Author: Ben Debski

An oft-neglected aspect of emerging economies is the severe poverty that still remains, and there have been many strategies designed to provide the necessary financial assistance that can help eradicate third-world living conditions. Originally hailed as a means of enabling the poor to climb out of poverty, microfinance has come in for criticism for sucking people into an uncompromising debt market.

In its latest report on the state of the microfinance industry, the Microcredit Summit Campaign says the goals of funding poor people should be to prevent the vulnerabilities they are accustomed to. It says: “If we want to provide financial services in a way that helps people move out of poverty, then we need to provide things that cannot be stolen. We need to provide products and services that help people living in poverty to address the many areas of vulnerability that they face, so that their hard-earned gains are not taken away by disaster and disease.”

Principles or profiteering
Although the concept of microfinance is rooted in a desire to help provide financial services to people who would otherwise not be able to access them – thereby empowering them to get out of poverty, as well as promoting better employment, economic development and growth – there has been a debate over whether some institutions are profiteering from the ignorance of the poor.

Originally developed during the 1970s by Bangladeshi economist Muhammad Yunus and his Grameen Bank, microfinance was used to help struggling entrepreneurs from the poorest parts of the world fund projects that would otherwise not get financing from traditional sources. Yunus received the Nobel Peace Prize for his work, but questions have been raised in recent years about the rates of interest on loans, a lack of transparency and the aggressive recovery methods used by providers.

For a country expected to be a global economic powerhouse during the current century, India is still saddled with a serious disparity in wealth between those at the bottom of society and the phenomenally wealthy at the top. During the past decade, India’s microfinance industry was held up as a shining example of how best to help the needy, but has also been linked to a spate of suicides. The problem was most prominent in the state of Andhra Pradesh, which reportedly saw as many as 200 poor residents take their own lives in 2010. An Associated Press report said at the time: “The state blamed microfinance companies… for fuelling a frenzy of over-indebtedness and then pressuring borrowers so relentlessly that some took their own lives.”

India is still saddled with a serious disparity in wealth

SKS, at the time India’s largest microfinance company, had a loan book worth $1.2bn. In July 2010, it went public and, according to The Economist, was ’13 times oversubscribed’. In the aftermath of the suicides, the company had to scale back its operations in the region, cutting 1,200 jobs and shutting 78 branches. As a result, access to microfinance declined in 2011; the first time this had happened since the Microcredit Summit Campaign began recording how many clients the industry has.

The group’s report said: “Most of these reductions come from Andhra Pradesh, where fast growth led to overlending, cases of harsh collection practices, and heavy regulation from state government. Many [microfinance institutions] and banks stopped lending to microfinance clients and self-help groups as a result.”

Tighter controls
One of the most contentious areas of microfinance is the level of interest on the loans borrowers must pay back. During the industry’s most bullish period, some providers charged borrowers as much as 40 percent. In 2011, new regulations were put in place to prevent these extreme terms, with a cap of 26 percent interest on loans offered by microfinance institutions.

There is also a limit of 10 percent on the amount lenders can place on top of the rate at which customers have borrowed the money. KC Chakrabarty, Deputy Governor of the Reserve Bank of India, said the cap was necessary to prevent profiteering: “Charging an interest rate beyond 26 percent from poor people is exploitation.”

Another area in which microfinance firms have been criticised is their alleged application of a one-size-fits-all approach on a national level. Many argue that, for microfinance schemes to be successful, lenders need to work on a local level, training up borrowers and helping them understand how best to use their new capital.

Chakrabarty believes the country’s microfinance institutions must take this route, saying they “should develop local expertise and scale up locally. They should not scale up nationally”. The Reserve Bank also introduced a licensing system for microfinance organisations and placed restrictions on lending to people who already had outstanding loans. Many critics of the system called for further restrictions on what the money could be used for, arguing loans should only be granted to businesses with clear potential.

