Eric Schmidt stepping down as Executive Chairman of Google parent company, Alphabet

Alphabet announced today that Eric Schmidt, the top executive at the company since 2001, is moving out of his role as the Executive Chairman of the Board and will instead remain on the board as a technical advisor.

From the press release:

“Since 2001, Eric has provided us with business and engineering expertise and a clear vision about the future of technology,” said Larry Page, CEO of Alphabet. “Continuing his 17 years of service to the company, he’ll now be helping us as a technical advisor on science and technology issues. I’m incredibly excited about the progress our companies are making, and about the strong leaders who are driving that innovation.”

“Larry, Sergey, Sundar and I all believe that the time is right in Alphabet’s evolution for this transition. The Alphabet structure is working well, and Google and the Other Bets are thriving,” said Eric Schmidt. “In recent years, I’ve been spending a lot of my time on science and technology issues, and philanthropy, and I plan to expand that work.”

No indication of who will replace Schmidt, but the release notes that the Board will appoint a non-executive chairman.

Google facing $1 billion in potential liability with UK class action

In 2012, Google paid $22.5 million to settle an FTC claim that the company “misrepresented to users of Apple Inc.’s Safari Internet browser that it would not place tracking cookies or serve targeted ads to those users . . .” The company bypassed Safari’s cookie-blocking settings, it said, to deliver a “signed-in” user experience.

Google explained that it “used known Safari functionality to provide features that signed-in Google users had enabled,” adding that “advertising cookies do not collect personal information.” Critics took a more skeptical view.

This same conduct is now the subject of a class action lawsuit in the UK. The potential UK class includes 5.4 million people who owned iPhones between June 2011 and February 2012. Google’s hypothetical liability in the matter could exceed $1 billion — considerably higher than the settlement in the US action.

The UK lawsuit is being framed as a privacy case about the “misuse of personal data.” Google says that it believes the suit is meritless and will contest it.

The group pursuing the case is called “Google You Owe Us.” On the group’s website it makes the following statements about the case, called a “representative action” in the UK:

We believe that Google took millions of iPhone users’ personal information illegally in 2011 and 2012. Google did this by bypassing default privacy settings on the iPhone’s Safari browser . . .

We want to ensure that big companies like Google respect our privacy in the future. Our personal information is valuable and it must be used it in a way that is trustworthy and fair.

This case can be seen in the broader context of European privacy complaints against US internet companies. Google and Facebook specifically have been the subject of numerous complaints in different countries.

Europe’s General Data Protection Regulation is coming in May, which will create strict new privacy rules and significant potential liability (millions of euros) for companies that fail to comply or violate its provisions.

Mozilla drops Yahoo search for Google with new Firefox Quantum browser release

Mozilla announced that they have terminated their search deal with Yahoo and that their new version of the Firefox browser, named Firefox Quantum, will feature Google as the default search provider.

“As part of our focus on user experience and performance in Firefox Quantum, Google will also become our new default search provider in the United States, Canada, Hong Kong and Taiwan,” Mozilla said in a statement.

Three years ago, in 2014, Mozilla partnered with Yahoo to become the default search engine on their popular browser. Previously, Google was the default on Firefox browsers.

Mozilla Chief Business and Legal Officer Denelle Dixon told Techcrunch:

We exercised our contractual right to terminate our agreement with Yahoo! based on a number of factors including doing what’s best for our brand, our effort to provide quality web search, and the broader content experience for our users. We believe there are opportunities to work with Oath and Verizon outside of search. As part of our focus on user experience and performance in Firefox Quantum, Google will also become our new default search provider in the United States, Canada, Hong Kong and Taiwan. With over 60 search providers pre-installed as defaults or secondary options across more than 90 language versions, Firefox has more choice in search providers than any other browser.

Here is a screen shot of the search provider settings, showing Google has the default, in the new browser:

Alphabet (GOOG) third quarter beats estimates: $27.8 billion, revenues up 24%

Google parent Alphabet announced third-quarter results. Both revenues and earnings per share beat Wall Street estimates.

The company reported roughly $27.8 billion in total revenues (up 24 percent), with Google contributing all but $302 million of that amount. Earnings per share were $9.57, which was about $1.24 higher than expected.

Advertising generated just over $24 billion in quarterly revenue. Operating income was about $7.8 billion. However, traffic acquisition costs (TAC) rose to $3.1 billion (vs. $2.6 billion a year ago). There are sure to be analyst questions about that item.

