The French government didn’t foresee the negative ripple effect of its interventionism in the Dailymotion case. VCs and entrepreneurs are appalled. It’s time to rethink the French way of funding innovation. (Part 2 or 2)
No one should be happy with the sale of French video streaming Dailymotion to Vivendi. Not buyers, nor the the startup’s management team –and certainly not the venture capital community. (First of two articles)
Prominent members of the European press are joining a major EU-induced antitrust lawsuit against Google. The move is short on rationale and long on ideology.
A couple of weeks ago, Axelle Lemaire, France’s deputy minister for digital affairs, was quoted contending Google’s size and market power effectively prevented the emergence of a “French Google”. A rather surprising statement from a public official whose profile stands in sharp contrast to the customary high civil service profile. As an MP, Mrs Lemaire represents French citizens living overseas and holds dual French and Canadian citizenship; she got a Ph.D. in International Law at London’s King’s College as well as a Law degree at the Sorbonne. Ms. Lemaire then practiced Law in the UK and served as a parliamentary aide in the British House of Commons. Still, her distinguished and unusually “open” background didn’t help: She’s dead wrong about why there is no French Google.
The reasons for France’s “failure” to give birth to a Google-class search engine are simply summarized: Education and money. Google is a pure product of what France misses the most: a strong and diversified engineering pipeline supported by a business-oriented education system, and access to abundant capital. Take the famous (though controversial) Shanghai higher education ranking in computer science: France ranks in the 76 to 100 group with the University of Bordeaux; 101 to 150 for the highly regarded Ecole Normale Supérieure; and the much celebrated Ecole Polytechnique sits deep in the 150-200 group – with performance slowly degrading over the last ten years and a minuscule faculty of… 7 CS professors and assistants professors. That’s the reality of computer science education in the most prestigious engineering school in France. As for access to capital, two numbers say it all: according to its own trade association, the size of the French venture capital sector is 1/33th of the US’ while the GDP ratio is only 1 to 6. That’s for 2013; in 2012, the ratio was 1/46th, things are improving.
The structural weakness of French tech clearly isn’t Google’s fault. Which reveals the ideological facts-be-damned nature of the blame, an attitude broadly shared by other European countries.
A few weeks ago, a surreal event took place in Paris, at the Cité Universitaire Internationale de Paris (which wants to look like a Cambridge replica). There, the Open Internet Project uncovered the next European antitrust action against Google. On stage was an disparate crew: media executives from German and French companies; the former antitrust litigator Gary Reback known for his fight against Microsoft in the Nineties – and now said to help Microsoft in its fight against Google; Laurent Alexandre, a strange surgeon/entrepreneur and self-proclaimed visionary living in
Luxembourg Brussels where his company DNA Vision is headquartered, who almost got a standing ovation by explaining how Google intended to connect our brains to its gigantic neuronal network by around 2040; all of the above wrapped up with a speech from French Economy Minister Arnaud Montebourg who never misses an opportunity to apply his government’s seal on anti-imperialist initiatives.
The lawsuit alleges market distortion practices, discrimination in several guises, anticompetitive conduct, preference for its own vertical services at the expense of fairness in its search results, illegal use of data, etc. (The summary of EU allegations is here). The complaint paves the way for painstaking litigation that will drag on for years.
Among the eleven corporations or trade groups funding the lawsuit we find seven media entities, including the giant German Axel Springer Group, Lagardère Active whose boss invoked the “moral obligation” to fight Google. There is also CCM Benchmark Group, a large diversified digital player whose boss, Benoît Sillard, had his own epiphany while speaking with Nikesh Arora in Mountain View a while ago. There and then, Mr. Sillard saw the search giant’s grand plan to dominate the digital world. (I paid a couple of visits to Google’s headquarters but was never granted such a religious experience – I will try again, I promise.)