Growth prospects
Although the market took a considerable hit from the scandal, as well as 2009’s economic downturn, there are signs it is starting to bounce back. In January, Yunusí Grameen Capital said it had secured $144m of equity for microfinance groups during 2012, “more than double the amount in the preceding year.”

Even SKS, with a reduced loan book of $325m, managed to raise $47.5m in equity in 2012. The total loan book for India’s microfinance industry is now said to be between $2bn and $3bn; down on the $5bn before its downturn, but still a considerable amount. Ultimately, how the industry survives the coming years depends on what strategies are put in place by regulators to ensure that people are protected from predatory commercial lenders. Providing the poor with an opportunity to break themselves out of poverty is a noble ideal, but it must be achieved through proper training, a localised and flexible strategy, and underpinned by meaningful and tight regulations.

How much longer India will need such a form of lending for the poor is also debateable. While the country enjoys its newfound status as one of the economic engines of the East, the disparity between rich and poor is both vast and shameful.

Bringing the poor into the tax system through employment will enhance the country’s growth prospects, but it should be done in a realistic and sustainable way. It should also avoid allowing an industry to develop collection tactics that bear worrying similarities to those of loan sharks.

The caps placed on interest rates implemented in 2011 were necessary, and although many firms have said the caps are stifling the industry’s ability to profit, they should be maintained to ensure borrowers are not over-extended. Microfinance should be less about profit and more about helping the poorest in society get on the first step to prosperity.

When I first studied macroeconomics for my MBA many years ago I remember thinking what elegance there was in the apparent simplicity of the model. A change in one component seemed to produce an equal and opposite reaction in its counterpart: increase demand and supply rushes in to fill the void; raise interest rates and prices go up while spending goes down.

Perhaps it is an easy model to understand badly. While interventions in the economy do produce the expected results in the short term, they also produce effects later on that are less well understood or planned for. Today’s fiscal and monetary policy makers also have the added complexity of working in a global marketplace and a global political arena where control of your own domestic affairs is an illusion.

With virtually every economy in the developed world currently struggling with the fallout from the global economic crisis of 2008 (plus the long-term results of many of their own domestic policies coming home to roost), Japan is drawing attention as an example of what disasters may lie ahead of many others – or is it?  Opinion seems to be divided on the probable outcome of Prime Minister Shinzo Abe’s package of fiscal and monetary measures designed to lift the country out of over two decades of deflation.

Textbook economics
Following the end of the Second World War, with the Yen having lost most of its value, Japan used low production costs and an obsessive commitment to manufacturing quality to build an export-driven economy.  During the period 1955 to 1970 the country enjoyed economic growth rates averaging around 9.5% per annum, allowing it to build up huge trade surpluses.

Today’s fiscal and monetary policy makers also have the added complexity of working in a global marketplace and a global political arena where control of your own domestic affairs is an illusion

In 1971, partly to address the competitive threat of cheaper Japanese imports to its own economy, the US abandoned the gold standard, leading to floating exchange rates.  Over the next few years the government of Japan tried to manage the value of the yen in foreign-exchange markets and two successive oil price shocks had the effect of lowering its value, so the country continued to be able to grow its exports, albeit at a slower rate. In 1985, however, France, West Germany, Japan, the US and the UK signed the Plaza Accord which agreed to devalue the US dollar in relation to the Japanese Yen and the German Deutsche Mark. As a consequence, the yen increased by as much as 51 percent over two years and Japanese economic growth fell significantly.

To offset the stronger yen, the Bank of Japan cut interest rates from five percent to 2.5 percent, fuelling a rapid increase in debt-funded investment which drove real estate prices into the stratosphere.  Alarmed, authorities increased interest rates to above their earlier rate of five percent and the property boom collapsed – we all remember pictures of suited former Japanese business men cooking tea under the bridges of Tokyo in the early 1990s.  Subsequent attempts to correct the problem with stimulus packages and a zero percent interest rate have failed to lift the country out of twenty years of deflation.