The revenue breakdown by segment:

Google properties: $19.7 billionGoogle network: $4.3 billionGoogle “other revenues”: $3.4 billionOther bets: $302 billion

Paid clicks on Google properties were up 6 percent year over year and aggregate cost per click (CPC) was up 1 percent. Here’s more detail:

Aggregate paid clicks overall up 47 percent (year over year).Paid clicks on Google properties up 55 percent.Paid clicks on the Google Network up 10 percent.Aggregate CPCs down 18 percent year over year (up 1 vs. last quarter).CPCs on Google properties off 21 percent.CPCs on Google Network were off 5 percent but flat sequentially.

Paid click growth was significant. However, CPCs were down (18 percent) from a year ago but up slightly (1 percent) from last quarter. Alphabet (GOOG) shares are up in after-hours trading.

The company says it now has more than 78,000 employees, compared with just under 70,000 a year ago. The earnings call webcast is happening now.

Investors anxious about Google traffic acquisition costs, which regulation could further increase

Google’s traffic acquisition costs (TAC) have been climbing. As Google’s ad revenues grow, so does the money it pays to partners and distributors. Investors are particularly sensitive to this issue.

In response to investor questions, Alphabet CFO Ruth Porat explained recently that Google’s increasing traffic costs are partly about mobile and programmatic growth, which have different payment structures and higher TAC. Last year, Google’s ad revenues were $90.3 billion; its TAC was $16.8 billion (other cost of revenues was $18.3 billion).

Alphabet cost of revenues, including TAC

Source: Google 10K filing 2016

As Bloomberg reports, investors worry that increasing TAC will squeeze margins and make Google less profitable. In Alphabet’s 10K filing from 2016, the company said the following about rising TAC:

In this multi-device world, we generate our advertising revenues increasingly from mobile and newer advertising formats, and the margins from the advertising revenues from these sources have generally been lower than those from traditional desktop search. We also expect traffic acquisition costs (TAC) paid to our distribution partners to increase due to changes in device mix between mobile, desktop, and tablet, partner mix, partner agreement terms, and the percentage of queries channeled through paid access points. We expect these trends to continue to put pressure on our overall margins.

Financial analyst Mark Mahaney recently estimated, according to Bloomberg, that each percentage point of TAC growth for Google/Alphabet represents nearly $300 million in decreased profit. In 2016, TAC as a percentage of Google advertising revenues was 21 percent; as of Q2 2017, it was 22 percent.

In the past, however, TAC has been higher as a percentage of overall revenues. In 2010, it was 26 percent of ad revenues, and in 2009, it was 27 percent. Yet Google’s ad revenues are much higher now, and so are the real dollars it pays to partners.

TAC has been increasing partly because of these distribution and rev share payments, which Google makes to Apple and various Android ecosystem partners. It has been estimated they will approach $10 billion by year-end, up from roughly $3.5 billion five years ago.

Another wild card that could impact TAC, according to Bloomberg, is regulation. In its 10K filing late last year, Google said new litigation or regulations, including the elimination of various safe harbors, could impact Google’s performance and increase costs:

The General Data Protection Regulation (GDPR), coming into effect in Europe in May of 2018, creates a range of new compliance obligations and increases financial penalties for noncompliance significantly.Court decisions, such as the “right to be forgotten” ruling issued by the European court, which allows individuals to demand that Google remove search results about them in certain instances, may limit the content we can show to our users and impose significant operational burdens.Various US and international laws restrict the distribution of materials considered harmful to children and impose additional restrictions on the ability of online services to collect information from minors.Data protection laws passed by many states and by certain countries outside the US require notification to users when there is a security breach for personal data, such as California’s Information Practices Act.Data localization laws generally mandate that certain types of data collected in a particular country be stored and/or processed within that country.

According to Reuters, the UK government is considering removing one of Google’s safe harbors. It’s contemplating regulating Google and Facebook as traditional news publishers, with all the associated burdens and potential liabilities. An increasing percentage of the population gets its news from these sources, even though they’re not the generators of the news.

Partly this is a response to a number of traditional publishers and media outlets which are lobbying UK regulators to treat Google and Facebook as they’re treated. That would almost certainly increase Google’s operational and legal costs as well.

Google extends olive branch to publishers, lays out new focus on subscriptions

In a rare joint appearance, Google executives Philipp Schindler, chief business officer, and Sridhar Ramaswamy, SVP of ads and commerce, addressed a group of several dozen publishers and broadcasters at an event held at the company’s Chicago offices Tuesday. And, at that event, he extended an olive branch.