Despite the media industry’s weight, the lawsuit fails to expose Google practices directly affecting the P&L of news providers. Indeed, some media companies have developed business that competes with Google verticals. That’s the case of Lagardère’s shopping site LeGuide.com but, again, the group’s CEO, Denis Olivennes, was long on whining and short on relevant facts. (The only fun element he mentioned was outside the scope of OIP’s legal action: with only €50m in revenue, LeGuide.com paid the same amount of taxes as Google whose French operation generates $1.6bn in revenue).
Needless to say, that doesn’t mean that Google couldn’t be using its power in questionable ways at the expense of scores of e-retailers. But as far as the media sector is concerned, gains largely outweigh losses as most web sites enjoy a boost in their traffic thanks to Google Search and Google News. (The value of Google-generated clicks is extremely difficult to assess — a subject for a future Monday Note.)
One fact remains obvious: In this legal action, media groups are being played to defend interests… that are not theirs.
In this whole affair, the French news media industry is putting itself in an awkward position. In February 2013, Google and the French government hammered a deal in which the tech giant committed €60m ($81m) over a 3-year period to fund digital projects run by the French press. (In 2013, according to the fund’s report, 23 projects have been started, totaling €16m in funding.) The agreement between Google and the French press stipulates that, for the duration of the deal, the French will refrain from suing Google on copyrights grounds – such as the use of snippets in search results. But those who signed the deal found themselves dragged in the OIP lawsuit through the GESTE, a legacy trade association – more talkative than effective – going back to the Minitel era that supports the OIP lawsuit on antirust rather than copyrights grounds. (Those who signed the Google Funds agreement issues a convoluted communiqué to distance themselves from the OIP initiative.)
In Mountain View, many are upset by French media that, on one hand, get hefty subsidies and, on the other, file an anti-Google suit before the Europe Court of Justice. “Back home, the [Google] Fund always had its opponents”, a Google exec told me, “and now they have reasons to speak louder…” Will they be heard? It is unlikely that Google will pull the plug on the Fund, I’m told. But people I talk to also said that any renewal, under any form, now looks unlikely. So will be the extension of an innovation funding scheme in Germany — or elsewhere. “Google is at a loss when trying to develop peaceful relations with the French”, another Google insider told me… “We put our big EMEA [Europe and Middle East] headquarters in Paris, we created a nicely funded Cultural Institute, we fueled the innovation fund for the press, and now we are bitten by the same ones who take our subsidies…”
Regardless of its merits, the European press’ involvement in this antitrust case is ill-advised. It might throw the relationship with Google back to the Ice Age. As another Google exec said to me: “News media should not forget that we don’t need them to thrive…”
At the last minute, ending three months of tense negotiations, Google and the French Press hammered a deal. More than yet another form of subsidy, this could mark the beginning of a genuine cooperation.
Thursday night, at 11:00pm Paris time, Marc Schwartz, the mediator appointed by the French government got a call from the Elysée Palace: Google’s chairman Eric Schmidt was en route to meet President François Hollande the next day in Paris. They both intended to sign the agreement between Google and the French press the Friday at 6:15pm. Schwartz, along with Nathalie Collin, the chief representative for the French Press, were just out of a series of conference calls between Paris and Mountain view: Eric Schmidt and Google’s CEO Larry Page had green-lighted the deal. At 3 am on Friday, the final draft of the memorandum was sent to Mountain View. But at 11:00am everything had to be redone: Google had made unacceptable changes, causing Schwartz and Collin to consider calling off the signing ceremony at the Elysée. Another set of conference calls ensued. The final-final draft, unanimously approved by the members of the IPG association (General and Political Information), was printed at 5:30pm, just in time for the gathering at the Elysée half an hour later.
The French President François Hollande was in a hurry, too: That very evening, he was bound to fly to Mali where the French troops are waging as small but uncertain war to contain Al-Qaeda’s expansion in Africa. Never shy of political calculations, François Hollande seized the occasion to be seen as the one who forced Google to back down. As for Google’s chairman, co-signing the agreement along with the French President was great PR. As a result, negotiators from the Press were kept in the dark until Eric Schmidt’s plane landed in Paris Friday afternoon and before heading to the Elysée. Both men underlined what they called “a world premiere”, a “historical deal”…
This agreement ends — temporarily — three months of difficult negotiations. Now comes the hard part.
