Coming to terms with Google's power

WORLD VIEW:'It's called capitalism. We are proudly capitalistic. I'm not confused about this."

So said Google executive chairman Eric Schmidt this week in a Bloomberg interview defending the company’s use of legal incentives in Britain, Ireland and other states to minimise worldwide taxation and therefore maximise worldwide profits. He spoke as a perfect storm engulfed the company on three fronts.

Governments throughout Europe bristled at the tax practice and vowed to bring large multinationals more into the mainstream of corporate taxation and anti-trust legislation in an age of austerity.

In Dubai the International Telecommunication Union discussed how to update the treaty governing the internet.

And in Germany, France, Italy, Belgium, Switzerland and Austria, parliaments and courts are deciding whether online news aggregators should pay copyright fees to media whose work they reference for advertising.

It is a critical juncture in the evolution of the internet and its commercialisation. These companies are now among the world’s largest, strongest and most profitable, and they therefore have power to influence events.

Google has plunged into advocacy in response, running vocal campaigns defending its tax strategy as legal, warning against state interference in regulation, and rejecting fees as an inefficient reduction of online freedoms.

Three issues are involved in evaluating these claims: market freedoms, state regulation and how to define the public good. They draw on different sources of inspiration and philosophy. Those advocating market freedoms usually invoke the public good in defence, as do state regulators; but neither group owns the concept and it can in fact be used to criticise each of them.

In economics it is usually defined as non-exclusive, like fresh air; in media the distinction between public and state broadcasting illustrates the case being made.

Google’s defence

Schmidt proudly defends Google’s use of tax incentives, which saw it pay an estimated €2.5 billion tax on worldwide profits of €26.4 billion in 2011 – most of it in its US headquarters and overall, it must be said, not that far off average global rates of corporate taxation. But in France the company paid €5 million on revenue of €1.25 billion to €1.4 billion; in Ireland it paid €69.91 million on turnover of €47.44 billion from 2005 to 2011 by judicious use of transfer pricing through the Netherlands and Bermuda.

Google was indulged in its heroic growth period from start-up in the 1990s to its semi-monopoly position today by the deregulated neoliberal framework of the time. By providing its search facilities free and making money via targeted advertising, it neatly combined market good and public good, reflected in its ideology of do “good things for the world” and “don’t be evil”.

Now that its position has so dramatically changed in the marketplace we should beware the special-interest standing behind invocations of the public good. That is not served only by market and profit maximisation. Nor is greater state regulation automatically detrimental to the personal freedoms undoubtedly expanded by Google’s activities.

Google is facing anti-trust investigations by the European Commission. This is in keeping with capitalist norms since it has a 90 per cent share of European online searches.

The company has the EU as an ally in its efforts to prevent the International Telecommunication Union from becoming a vehicle for state domination and censorship of the internet.

But there too lurk special interests based on the US model of light capitalist regulation. Many other states resent that as an abuse of a semi-monopoly position, since the existing addressing agency is US based.

News aggregators

Online news aggregators gather their material from individual media websites but do not pay them for it, which is why Rupert Murdoch called them kleptocrats. The arguments between the aggregators and media publishers are intra-market disputes, similar to those in the music industry.

They take place against a background of collapsing advertising revenues in newspapers, which then cut costs and therefore journalistic resources, in a spiralling decline of media quality.

It is not surprising that publishers seek to recoup such costs from those using their output to capture competitive advertising. Legislators in several states agree. In Brazil 150 newspapers refused to allow aggregators to use their sites, with little loss of revenue. That option is open in Europe too, Google says.

But a tax to help fund the public good of costly reportage has a wider appeal. Like the Tobin tax on financial transactions, it could create a new revenue stream capable of having broad oversight kept at an arm’s length from the state and making the news aggregators more accountable.