In his opening remarks, Schindler said Google returned $11 billion in ad revenues to publishers last year, while acknowledging, “We also know it has not been easy.”

Everyone in the room knew that one key reason publishers have had difficulty generating ad revenue is that Google and Facebook draw some 80 percent of the growth in digital ad dollars directly. But Ramaswamy said there are limits to what the ad ecosystem can do for publishers, adding that the industry must focus on both ads and subscriptions. Schindler said Google is committed to building out subscription programs and plans to significantly ramp investment in this area.

“We come in peace…We are all invested in seeing you [publishers] succeed” — Google chief business officer Philipp Schindler

The “leadership summit” came a day after Google announced the end of its decade-old First Click Free program in response to years of publisher complaints about the requirement to offer free access to content in exchange for Google rankings. Instead, Google said it will offer Flexible Sampling programs that give publishers more control over the subscription process without being penalized in the rankings for putting up paywalls.

Schindler touched on the three elements of Google’s new focus on subscription efforts:

     Google will use machine learning to determine when to present a subscription offer instead of an ad on publisher’s sites to users deemed likely to subscribe. The system will also use publishers’ audience data to build lookalikes much in the way Google does in ad targeting, to identify new potential subscribers. This is in very early testing now, and it’s unclear exactly how this will look.Reduce friction in the subscription signup process with mobile-optimized checkout flows. Again, Google is doing something similar on the ad product side with Purchases on Google ads enabled with Android Pay. In a briefing last week, Google VP for News Richard Gringas said all subscriber data would be passed to and owned by the publishers.Help users get more from their subscriptions to boost renewal rates. For example, users might opt in to share subscription information with Google. Content from publications a user subscribes to may then show higher in Google search results for that user. Ramaswamy stressed this is “early days.”

Facebook announced this summer that it will begin testing ways to let publishers sell subscriptions in Instant Articles and place content behind a paywall after a user reads at least 10 articles.

In framing the new focus on helping publishers drive subscription revenue, Schindler said, “We come in peace,” as he splayed his fingers in the Vulcan peace sign, clearly anticipating publisher skepticism at Google’s motives. “We are here to listen to you. We are all invested in seeing you succeed.”

“We deeply value the publishing ecosystem,” said Ramaswamy later. “It’s also selfish on our part,” he acknowledged, “because Google is nothing without quality information.” Ramaswamy said Tuesday’s announcements are part of a long and ongoing effort. “The advertising ecosystem has been profitable for Google and publishers, but there are limitations. We need to pay attention to subscriptions and commerce.”

Schindler told reporters that details on how the subscription advertising program will be structured in terms of revenue splits haven’t been decided. “The plan isn’t for this to be a huge revenue driver or the next big business or Google,” he said. It could be a revenue share or some other model, but the idea isn’t to push this much beyond cost covering, said Schindler.

Why the olive branch to publishers? “I think what you’re seeing is an arc, but we also hear the feedback that this is a tough transition,” said Ramaswamy. In his talks with publisher CEOs, they kept asking, “How can you help us with subscriptions?”

Attendees at the event included representatives from Vice, The New York Times, NewsCorp, Business Insider, The Wall Street Journal, USA Today Network and Pandora, among others. The overall attitude seemed to be cautious optimism.

Other announcements made Tuesday include plans to give publishers insights into their audiences based on Google’s own data, which can then be used to package audiences in direct deals sold through DoubleClick, “insights cards” about revenue, latency, viewability trends within DFP and new brand safety controls.

[This article originally appeared on Marketing Land.]

Alphabet to create separate business unit in Europe to run Google Shopping

According to Bloomberg, Google is going to create a separate business unit to manage shopping content in search results to comply with the European Commission’s recent antitrust decision. This unit will reportedly be required to compete in the auction against shopping competitors.

The unit will apparently use its own budget and revenues to bid in the auction and will only exist in the EU. Shopping search will continue as is in other markets, including the US.

Reuters had earlier reported that Google was going to “display rival shopping comparison sites via an auction.” That approach appeared to be similar to the earlier “rival links” proposal that failed to settle the antitrust dispute before the formal complaint (statement of objections) was filed in 2015.

Google was fined roughly $2.7 billion (€2.4 billion) for abuse of market position in shopping search. The fine was the largest antitrust penalty in EU history. The previous record was $1.3 billion against Intel. As part of the decision, Google is compelled to offer a remedy, even as it appeals that decision. Failure to comply would subject Google to daily financial penalties.

