Monday Note

Arrogance is the most toxic waste-product of technology companies. Past examples abound: IBM, AT&T, Microsoft… All their hauteur got them were expensive antitrust actions and customer backlash. Last week, we got yet another example of the insufferable behavior still prevailing in the high-tech world — with the to-be-expected response from regulators and markets.

Navx is a €1m a year French company whose business is speed radar location databases. In France, it is illegal to sell or use selling radar detectors, devices that pick the microwave or laser radiation emitted by speed guns and automated cameras. But providing speed trap location data is lawful. In fact, the French Interior Ministry maintains a public database for fixed radars. And companies such as Navx, or various GPS makers supply location information for mobile radars.

To sell its product, Navx relies massively on Google AdWords: the company buys keywords that guarantee a high ranking in search results associated to terms like “avertisseur radar” (radar warning). Over the years, Navx invested a large part of its revenue in keywords purchases, up to €400,000 a year. For Navx, like for millions of other businesses all over the world, the result was a massive dependency on Google systems. For Navx, Google worked very well: in October 2009, 69% of new subscribers revenue came from AdWords. The company was still losing money, but growth was promising. Then, Google pulled the plug, arguing Navx business was illegal. Google’s ukase came at the worst possible time: Navx was about to complete its second round of funding. The company lost most of its new revenue stream, causing investors to get cold feet, in turn causing Navx to lay people off, and so on.  Navx argues the legality argument was a mere pretense: Google had a real, ulterior motive for the ejecting the speed trap location ads from its system. Navx believes its tiny but growing service came to be viewed as competition for Google’s own geolocation services. That’s a possibility.

Such a story is typical of Google’s opaque world. Countless examples are offered in books, in newspaper and magazine stories where businesses went belly up because some  geeks in Mountain View turned the dials of an unseen algorithm, without the slightest regard for the impact on the very businesses that pay their salaries.

The Navx story is different, though. The company took its case to the French Competition Authority; last week, the regulator issued its ruling on the matter: a) Google acted in a monopolistic way (in France, it controls 90% of the search market); b) Navx business didn’t break French laws governing radar detection devices or services; c) Google did act in a discriminatory way, without any legal ground for so doing.

Google was given five days to reinstate Navx Ad Words account, and four months to clarify its Terms of Service. (The full ruling, in French, is here).

This landmark decision from the French authority should come as a warning to Google. It is the first time that a regulatory ruling defines Google as a clear-cut  monopoly. It does create a precedent in a European Union that makes antitrust action the cornerstone of its trade policies. Several related cases have already been brought before the European Commission. For example, the British comparison website Foundem complained Google imposed discriminatory penalties. This also applies to the French legal search site Ejustice and to Microsoft’s online shopping guide Ciao! (See stories Reuters and Venture Beat ). In Germany, the Bundeskartellamt, the local competition authority, has been called in by two publishers and a digital mapping companies for the same motives; and the Italian regulator will rule by September 30 after a complaint from a group of newspaper publishers.

Such lawsuits — less and less isolated — will end up having a broader effect on Google’s business. In the past, many entities endured Google’s autistic practices in silence; in a network economy Googles “subjects” can now rise and regroup.

Many American companies suffer from vision impairment: they consider the Rest of the World as an aggregation of second-class people. What I called in a previous column the “Burundi Syndrome”, leads to zero delegation of authority. This leads to terrible results. Each attempt from a European subsidiary to adapt company policies to its local market conditions hits a wall of a soviet-like centralization, this time epicentered on the West Coast of the United States.

This is true for Google, but also for Apple, Amazon or Microsoft. The people they maintain on this side of the Atlantic are powerless – and, often, frightened; they will constantly defer to the HQ, “la corp” in French parlance, for any decision. Such rigid stance is actually good news for alternative, more flexible players. There are local companies willing and able do what it takes to capture the markets left open by their inflexible US competitors, in digital advertising or contents delivery.  One customer at a time, big companies undermine a customer and partner base that was once largely sympathetic.

In the long run, ignoring these trends can only have adverse effects.

First, regulators shouldn’t be underestimated. In Europe, they are getting more technology savvy, better organized and more able than ever to develop cross-country cooperation.

Second, such practices ultimately damage revenues. Take Apple’s eBooks Store, for instance. Using of a French-based iTunes account prevents a customer from buying books in English on the US eBooks store, this without offering any legal reason for the prohibition. Now, turn to France: perhaps as a surprise to US-based Apple execs, a significant number of French iPad users want to read books in English. The result of Apple’s segregation of iTunes accounts? These users flock to Amazon Kindle’s application. A similar lack of flexibility applies to e-newspaper prices; Apple set two levels: €0.79 or €1.29, nothing in between. These numbers don’t fit the needs of local publishers. But Apple Europe gives only a deaf hear to requests for adaptations — even if these won’t in any way harm iTunes’ margins.

Google’s black box or Apple’s access and pricing policies provide the fascinating spectacle  of great brands letting their lazy condescending behavior hurt their customers and partners. “Any customer can have a car painted any colour that he wants so long as it is black“: the old Henry Ford motto no longer applies in a global, connected economy – which also happens to be an extremely creative one. In many sectors, collective creativity will provide new ways around the bunker mentality that plagues large American corporations.

—frederic.filloux@mondaynote.com

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