Yet even the latest economic statistics can give a confusing picture. Data released early in February showed that Japan’s economy experienced its third straight quarter of contraction to December 2012, shrinking by a worse-than-forecast annualised rate of 0.4 percent. Industrial output that had slowed following the shock of the 2011 earthquake fell a further 1.7 percent from October to November, again more than forecast by experts, and consumer prices fell another 0.1 percent.

Contrarily, 2012 also saw the Nikkei 225 stock average rise by around 23 percent and close on a four year high on February 6 2013. Despite over twenty years of deflation in the troubled economy, Japanese corporations have recorded five straight quarters of collective profit rises. This, in part, is why some experts are predicting that the country should not be written off. As Scott Callon at Ichigo Asset Management says, “Pound for pound, Japan is punching well above its weight.”

Band-aid or fix?
Re-elected for a second term by a population grown tired of the stagnating effects of deflation, Prime Minister Shinzo Abe has announced his latest measures in what is being dubbed ‘Abenomics’. His proposals include increased fiscal spending, radical quantitative easing, devaluing the yen, maintaining a zero interest rate and setting a two percent target inflation rate.

To achieve his objectives of quantitative easing and a two percent inflation rate he needs the cooperation of the Bank of Japan and he means business; earlier this year he issued veiled threats that if the BoJ does not meet his two percent inflation target he will revise a law guaranteeing the bank’s independence. The Governor of the Bank Masaaki Shirakawa, who disagreed with Abe’s policies, stepped down and has been replaced by Haruhiko Kuroda, described as being more ‘dovish’.

Response to Abe’s programme has been divided. The OECD is clearly bullish about the measures, declaring in its interim report on the outlook for the Group of Seven economies released in late March, “The prospect of more aggressive easing, with the Bank of Japan’s adoption of a two percent inflation target, has resulted in a 20 percent depreciation of the yen in real effective terms and a surge in equity prices. These have boosted the near-term growth and inflation outlook. This shift in stance and the effects of its announcement are welcome.”

Professor Richard Werner, whose career has included consulting to the Asian Development Bank and advising the Japanese Liberal Democratic Party’s Central Bank Reform Research Group, disagrees. “There has been too much talk about the exchange rate,” he says, “but this is a side-show. Japan has been in a 20 year recession not because the yen has been too strong, but because of lacking domestic demand.

“Raising the inflation target to two percent and then increasing bank reserves massively is not likely to achieve anything, as these measures ignore how the economy and the monetary system actually function,” he adds.

Werner, who originally proposed the concept of quantitative easing in the mid-1990s, claims the term is being misused by monetarists – and the BoJ – to describe reserve expansion. “The term was meant to refer to broad credit creation,” explains Werner.

“What is needed is an increase in the supply of money in circulation, not in bank reserves.  This is true quantitative easing and it always works. We have clearly seen this in the US where bank credit has been growing by more than five percent for a while, delivering a full-blown recovery this year.”

Japan’s lifeline
One can see many similarities between Japan’s economic woes and the crises facing European countries currently struggling with massive debt loads and sluggish growth.  Japanese government efforts to stimulate economic activity over the last twenty years led to spending that has outstripped tax revenues by a factor of two to one.  The country now has a gross national debt of around 240 percent of GDP – the highest in the world, according to IMF estimates, although possibly Zimbabwe’s is higher.

But Japan has a couple of protective cushions that have thus far kept it from the ignominy of international rescue. One is the country’s massive trove of international assets built up during its period of large trade surpluses. Japan holds around $1trn in US Treasury bills along with around $3trn of other foreign assets making it the world’s largest net international creditor.

The other is the massive amount of personal savings built up by a thrifty society.  Household savings rates have traditionally ranged between 15 and 23 percent and ninety percent of Japanese Government Bonds (JGBs) are held domestically.  The high levels of government debt are sustainable because of its zero interest rate policy, which savers will accept because falling prices mean that they are actually receiving real rates of return. It is a delicate balance that hinges on maintaining stasis in all factors.