The specifics in the Bloomberg article suggest the new business unit concept is an updated proposal vs. the earlier Reuters report. However, Reuters may have incompletely or inaccurately described the Google proposal.

Here’s what shopping search results in France currently look like:

According to Bloomberg’s report, the new configuration will feature 10 slots that would be made available through the auction. Each result would display the name of the shopping site offering the product and link to those websites.

You can see some potential presentations of Google Shopping results on the s360 blog and below:

Google Shopping results will be branded “by Google,” and those from other sites will be labeled accordingly.

Bloomberg quotes several shopping site competitors who express displeasure with the proposed solution because it involves paid advertising rather than organic traffic. However, the report also says “[EU] regulators have accepted that the panel is for advertising and slots cannot be given away.”

Google gradually limiting search ads on addiction treatment queries

Beginning last week, Google started limiting ads on search results pages for drug and alcohol treatment center queries.

Rehabilitation centers like those operated by Advanced Recovery Systems have suddenly seen ads disappear from roughly 40 percent of queries they were targeting, reported The Verge.

Searches for “drug detox,” “drug rehabilitation” and “drug treatment program” are some of the queries that return results without ads. Where text ads once appeared, a pack of organic local listings may display at the top of the search results page when available.

Organic local pack results appear at the top of a search for “drug detox.”

There are still ads appearing on many rehab-related queries, such as “addiction help,” addiction rehab” and “painkiller detox.” That is likely to change, however, as this update rolls out.

Ads appear on a search for “addiction treatment,” but that may change with this update.

That leaves legitimate treatment centers in a kind of limbo, with potential for visibility and traffic from Google search ads to be limited further as the rollout continues. This change only impacts ads. Organic results are unchanged, other than appearing higher on the page when ads are disabled.

Why the change?

With the worsening opioid addiction crisis in the US, demand for treatment programs has surged. A lack of regulation and treatment standards, coupled with outsized demand and new insurance mandates, creates an environment ripe for abuse.

“We found a number of misleading experiences among rehabilitation treatment centers that led to our decision, in consultation with experts, to restrict ads in this category. As always, we constantly review our policies to protect our users and provide good experiences for consumers,” a Google spokesperson said.

One of the groups Google has been consulting is Facing Addiction, a non-profit resource for people seeking treatment. “We have been having discussions with Google for the past few months. As you can imagine, this is an extraordinarily complicated conversation, with many moving parts,” said Jim Hood, Facing Addiction co-founder, in an email.

Facing Addiction undertook a comprehensive analysis of how much money addiction treatment service providers and lead generating companies in the field pay to advertise the facilities in Google search results. With the current economics of treatment care, it is worth paying almost anything for a lead, because just a small percentage need to convert into paying patients to make it well worth the marketing costs, says Hood. In other words, patient care becomes a secondary concern.

This isn’t the first time Google has changed the way it handles ads for a specific category of services to address abuse. In part in response to numerous problems with fraudulent locksmith ads, Google instituted a verification process and launched an entirely new ad product called Home Services Ads for locksmiths and other local service providers. In July 2016, Google instituted a ban on payday and high-interest loan advertisers. In 2011, the US Department of Justice levied a $500 million fine on Google for having allowed Canadian pharmacies to target US consumers with search ads for a period of time before the company banned such advertisements.

Gradual rollout

Unlike the pharmacy and payday loan scenarios where ads can still appear on related queries, Google is disabling advertising on certain addiction treatment-related search results altogether — for now at least. This could evolve as Google works with outside advisors and experts in the field.

The goal is to ensure that consumers turning to Google to search for help only see ads for reputable resources. That’s a complicated effort that will take time. It also puts good actors that have relied on Google as a lead source in a tough and unpredictable spot. Advertisers are likely to see a continuing drop-off or fluctuation in ad impressions as Google works through its response. Ads could be gone for good on these queries, but it’s conceivable an alternative solution will arise.

Yelp says Google violated 'do not crawl' provision of 2013 FTC settlement agreement

Mark Van Scyoc / Shutterstock.com

Yelp has sent a letter to the Federal Trade Commission (FTC) asserting that Google is improperly using Yelp images in local search results in violation of its 2013 antitrust settlement with the regulatory agency. Yelp also circulated the letter to several members of Congress and state attorneys general, according to a report in The Wall Street Journal.

