Google Book Search Settlement Comments (A Little Late)

By Eric Goldman

The Google Book Search settlement sparked plenty of discussion, but the coverage was suppressed by the high entry barriers to commenting–specifically, 300 pages of dense slow-reading legalese in the settlement agreement. Some of you may be faster readers than I am, but it would take me at least a full day to read everything. As a result, I still haven’t made my way through the thick stack, and I’m not sure if/when I will actually do so.

In light of that, I will make only three high level points about the settlement:

1) Did Google make a good business decision to enter this market? If the settlement gets final approval, Google will get a clear path to republishing book content. However, this was an expensive market to enter. To get this result, Google will pay the $125M settlement fee, plus all of the litigation costs (which were undoubtedly enormous), the costs to construct the technology and scan the books to date, and the future construction and scanning costs. Further, Google’s future book-related revenues will be taxed 63% (which may sound like a high percentage, but I’m sure Google has done higher splits in other context).

So how long will it take for Google, earning 37 cents on the dollar, to recoup its investment of well over $125M? More to the point, what is the implicit ROI on this investment, and how does that compare to other investment choices that Google could have made with the money? My guess is that if, at the beginning, Google knew that it would cost so much to enter the business, the rational decision would have been for Google to put the investment dollars in higher yielding investments.

(Note: I know that Google is awash in cash and doesn’t need to maximize its return on every investment, so Google can afford to make lower-yield investments to make other socially important points. I’m glad they can, and I’m glad they do. Even so, I’m still struck by the size of their investment to enter this market.)

2) This deal has the potential to reengineer a number of industries. Part of the settlement agreement’s length is due to the fact that the agreement creates a new collective rights organization, the Book Rights Registry, and articulates a command-and-control approach to govern how Google will interact with the Book Rights Registry. Personally, I think this overall architecture has a high risk of failure–no matter how long the contract, it’s impossible to anticipate everything by contract to ensure successful competition over time. In fact, I suspect that anyone who picks up the contract 20 years from now will think the agreement is filled with anachronisms that reflect current assumptions about the technology and the book industry that won’t make sense then.

I am especially interested in the potential effects of this deal on the library market–a huge market that drives a number of publishing industry sectors. Harvard Library’s reversal notwithstanding, my initial assumption is that many/most libraries will be very desirous of obtaining a license to the electronic book database for two reasons. First, the database will have a lot of good stuff, and this may be a cost-effective way of expanding their collections. Second, libraries are literally running out of physical space, so an electronic database of books may solve a problematic and expensive facilities problem. But the dollars libraries spend on the database are going to come from somewhere, presumably either from money spent on print publications or from existing electronic licensees. Either way, this will create some winners and losers.

Creating a collective rights organization by contract has other major risk factors, most obviously antitrust concerns. There are a number of reasons to question the competitive effects of this deal, but the agreement waves the red flag in front of antitrust regulators by containing some provisions where Google and the Book Rights Registry are supposed to agree on downstream prices to customers. Sure looked like vertical price restraints to me. It may be no accident that collective rights organizations typically operate under Congressional authorization or an antitrust consent decree.

Because of these problems, it will be interesting to see who objects to the deal. Among the candidates:

– the DOJ, who might be still spoiling for a fight over Google’s market power after successfully tanking the Google/Yahoo ad syndication deal.

– entrenched interests in the library supplier market, such as Baker & Taylor or existing electronic database licensees

– individual authors or publishers who feel screwed by the opt-out system

– other major players in the book industry whose market niche could be reengineered. Amazon is an obvious candidate.

3) If the deal goes through, this arrangement could represent a discontinuous step up in the overall knowledge that benefits our society. One of the most problematic aspects of book publication is that the content isn’t searchable (one of the reasons I much prefer writing law review articles that get into Westlaw/Lexis than book chapters that become effectively unsearchable). If this database makes book content globally and easily searchable, massive quantities of human knowledge become newly findable and more usable. What a huge win for all of us! It remains to be seen if we’ll realize this theoretical promise, but I remain hopeful we will.

The deal needs approval from the judge (it has already received preliminary approval sufficient to solicit opposition), and it will be interesting to see who lines up in opposition. The deal also could be attacked by the antitrust regulators and others. So I may try to defer investing the time to read the agreement in total until we see what happens.

There were a lot of articles on the settlement. Some of the ones that caught my attention:

* Mike Masnick: Will Others Now Line Up To Get Paid From Google?

* Fred von Lohmann: Google Book Search Settlement: A Reader’s Guide

* Mike Masnick: Short Term Profits Over Long Term Principles; Google’s Caving On Book Scanning Is Bad News

* David Drummond’s official Google blog post

My 2005 comments on Google’s efforts.

UPDATE: I’ve since learned that James Grimmelmann did a lot of the hard work that I’ve been trying to avoid. His analysis and list of recommendations is excellent.