The all-important underlying demographics are changing, however. Prior to the 1990 property crash, Japan enjoyed unemployment rates as low as two to three percent; today they are nearer five percent, and the wages of those in work are falling. Workers no longer enjoy jobs for life, with over 30 percent of the labour force in part-time or contract positions.

While unemployment has increased, the population is both shrinking and aging. Experts forecast a 25 percent reduction in overall population by 2050 and an increase in the proportion of the population over 65 from 12 percent to 23 percent. Savings rates have declined to just three percent and pension funds are cashing in assets under management in order to pay out retirement benefits. For the first time, the amount of money being paid to retirees from savings exceeds the amount of new money that is going into savings funds.

Contrasting view
Not everyone believes that all is lost for the Japanese economy. In fact, some are arguing that Japan has directly or indirectly taken the opportunity of what are referred to as the Lost Two Decades and used it to redefine economic success.

First, some interesting facts. Over the last two decades, while the US has increased its net overseas liabilities by $8trn, Japan has increased its net overseas assets by $3trn. The country’s health system is partly to blame for the aging society, having boosted life expectancy to four years longer than that enjoyed in the US, and unemployment, while high for Japan, is still about half of that in the US and is now falling.

Eamonn Fingleton of the New York Times has argued that “Japan has succeeded in delivering an increasingly affluent lifestyle to its people despite the financial crash.  In the fullness of time, it is likely that this era will be viewed as an outstanding success story.”

Another bright spot is Japanese industry; its car industry has shown remarkable growth, with both Toyota and Nissan more than trebling sales between 1989 and 2012.  Many household name corporations have been sitting out the difficult years paying off any outstanding debt and building reserves that they are now looking to use for overseas takeovers over the next few years.

Japanese firms also want to help the government kick-start the economy. A recent report from Nikkei said that Japanese retail giant FamilyMart has announced a plant to boost annual compensation by an average of 2.2 percent in an effort to help achieve Abe’s target of a two percent rise in consumer prices. Two other major retailers have announced similar plans, and two of the major automobile manufacturers are doing likewise.

But most people seem to have accepted that the growth rates of just under 10 percent enjoyed in the post war years, or even close to five percent experienced up to the property crash of 1990, will not be the norm in the future. In an interesting analysis, Brendan Barrett of the United Nations University points out that rather than becoming the economic and societal wreck one would expect of a country enduring two decades of deflation and recession, Japan may be defining a new model of economic success.

He cites the findings of the 2012 Inclusive Wealth Report, a new initiative from the International Human Dimensions Programme on Global Environmental Change. The Inclusive Wealth Index was set up as an alternative measure of success to the traditional economists’ measure of GDP, and over the period from 1990 to 2008, Japan apparently performed quite well.

“Japan depicts the most favourable situation,” say the report’s authors, “as it is experiencing wealth accumulation while at the same time increasing its natural capital stocks. This has been achieved primarily through investment in the forest sector. This position is also explained by a slower population growth rate in relation to other nations.”

Not surprising, then, that the Institute of Studies in Happiness, Economy and Society (ISHES) was set up in Japan in 2011. Founder Junko Edahiro argues in favour of a steady state rather than a growth-based economy, saying, “We live not for economic growth. We live for happiness in our daily lives and we hope generations to come can enjoy their happiness. Economies and societies should do something to serve this purpose and should take on different forms and structures if they fail to meet their goals.”

Work to be done
However, there is still the hard task of running the economy to be addressed and observers question whether the government has grasped the need to tackle fundamental structural issues.

Commenting on the release of lower-than-expected results from the last quarter of 2012, Economics Minister Akira Amari noted that while the economy was still showing some weakness, it was likely to resume moderate recovery helped by monetary easing, stimulus spending and an expected pick-up in global growth.  Many argue that this blind faith in a package of measures that have already been tried and shown not to work is misplaced.

