions. It has been suggested as a way to settle various labour disputes, and actually embraced in US Major League Baseball.

A final offer nightmare case

But in some situations it looks likely to work badly, introducing enormous uncertainty. And that seems likely to be how the dispute between News Corp and Google ends up.

Here’s why. Right now, there’s pretty much no data about the value of inbound links to News Corp. This is very different from US baseball, where there’s widespread agreement that players add some value, a long history of payments, and relatively narrow disputes about quantum.

Right now, no news media anywhere get paid for links. Final offer arbitration is being injected into a situation with no history of payment.

This is not just because the Internet got into a strange non-paying habit. It’s because money flows the same way value flows. And when a search engine links to a news site, all the evidence is that the news company gets the better of the deal.

Indeed, to the extent that money ever flows in these circumstances, it flows the other way: media companies pay search engines. (It’s accepted that decent search engines only allow this by marking each link clearly as “Ad”. Media companies get away with putting the ads under a more ambiguous heading, like “Promoted” or “Sponsored Content”.)

An additional clue about the flow of value in these circumstances is that companies like News Corp could bar Google from their sites in an instant if they so chose, using nothing more complex that a two-line text file called “robots.txt”. Yet News Corp and its colleagues never do bar Google – because they want the money that comes with Google traffic.

What News Corp really appears to dislike is this.

  • The information market has changed over the past 25 years, with newspaper duopolies evaporating.
  • Without duopoly power, newspapers make vastly less money than they used to.
  • Meanwhile, Google makes far, far more from ad sales than News Corp does.

I really can’t overstate how simple this is. Newspaper people, who are paid to understand how the world works, mostly still seem to think that they’ve been done a dreadful wrong and that it should be set right. For News Corp management, it’s even simpler: squeeze every drop of cash it can out of its remaining newspaper business.

Google hasn’t “stolen” from News Corp, any more than it has stolen from any other sites it links to. It doesn’t even run ads on the pages where it links to news stories. Despite what News Corp journalists keep writing, Google isn’t “paying for content” or “running news” on its site. It’s just linking to news stories on News Corp’s site, like this: Betting agency Sportsbet has opened markets for Dan Andrews’ much anticipated press conference to reveal whether the snap lockdown will …

As plenty of people have already found, it’s actually very tough to make money producing list of links like this to other people’ news. Google makes the vast majority of its profits from areas News never played in to start with. Heck, it doesn’t even run classified-ad sites of any note: Realestate, Carsales, eBay and a bunch of smaller players took that market. All Google’s really guilty of in this space is offering links to a wider variety of news stories than News Corp would like.

But Google has a lot of money now, and News Corp wants some of it.

A market power solution

So how does the ACCC justify recommending arbitration, and final offer arbitration in particular, in circumstances so ill suited to it?

The logic of the ACCC’s utterances to date seems to be that the arbitrator is there to repair the power imbalance between the two parties. Google, it suggests, doesn’t pay News Corp for ads because of the market power imbalance between the two.

OK, stop sniggering about that last sentence, and ask yourself: how could an arbitrator decide what would be reasonable in the absence of a power imbalance?

Well, are there any places where News Corp and its fellow media firms would not be at such a market disadvantage? How about the situation between News Corp and, say, Yahoo parent company Altaba? Altaba has a $US10 billion market capitalisation, a little lower than News Corp’s $US13.7 billion.

So how much does Yahoo pay to link to News Corp stories?

Honestly, I don’t know for absolute sure. But I think the amount is $US0. And I suspect it’s the same for the news pages at Microsoft Bing, and DuckDuckGo, and so on. (Yahoo and Duck may use Google News technology, but I don’t think that changes the underlying case.)

And I do know what the current rate is when Club Troppo links to News Ltd stories with 20-word descriptions, as I did above. We pay exactly nothing. (Note: Nick, if this has changed recently, please let me know.) 

So how’s an arbitrator to decide what the “reasonable” price is for Google to pay News, when even we here at Club Troppo pay nothing? It seems to me that $US0 is the obvious starting point for Google too, and that in a reasonable world, that should be Google’s offer.

But in the world we’re in, would an arbitrator agree?

The reality: no-one knows how an arbitrator would decide

The reality is that there’s no real way for anyone to know what an arbitrator would do. Arbitrator A, an economist, might look at the market and decide $0 is a very reasonable offer in all the economic circumstances. Arbitrator B, a lawyer, might decide that 10 cents per story is just fine. The strength of final offer arbitration is also its weakness: the arbitrator has to accept one of two offers. When the society can’t agree on the basic principles of fairness in a particular situation – when the subject of the arbitration is unmoored from economic reason – then everything becomes a crap-shoot.

Now, Google can’t really take that risk. It can’t be expected to just gamble that an arbitrator will come up with some non-zero number, whether for well-thought-out reasons or, just as likely, somewhat weird ones. And its risk is higher because the government will appoint the arbitrators. What sort of people do you think it might choose?

Effectively, Google is being asked to ignore the market signals and just guess at what might go through an unnamed government-appointed arbitrator’s head if the issue ever came before them.

It’s possible that the ACCC has some reasoning on this that I haven’t seen yet. I want to cut it some slack: over the years it has been a constructive organisation, and ACCC chief Rod Sims has been a model public servant. Yet right now, its conduct seems bizarre. Likewise the federal government. But somehow my disappointment with the ACCC is greater.

The bottom line

Google may be guilty of various sins – for instance, gradually shrinking the prominence of the “ad” warnings on paid links. But on the numbers, underpaying for linking to News Corp sites doesn’t seem very likely to be one of those sins.

Yet Google has effectively been confronted with a bizarre commercial choice: pay up, or play Russian Roulette on final offer arbitration.