According to Google’s Eric Schmidt, the deal is built on two stages:
“First, Google has agreed to create a €60 million Digital Publishing Innovation Fund to help support transformative digital publishing initiatives for French readers. Second, Google will deepen our partnership with French publishers to help increase their online revenues using our advertising technology.”
As always, the devil lurks in the details, most of which will have to be ironed over the next two months.
The €60m ($82m) fund will be provided by Google over a three-year period; it will be dedicated to new-media projects. About 150 websites members of the IPG association will be eligible for submission. The fund will be managed by a board of directors that will include representatives from the Press, from Google as well as independent experts. Specific rules are designed to prevent conflicts of interest. The fund will most likely be chaired by the Marc Schwartz, the mediator, also partner at the global audit firm Mazars (all parties praised him for his mediation and wish him to take the job).
Turning to the commercial part of the pact, it is less publicized but at least as equally important as the fund itself. In a nutshell, using a wide array of tools ranging from advertising platforms to content distribution systems, Google wants to increase its business with the Press in France and elsewhere in Europe. Until now, publishers have been reluctant to use such tools because they don’t want to increase their reliance on a company they see as cold-blooded and ruthless.
Moving forward, the biggest challenge will be overcoming an extraordinarily high level distrust on both sides. Google views the Press (especially the French one) as only too eager to “milk” it, and unwilling to genuinely cooperate in order to build and share value from the internet. The engineering-dominated, data-driven culture of the search engine is light-years away from the convoluted “political” approach of legacy media that don’t understand or look down on the peculiar culture of tech companies.
Dealing with Google requires a mastery of two critical elements: technology (with the associated economics), and the legal aspect. Contractually speaking, it means transparency and enforceability. Let me explain.
Google is a black box. For good and bad reasons, it fiercely protects the algorithms that are key to squeezing money from the internet, sometimes one cent at a time — literally. If Google consents to a cut of, say, advertising revenue derived from a set of contents, the partner can’t really ascertain whether the cut truly reflects the underlying value of the asset jointly created – or not. Understandably, it bothers most of Google’s business partners: they are simply asked to be happy with the monthly payment they get from Google, no questions asked. Specialized lawyers I spoke with told me there are ways to prevent such opacity. While it’s futile to hope Google will lift the veil on its algorithms, inserting an audit clause in every contract can be effective; in practical terms, it means an independent auditor can be appointed to verify specific financial records pertaining to a business deal.
Another key element: From a European perspective, a contract with Google is virtually impossible to enforce. The main reason: Google won’t give up on the Governing Law of a contract that is to be “Litigated exclusively in the Federal or States Courts of Santa Clara County, California”. In other words: Forget about suing Google if things go sour. Your expensive law firm based in Paris, Madrid, or Milan will try to find a correspondent in Silicon Valley, only to be confronted with polite rebuttals: For years now, Google has been parceling out multiples pieces of litigation among local law firms simply to make them unable to litigate against it. Your brave European lawyer will end up finding someone that will ask several hundreds thousands dollars only to prepare but not litigate the case. The only way to prevent this is to put an arbitration clause in every contract. Instead of going before a court of law, the parties agrees to mediate the matter through a private tribunal. Attorneys say it offers multiples advantages: It’s faster, much cheaper, the terms of the settlement are confidential, and it carries the same enforceability as a Court order.
