Google v the French press: how to avoid a lose-lose scenario

http://www.guardian.co.uk/technology/2013/jan/21/france-google

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Google and the French press have been negotiating for almost three months now. If there is no agreement within 10 days, the government is determined to intervene and pass a law instead. This would cause serious damage to both parties.

Since last November, about twice a week and for several hours, representatives from Google and the French press have been meeting behind closed doors. To ease tensions, an experienced mediator has been appointed by the government. But mistrust and incomprehension still plague the discussions, and the clock is ticking.

In the currently stalled process, the whole negotiation revolves around cash changing hands. Early on, representatives of media companies were asking Google to pay €70m ($93m) per year for five years. This would be "compensation" for "abusively" indexing and linking their contents and for collecting 20 word snippets. For perspective, this €70m is roughly the equivalent to the 2012 digital revenue of newspapers and news magazines that make up the IPG association (General and Political Information).

When the discussion came to structuring and labelling such cash transfer, IPG representatives dismissively left the question to Google: "Dress it up!", they said. Unsurprisingly, Google wasn't ecstatic with this rather blunt approach. Still, the search engine feels this might be the right time to hammer a deal with the press, instead of perpetuating a latent hostility that could subsequently explode and cost much more. At least, this is how Google's European team seems to feel. (In its hyper-centralised power structure, management in Mountain View seems slow to warm to the idea.)

In Europe, bashing Google is more popular than ever – not to mention all the other US-based internet giants, widely accused of killing old businesses (such as Virgin Megastore – a retail chain that also made every possible mistake). But the core issue is tax avoidance. Most of these companies hired the best tax lawyers money could buy and devised complex schemes to avoid paying corporate taxes in EU countries, especially UK, Germany, France, Spain, Italy ...

The French Digital Advisory Board — set up by Nicolas Sarkozy and generally business-friendly — estimated last year that Google, Amazon, Apple's iTunes and Facebook had a combined revenue of €2.5bn -€3bn but each paid only €4m on average in corporate taxes instead of €500m (a rough 20% to 25% tax rate estimate). At a time of fiscal austerity, most governments see this (entirely legal) tax avoidance as politically unacceptable. In this context, Google is the number one target. In the UK for instance, Google made £2.5bn (€3bn or $4bn) in 2011, but paid only £6m (€7.1m or $9.5m) in corporate taxes. To add insult to injury, in an interview with The Independent, Google's chairman Eric Schmidt defended his company's tax strategy in the worst possible manner: "I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate. It's called capitalism. We are proudly capitalistic. I'm not confused about this."

Ok. Got it. Very helpful.

Coming back to the current negotiation about the value of the click, the question was quickly handed over to Google's spreadsheet jockeys who came up with the required "dressing up". If the media accepted the use of the full range of Google products, additional value would be created for the company. Then, a certain amount could be derived from said value.

That's the basis for a deal reached last year with the Belgium press (though the agreement is shrouded in a stringent confidentiality clause). Unfortunately, the French press began to eliminate most of the eggs in the basket, one after the other, leaving almost nothing to "vectorise" the transfer of cash. Almost three months into the discussion, we are stuck with antagonistic positions. The IPG representatives are basically saying: we don't want to subordinate ourselves further to Google by adopting opaque tools that we can find elsewhere. Google retorts: we don't want to be considered as another deep-pocketed "fund" that the French press will tap into forever without any return for our businesses; plus, we strongly dispute any notion of "damages" to be paid for linking to media sites. Hence the gap between the amount of cash asked by one side and what is (reluctantly) acceptable on the other.

However, I think both parties vastly underestimate what they'll lose if they don't settle quickly.

The government tax howitzer is loaded with two shells. The first is a bill (drafted by none other than IPG's counsel, (see PDF here), which introduces the disingenuous notion of "ancillary copyright". Applied to the snippets Google harvests by the thousands every day, it creates some kind of legal ground to tax it the hard way. This montage is adapted from the music industry in which the ancillary copyright levy ranges from 4% to 7% of the revenue generated by a sector or a company. A rate of 7% for the revenue officially declared by Google in France (€138m) would translate into less than €10m, which is pocket change for a company that in fact generates about €1.5 billion from its French operations.

That's where the second shell could land. Last Friday, the Ministry of Finances released a report on the tax policy applied to the digital economy titled "Mission d'expertise sur la fiscalité de l'économie numérique" (PDF here). It's a 200 page opus, supported by no less than 600 footnotes. Its authors, Pierre Collin and Nicolas Colin are members of the French public elite (one from the highest jurisdiction, le Conseil d'Etat, the other from the equivalent of the General Accounting Office — Nicolas Colin also being a former tech entrepreneur and a writer). The Collin & Colin Report, as it's now dubbed, is based on a set of doctrines that also come to the surface in the United States (as demonstrated by the multiple references in the report).

To sum up:

• The core of the digital economy is now the huge amount of data created by users. The report categorises different types of data: "collected data" is gathered through cookies, whether the user allows it or not. Such datasets include consumer behaviours, affiliations, personal information, recommendations, search patterns, purchase history, etc. "Submitted data" is entered knowingly via search boxes, forms, timelines or feeds in the case of Facebook or Twitter. And finally, "inferred data" is a byproduct of various processing, analytics, etc.

• These troves of monetised data are created by the free "work" of users.

• The location of such data collection is independent from the place where the underlying computer code is executed: I create a tangible value for Amazon or Google with my clicks performed in Paris, while the clicks are processed in a server farm located in Netherlands or in the United Sates — and most of the profits land in a tax shelter.

• The location of the value insofar created by the "free work" of users is currently dissociated from the location of the tax collection. In fact, it escapes any taxation.

Again, I'm quickly summing up a lengthy analysis, but the conclusion of the Collin and Colin report is obvious: sooner or later, the value created and the various taxes associated with it will have to be reconciled. For Google, the consequences would be severe: instead of €138m of official revenue admitted in France, the tax base would grow to €1.5bn revenue and about €500m profit; that could translate into €150m in corporate tax alone instead of the mere €5.5m currently paid by Google. (And I'm not counting the 20% VAT that would also apply.) Of course, this intellectual construction will be extremely difficult to translate into enforceable legislation. But the French authorities intend to rally other countries and furiously lobby the EU Commission to come around to their view. It might takes years, but it could dramatically impact Google's economics in many countries.

More immediately, for Google, a parliamentary debate over ancillary copyright will open a Pandora's box. From the right to the left, encouraged by François Hollande's administration, lawmakers will outbid each other in trying to trashing the search engine and beyond that, every other large internet company.

As for members the press, "they will lose too", a senior official tells me. First, because of the complications in setting up the machinery the Ancillary Copyright Act would require, they will have to wait about two years before getting any dividends. Two, the governments — the present one as well as the past Sarkozy administration — have always been displeased with what they see as the French press's "addiction to subsidies"; they intend to drastically reduce the €1.5bn in public aid. If the press gets is way through a law, according to several administration officials, the Ministry of Finances will feel relieved of its obligations towards media companies that don't innovate much despite large influxes of public money. Conversely, if the parties are able to strike a decent business deal on their own, the French press will quickly get some "compensation" from Google and might still keep most of its taxpayer subsidies.

As for the search giant, it will have to endure a small stab but, for a while, will be spared the chronic pain of a long and costly legislative fight — and the contagion that goes with it: the French bill would be dissected by neighbouring governments which will be only too glad to adapt and improve it.

frederic.filloux@mondaynote.com

Next week: why European media companies should be cautious in their dealings with Google