The 2013 settlement concluded nearly two years of investigations and political maneuvering. As part of the agreement, Google said it would:

[M]ake available a web-based notice form that provides website owners with the option to opt out from display on Google’s Covered Webpages of content from their website that has been crawled by Google. When a website owner exercises this option, Google will cease displaying crawled content from the domain name designated by the website owner on Covered Webpages on the google.com domain in the United States. Website owners will be able to exercise the opt-out described above by completing a web-based notice form. Google will implement the opt-out within 30 business days of receiving a properly completed notice form . . .

Reportedly, the commitment lasts through the end of this year, though that isn’t explicitly stated in the FTC discussion of the settlement or Google’s accompanying letter to the FTC.

The “do not crawl” provision of the settlement agreement came partly in response to 2011 Yelp claims that Google was requiring that the review site allow use of its content on Google Place Pages as a condition of being included in Google’s search index.

I have been unable to independently find Yelp images being used in Google Maps. However, the WSJ article cites multiple examples:

Yelp said it investigated and found that over one hour, Google pulled images from Yelp’s servers nearly 386,000 times for business listings in Google Maps, which Google exempted from its promise to not scrape content. Yelp then searched Google for 150 of the businesses from those map listings and found that for 110 of them, Google used a Yelp photo as the lead image in the businesses’ listings in search results.

For instance, googling “brooklyn zoo williamsburg” on a smartphone yields a box atop the search results with information about the Brooklyn Zoo NY gym in Brooklyn, including its address, hours and reviews. Also included is a photo of the gym’s interior, which was pulled from its Yelp page. Other examples include Mount Sinai Hospital in Chicago and the Capital Mall in Olympia, Wash. Users or business owners typically post photos on Yelp.

If Google is found in violation of the 2013 settlement agreement, each instance “may result in a civil penalty of up to $16,000,” according to the FTC release. If each image is treated as a separate violation, that would hypothetically trigger penalties of more than $6 billion, which is entirely unlikely.

If the “do not crawl” provision of the agreement does in fact expire at the end of this year, it’s not clear what will happen in 2018. Google could potentially resume crawling and inclusion of third-party content over publisher objections. I suspect, however, that Google would not do so and risk a high-profile outcry from Yelp and potentially others.

Such a move wouldn’t help Google’s case in Europe, nor in the US, where an uncertain and volatile political climate could potentially create new risks for the company.

Postscript: After this story posted, Google provided the following comment:

For many years, we’ve been in regular contact with Yelp about product changes and how they appear in search results. This is the first time we’ve heard of Yelp’s complaint that images from their site may be appearing in the way they claim. If they’d raised this concern with us, we would have immediately taken steps to look at the issue and update these results — as we’re doing now.

Report: Google to appeal $2.7 billion EU fine

According to The Telegraph, Google is planning to file an appeal against the roughly $2.7 billion (€2.4 billion) antitrust fine imposed by the European Commission in June for abuse of market position in shopping search. The fine was the largest in EU history; the previous record fine was $1.3 billion against Intel.

Last week, Intel won a rare partial victory against EU antitrust regulators when the European Court of Justice instructed a lower court to re-examine its decision and take a closer look at the underlying facts and market impact of Intel’s behavior.

It’s not clear whether last week’s decision impacted Google’s thinking on whether or not to appeal (Google’s decision was likely made before last week). Though it will likely be in process for several years, an appeal makes sense because the company faces potential similar fines and demands for change around other types of “vertical search” results such as maps/local, travel and other categories.

Google is required to submit proposals for changes in its search results to bring them into compliance with EU rules. Google reportedly submitted its plan last month. It will be compelled to make those changes and live within them during the appeal process.

Google also faces private litigation from European shopping comparison site Kelkoo and potentially others. Kelkoo argues that Google shopping results have substantially deprived it of traffic. The European Commission decision and fine apparently can be entered into evidence in a civil case. Then the question to be litigated is whether Google’s behavior caused the alleged damages (loss of traffic, revenue).

In Google’s favor, UK-based Streetmap sued Google in UK court in 2015 under an “abuse of competition” theory. Effectively, the case was a mirror of the European Commission’s antitrust case (then not yet decided). However, the High Court of Justice in the UK ruled against Streetmap saying that Google’s Maps OneBox didn’t seem “appreciably to affect competition in the market for online maps.”

There are two other antitrust matters involving Google in the EU. One is focused on exclusivity provisions in Google AdWords agreements and the other on app-install requirements in Android-OEM contracts.