Google (and all the internet giants for that matter) usually refuses an arbitration clause as well as the audit provision mentioned earlier. Which brings us to a critical element: In order to develop commercial relations with the Press, Google will have to find ways to accept collective bargaining instead of segmenting negotiations one company at a time. Ideally, the next round of discussions should come up with a general framework for all commercial dealings. That would be key to restoring some trust between the parties. For Google, it means giving up some amount of tactical as well as strategic advantage… that is part of its long-term vision. As stated by Eric Schmidt in its upcoming book “The New Digital Age” (the Wall Street Journal had access to the galleys) :
“[Tech companies] will also have to hire more lawyers. Litigation will always outpace genuine legal reform, as any of the technology giants fighting perpetual legal battles over intellectual property, patents, privacy and other issues would attest.”
European media are warned: they must seriously raise their legal game if they want to partner with Google — and the agreement signed last Friday in Paris could help.
Having said that, I personally believe it could be immensely beneficial for digital media to partner with Google as much as possible. This company spends roughly two billion dollars a year refining its algorithms and improving its infrastructure. Thousands of engineers work on it. Contrast this with digital media: Small audiences, insufficient stickiness, low monetization plague both web sites and mobile apps; the advertising model for digital information is mostly a failure — and that’s not Google’s fault. The Press should find a way to capture some of Google’s technical firepower and concentrate on what it does best: producing original, high quality contents, a business that Google is unwilling (and probably culturally unable) to engage in. Unlike Apple or Amazon, Google is relatively easy to work with (once the legal hurdles are cleared).
Overall, this deal is a good one. First of all, both sides are relieved to avoid a law (see last Monday Note Google vs. the press: avoiding the lose-lose scenario). A law declaring that snippets and links are to be paid-for would have been a serious step backward.
Second, it’s a departure from the notion of “blind subsidies” that have been plaguing the French Press for decades. Three months ago, the discussion started with irreconcilable positions: publishers were seeking absurd amounts of money (€70m per year, the equivalent of IPG’s members total ads revenue) and Google was focused on a conversion into business solutions. Now, all the people I talked to this weekend seem genuinely supportive of building projects, boosting innovation and also taking advantage of Google’s extraordinary engineering capabilities. The level of cynicism often displayed by the Press is receding.
Third, Google is changing. The fact that Eric Schmidt and Larry Page jumped in at the last minute to untangle the deal shows a shift of perception towards media. This agreement could be seen as a template for future negotiations between two worlds that still barely understand each other.
The French cultural elite has come up with a bunch of ideas to stimulate the legal consumption of digital goods. The basic principles are stunningly original: subsidize and tax. These creations are detailed in a report ordered by the Président de la République to the Ministry of Culture. This is the way it works here: when a problem plagues the private sector, the executive branch tasks clever, carefully picked-up fellows with writing a report. It involves hearings —about a hundred in that case — held behind closed-door, off-the-record; no one can figure out who is standing for what.
This time, the selected authors of the report titled “Création et Internet” (available here) are: Patrick Zelnik, a music producer, Jacques Toubon, a 69 years-old former all-purpose minister (including Culture in1993-1995) and Guillaume Cerutti, the CEO of Sotheby’s France. Not exactly digital front-runners. As a music producer, Zelnik has brilliantly missed the digital train; Toubon has seen more mice in government offices than on his desk and Cerutti is running an auction house where sales are concluded with a hammer blow, not a touchpad click.
One of the most spectacular strokes of inspiration involves the creation of a taxpayer-subsidized “Online Music Card”. It could work like this: a young internet user, compulsive music downloader, buys a card for €20-€25. But the card carries a face value of €50. Then, after a while — expect a few years for roughly a million of young people above 24 — the magic happens: this crowd mutates into legal download addicts and forgets the appeal of illegal Net music (which, in France, is 20 times more important than the legal variety). That’s a hell of a good news for Apple, its iTunes cards could be bought by the bulk using French taxpayers’ money. Bear with me: that’s Christopher Columbus’ Egg. How come we didn’t think of it earlier? Flooding the young addicted-to-free generation with subsidies to reverse the anything goes, culture-copyright-looting tsunami! You know what? Sometimes, I’m proud of my country.
Second idea, my favorite: taxing Google. The concept, so to speak, is the following.