David Beim, from the Columbia Business School’s Centre on Japanese Economy and Business suggests that supporting industry is the best way forward. “Banks are not constrained by reserve requirements but by capital requirements and customer loan demand,” he says. “Monetary policy cannot alter these constraints. Fiscal policy (increase spending or lower taxes) can increase economic activity but only temporarily, as Japan has found out over the past 15 years. It adds to government debt as well.

“The only agents who can create real value-adding economic activity are private corporations, and they are influenced mainly by their own balance sheets and the state of demand for their products. The best thing the Abe government can do to stimulate growth is clear away the impediments to competition. Japan has far too many restrictions on doing business, most of which are designed to protect existing interests.”

Richard Werner’s solution to the immediate crisis is quick and to the point: “The fastest method to achieve a recovery in Japan at this stage is for the government to stop the issuance of government bonds entirely and instead fund itself entirely by borrowing from banks via loan contracts, to be paid out into the government’s accounts at the various banks. There would be full-blown recovery within nine months.”

Jeff Bewkes, CEO of Time Warner, was recorded in February this year as saying he offered the Chinese government “all our stuff to your people for free, but how about you donít reship it to every country around the region?” Bewkes’ statement, in effect, amounts to one of the worldís biggest media conglomerates writing off the worldís most populous nation in sole exchange for the bettering of piracy prevention laws.

An estimated 95 percent of Time Warner films watched in China are being either illegally downloaded or resold as counterfeit equivalents. At present, countless other US companies – most of which are much more vulnerable than Time Warner – are falling foul of similar acts. As China continues to prosper, the US grows increasingly powerless in its efforts to pressure the Chinese government into better enforcing copyright laws and stamping out piracy.

Time Warner’s attempt to curb Chinese copyright infringement is representative of wider US efforts to suppress the growing threat of piracy emanating from the country. Such infringement is an intractable problem in China, and its continued perpetration is having damaging repercussions on the US economy.

Reuters claims Chinese piracy and counterfeiting costs the US economy $48m a year – and that, if it could be combatted, could allow for the creation of a further 2.1 million US jobs. The prospect of offering free film and TV products would undoubtedly allow Time Warner to better infiltrate the Chinese market, though it’s hard to comprehend how the plan could be viable on an economic scale.

Priorities in order
Bewkes’ deal is based on a number of assumptions, one being that the Chinese government has the ability – or the willingness – to halt the production and circulation of pirated materials. Itís true that the methods and sentences by which piracy is punishable are contributing towards the circulation of counterfeit goods. These are measures the government is within its right to change, but would the tightening of copyright laws benefit the Chinese economy?

The Chinese government, above all else, seeks to foster and to develop key industries and state-owned champions over the protection and upholding of IP rights. It demonstrates a vein of leniency in the punishing of copyright infringement, because these offences contribute to the development of the Chinese economy.

By offering content for free to a nation of 1.3 billion people, Time Warner is, in essence, undermining its own pricing structure. If the company was to offer free content to the most populous nation on Earth, there could potentially be gross ramifications in the perceived value of Time Warner products.

Individual and intellectual property is not attributed to the individual, but interpreted as an offering to the community

This isn’t the first of Time Warnerís attempts to better negotiate a highly polluted Chinese market. In 2006, the company attempted to undercut Chinese movie pirates by reducing DVD prices to the equivalent of $3. The company – operating under the name Warner China, a partnership between Warner Bros, China Film Group and Hengdian Group – presented an adaptable and unorthodox method in that DVD releases were made available only days after the cinema release.

Whereas the pricing and immediacy of the DVDs was unmatched by any legitimate US media conglomerate, the $3 price tag was considerably more expensive than the $1-1.50 average available to those purchasing counterfeit versions on the Chinese market. Time Warner mistakenly placed faith in the Chinese consumer’s willingness to invest in a legal, premium product.

China’s leniency towards copyright infringement is not a criminal disregard for copyrighting law: it is the result of cultural tendencies in which individual and intellectual property is not attributed to the individual, but interpreted as an offering to the community.

Tackling a new market
Perhaps the most important lesson to be taken from this scheme is that rival US companies were willing to put aside western business philosophies in exchange for an opportunity to better infiltrate the elusive Chinese market. This lesson was best demonstrated by the partnership between rivals Warner Bros and Paramount – their reason for partnering being that, in China, the competition is with pirates and not with each other.

Ultimately – as has been suggested by Bewkes’ more recent proposition – selling for a little is better than not selling at all. Acting as a further incentive for related companies is the fact that legitimate sales help bolster DVD sales figures; an important aspect when considering the continuing decline in disc sales.

In addition to street-level copyright infringements, entities in China have been held responsible for far more sophisticated means of piracy, largely in the form of computer hacking breaches and the subjecting of Western companies to malicious software.

Already this year, a host of large US companies have fallen foul of computer breaches, most notably Facebook and Twitter – both of which have experienced malicious software intrusions – but also Apple, whose computers were hacked at its California offices. Such breaches are an attempt to obtain data of high commercial or military value.

It’s likely that such cyber attacks are a more frequent occurrence than is widely reported, as most are left unlisted for fear of a business appearing vulnerable to further hacks – thereby eroding its reputation with customers.

Unit 61398
US-based security company Mandiant claims to have traced these cyber attacks to a state-run office building in Shanghai. It says Unit 61398, occupied by the People’s Liberation Army, is believed to have ìsystematically stolen hundreds of terabytes of dataî from over 140 global organisations.

Mandiant suspects hacking activities at Unit 61398 have been in operation since 2006 and considers it one of the most prolific hacking groups worldwide “in terms of quantity of information stolen”. China has since questioned the validity of these investigations and has strongly denied knowing of any such hacking activity.

The US has repeatedly raised concerns about cyber attacks – many of which were traced back to China – and looked to pursue those responsible for this latest string of breaches. Having started strongly in 2013, the US appears intent on clamping down on piracy, and will be prosecuting China’s Xiang Li – who was found guilty of stealing $100m worth of high-end software – and shutting down Gougou.com, a Chinese pirate search engine.

Ultimately, the abundance of internet piracy, as well as the rampant selling of counterfeit goods, is crippling the means by which Time Warner can register consumer interest in its products. It is clear why Time Warner is steadfast in its determination to – at least in part – find innovative ways to stamp out piracy.

Over the past decade, Google has risen from regular search engine, competing with the likes of Yahoo and MSN, to omnipresent corporation with fingers in pies ranging from satellite development to social media and analytics tools. Because of its position as search engine of choice for around two-thirds of global internet users, and its access to 425 million active Gmail accounts, Google has an unparalleled insight into the private lives and choices of its users.

While some might believe that with great power comes great responsibility, Google’s track record suggests it believes that with great power comes great business opportunity. With or despite its ‘do no evil’ motto, Google has persevered in aggravating competitors, regulators and consumers alike.

When the Federal Trade Commission scrapped its antitrust investigation of Google last November, many failed to comprehend the decision. After 18 months of investigation, the FTC concluded that, while some of the internet behemoth’s actions were questionable, there was no proof that consumers were being harmed – only competitors.

Some called it a victory for Google, while others questioned the motivation behind the decision and the use of lobbying to secure a favourable ruling. Whatever the reason for the dropped anti-trust investigation, it has certainly raised a few questions and more than a few eyebrows. The FTC investigation was only one of a similar number of inquests around the world.

Cracking the code

Google’s triumph is a set of algorithms that allow it to search websites for suitable answers to our questions. Because of the volume of people who use the search engine on a variety of websites, formats and devices, Google has accumulated significant insights into its users and with it an invaluable trove of information for advertisers.

Because of the prevalence of the algorithms, companies must tailor their online content to Google’s formulae, or risk breaching its guidelines and getting lost in the depths of the web.

Being able to understand what makes Google tick can be the difference between huge success and monumental failure. That puts Google in a highly advantageous position, but it has been accused of using this information to the detriment of its competition in violation of antitrust regulation.

The main charges in the now defunct FTC investigations and the ongoing EU investigation are that Google manipulates search results unfairly in order to promote its own services to the detriment of other service providers. JoaquÌn Almunia, the EU’s competition chief, has insisted Google’s absolution in the FTC investigation will not affect the EU’s verdict on the matter. He said: “We are still investigating, but my conviction is they are diverting traffic [to its own services].”

Google has not only raised the ire of regulators, but also that of its competitors, who have started forming unlikely alliances

If proven, this would constitute abuse of dominance and is a big deal, especially considering the search engine holds 90 percent of the European market in its grip (compared to a mere 67 percent share in the US). According to Almunia, the problem is “the way things are presented” by Google.

Though FTC investigators concluded there was no evidence consumers were being harmed by Googleís practices, Almunia begs to differ. He said: “The way the US looks at abuse of dominant position is different from the European one.”

Beyond antitrust

Google has been embroiled in other controversies aside from its allegedly anti-competitive search results presentation. Much has been said about the privacy policies across its services. Given the amount of information Google holds on every one of its users, it is more alarming to imagine it might be abusing that power than violating competition rules.

In March 2012, the company published a new set of privacy policies, unifying all policies across platforms in one fell swoop. Google has cited ‘usability’ as the main reason for consolidating the privacy settings in over 70 of its applications. But what the unified policy amounts to in effect is a way for Google to start collating user information from all its services in one place. It is of particular concern to YouTube and Gmail users, who have seen their accounts unified, and their searches and clicks saved and stored together.

In a blog post to users last March, Google’s Director of Privacy, Product and Engineering, Alma Whitten, wrote: “Our new privacy policy makes clear that, if you’re signed in, we may combine information you’ve provided from one service with information from other services. In short, we’ll treat you as a single user across all our products, which will mean a simpler, more intuitive Google experience.” The trouble with that is the amount of information Google has amassed over the years. Not only does the company have access to personal information through emails, information about users” location, and searches, it also has control over the information on the web; who can find it, where and how easily. Hundreds of millions of books, documents, films, songs and products are all online under Google’s thumb.

Voices of concern

Canada’s privacy commissioner, Jennifer Stoddart, was the first to raise questions about the policy. In an open letter to Google, she wrote: “As we understand it, the policy changes do not mean that Google is collecting more information about its users than it currently does. They do, however, mean that you are going to be using the information in new ways – ways that may make some users uncomfortable.”

Last October, French press regulator CNIL followed in Stoddart’s footsteps and gave Google four months to revise its policy. In total, 12 separate recommendations were published – and signed by 24 of Europe’s 27 data regulators – in order to bring the internet giantís policies up to EU standards.

It has been suggested: users be allowed to choose under what circumstances data about them could be collected and stored; a centralised opt-out service should be offered, enabling users to choose which services provide data about them; and Google should limit its tools to comply with a limit to how data can be used (for instance, targeted data can be used to improve security but not to target advertising).

Google has not responded, insisting its policy is compliant with EU regulation. European authorities have threatened action before the end of the summer, but given the internet company’s legal history, it seems unlikely it will be much fazed by this latest incursion into the European legal system. A spokesperson said: “We have engaged fully with the CNIL throughout this process, and we’ll continue to do so going forward.”

Sign in

In fact, it seems Google might be holding all the cards in this particular game. Ninety percent of internet users in Europe turn to the mighty search-engine-cum-online-empire with their queries, and they were not dissuaded from using its services when their privacy policy suddenly changed without approval from regulators.

Nor did users seem concerned about how their private information might be used by giant faceless corporations. The fact European regulators have called the controversial privacy policies ‘high risk’ but have stopped short of declaring them illegal is telling in itself. It seems that consumers are, when it comes down to it, by-and-large unconcerned or uneducated about the consequences of Google’s information hoarding.

Ninety percent of internet users in Europe turn to the mighty search-engine-cum-online-empire with their queries, and they were not dissuaded from using its services when their privacy policy suddenly changed without approval from regulators

Larry Dignam, writing for ZDNet and TechRepublic, says the company’s policies are nothing short of scary. He wrote: “Google will know more about you than your wife does. Everything across your screens will be integrated and tracked. Google noted that it collects information that you provide from your usage, device information and location.”

But users cannot help but produce these pieces of information if they are online, and there is no way of opting out. Unavoidable as these ‘information trails’ may be, it is questionable if the mere fact they exist gives Google the right to use them: especially as Google provides little or no benefit to the users in return.

House of cards

There is also a question of power. As Google targets ads and search results based on algorithms generated from personal information, it is in effect deciding what content is most suitable for each user. If restricting is too strong a word, Google is certainly guiding each userís internet experience for its own financial gain.

Google has not only raised the ire of regulators, but also that of its competitors, who have started forming unlikely alliances in a bid to curb some of its influence. Most of these lawsuits centre on Google’s mobile platform, Android, which is used on smartphones from a variety of manufacturers. Apple and Microsoft have recently teamed up to challenge Google on some Android patents, at a cost of billions to the two challengers.

Oracle, makers of the Java platform on which Android apps are built, is also embroiled in a legal battle with Google over the allegedly unlicensed use of its software. While the Apple/Microsoft slew of litigation threatens to destabilise Android, if Oracle is successful it could destroy the platform. Other search engines, like Yahoo, clearly have nothing but contempt for Google. Over the years, there has been much bickering between the two, with Yahoo accusing Google of taking ideas it implemented first but which were never entirely successful because of Yahoo’s modest market share. Amazon has taken issue with Google over the cloud storage market; a feud that is likely to be reignited as Amazon continues to invest in its own Android app store.

For technology columnist MG Siegler this animosity with competitors stems from “Google’s desire to do everything,”. He says: “Once just a search company, they [sic]  now actively compete with Apple, Microsoft, Oracle, Facebook, Amazon, Twitter, Yelp, Groupon, Color, Path – just to rattle off a few.”

Siegler argues it is Google’s right to do whatever it considers best for the company and that its vast funds are more than enough to take on these challenges, “but the alienation of other companies,  many of which were former allies, isnít helping it. And if any of these Android lawsuits go through, or if they [sic] fail to eventually obtain the patents necessary to protect themselves, Google could find themselves in serious trouble.”

Feeling lucky?

Google has been in the habit of extricating itself from difficult situations: The Wall Street Journal (WSJ) called the company’s absolution by the FTC an ‘escape’ rather than a victory. WSJ has also noted the amount of money Google has spent on lobbying over the past 12 months. The US Centre for Responsive Politics has estimated the internet giant spent in excess of $14m on lobbying in 2012, pertaining to the antitrust probe and other issues. Over the same period, Apple spent $2m.

Others have not failed to observe how Google’s Executive Chairman, Eric Schmidt, has become a seemingly omnipresent figure in Washington, socialising with Republicans and Democrats alike. Politico and WSJ published a review of a letter by Democratic US Senator Mark Udall from Colorado: after meeting with Schmidt, Udall took it upon himself to contact the then-chairman of the FTC, Jon Leibowitz, urging him to proceed cautiously with the antitrust investigation.

The FTC maintains it dropped the investigation because it could not make a case against Google, not because of political pressure. Of the paltry commitments the FTC did manage to get from Google in return for dropping the investigation, Leibowitz said: “It is good for consumers, it is good for competition, it is good for innovation, and it is the right
thing to do.”

Google might have less political influence in Europe, but it has more users. As it continues to extend its reach across platforms, media and even industries, the thought of the company being allowed to continue uncensored is truly terrifying. As many internet sceptics and conspiracy theorists have suggested, Google has grown from a quirky search engine into a modern day Leviathan that might already be too big to bridle.