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Google, the bumbling behemoth.

Google South Africa set the cat among the pigeons when country manager Stafford Masie revealed intentions to moderate SA’s search industry, saying some e-marketing companies were committing “fraud” against customers.

Masie stated “Google-certified agencies” would be introduced in early 2009 to stop local search marketing companies making a financial “killing … off ill-informed clients”. Google SA said five e-marketing agencies already working across Google’s current base of 30 named and active clients will lead this programme. Google SA said the agencies in question would pioneer the programme to help determine what would be required for agency certification. Masie said after this process, certification will be made available to “all and everyone”. The full text of Masie’s response on agency certification can be found here.

Google’s move to moderate the local search market was met with skepticism and distrust by local search marketing companies that acknowledge questionable ethics have been practiced by a few agencies, but say Google caused this problem to begin with.

Google caused the “fraud”
Search marketing experts say Google gives credits or commissions to search agencies in developed countries that circumvent overcharging. In the absence of a commission structure (an advertising industry norm), the local market determined its own rates. Local outfit Entelligence petitioned Masie to institute commissions in SA early this year, but without success.

“Many South African agencies charge a commission to manage Google Ads on behalf of customers. However, this fee (16.5% is the advertising norm) is charged transparently. In other markets, such as the USA and UK, agencies automatically receive a discount on billed ad-spend, which is effectively the agency commission. However, SA does not adhere to the same policy. I met with Google in March in an attempt to get South African agency incentives brought in line with international standards, but was not successful,” says Sean Riley, MD of Entelligence.

Masie responded saying Google did have a commission system in other territories, but that this was being scrapped in 2009. “We did have a funding programme called Best Practice Funding (BPF), which was an initiative to give EMEA agencies the funding, training and research needed to make search advertising a success. BPF was always a short-term measure, designed to be reviewed annually. It was introduced in 2006, but two years later, its objectives of growing and sustaining the search market had been met and so we announced the end of BPF on January 1 2009.”

‘Outrageous’ claims
Reacting to Masie’s allegations of industry fraud, Riley says: “Fraud is quite a dramatic allegation for Google to make without substantiation. There will always be one or two bad apples, who abuse trust. But without proof, allegations of fraud are outrageous. We open all our books and do everything transparently and the first thing we tell clients is they are able to manage paid search advertising with Google directly.

“However, our value offering lies in getting ads to perform better and our clients use us because of our IP, experience and ability to deliver value. Google’s allegations of fraud are a clear attempt to manipulate the market for the company’s own benefit,” says Riley, adding that a “go direct” model would realise conflicts of interest for brands served directly by Google.

“If Google manages three home loan customers how will they ensure their allegiance? How does Google plan to be objective if they service five customers from one market segment? Will they share the insight gained from search marketing across all customers so these brands lose their competitive edge? How will they resist driving up the cost of advertising for all customers?” asks Riley.

ICT analyst Lindsey Mc Donald, of Frost & Sullivan, comments: “Mr Riley’s points are indeed valid, especially concerning a possible conflict of interests. South Africa is only just beginning to enjoy the results of more competition in the telecommunications industry; it would be a pity if Google is indeed trying to monopolise a market that has only just begun to flourish.”

Other issues that trouble local search marketing companies:
* Why Google chose to only accredit the five agencies it is working with;
* Whether Google is playing favourites;
* Whether accreditation would mean that Google would drive revenue producing search products over non-revenue generating services (organic search);
* How Google will ensure agency intellectual property is protected; and
* How Google can assure independence and impartiality, particularly in terms of self-interest and while it harbours competitive interests.

Position needs clarification
Many search marketing companies expressed the fear that Google would go direct in a wide-scale effort to disintermediate the industry.

Mc Donald comments: “The message from Google is unclear and carries a large degree of ambiguity. Even if the company intends to ensure top quality skills are brought to market and that online marketing/advertising is more effective, the way in which it has announced this to market leaves room for doubt. Google’s inherent popularity is due to its bleeding edge innovation and it seems ironic that it would seemingly want to curb innovation if stated industry fears are to be believed. The company’s priority should be to clarify its position at the earliest opportunity.”

Masie’s statement on agency certification follows recent reports that Google was being investigated by the Competition Commission for allegedly abusing its dominance and attempting to poach a client (Yellow Pages) from online marketing company, Entelligence. It is alleged Google hiked ad rates without consulting Entelligence, and then sought to disintermediate the relationship between the marketing consultancy and its client by persuading Yellow Pages to place advertising direct with Google.

Entelligence cried foul, saying it had met with Google SA earlier and revealed marketing strategies for promoting Yellow Pages. “Not only did they try to go direct to the customer, which isn’t great but is still palatable, but they threatened to switch off the Google accounts we used to fulfill Yellow Pages so they could win the account, by setting about a set of events that would lead to us being unable to deliver services to Yellow Pages,” says Riley.

Masie denies these allegations. On the issue of going direct, Masie says: “There is no ‘conflict of interest issue’. Google South Africa works on a named account list and we work with agencies and will continue to work with agencies. In 2009 we intend to provide agencies better tools and services in relation to improving/building their Google capacity, competencies and capabilities.”

Masie emphatically states Google is “agency-friendly”. However, in the Entelligence case, while the Competition Commission stated that Google’s actions were not anti-competitive, the commission did state: “Google’s actions may amount to inducing a customer from not dealing with Entelligence.”

Conflicts of interests
“I do understand the requirement and intent behind the local Google office attempting to protect the reputation of search and its impact considering their hold on the market,” says Peter Stewart, MD of ClickThinking, which runs campaigns through Google Ireland. “A badly run campaign by an agency struggling with the medium could turn a potential search success into a nightmare, with the client losing faith in the medium (and of course, Google losing out on revenue).

“However, they need to be very clear in terms of the rules and what certification means, and in my mind, they haven’t.

“My major concern would be intellectual property protection. ClickThinking has invested heavily in building proprietary methodologies regarding search cent optimisation and source to sale conversion reporting, which set us apart. Do we need to disclose these to be accredited? What do we need to disclose and will it be publicly accessible? This is not clear and I think it needs to be prior to the roll-out of this process. The disintermediation of agencies in my mind is a misnomer. A conversion agency’s responsibility is to maximise return across multiple channels, including search. How can Google be objective when their main objective is to profit from paid search advertising? Will Google advise a client to spend more on MSN because the conversion ratios are better? It’s unlikely and I would be very surprised if this is their intention.”
No commitment to equity

An agency working close to Google, however, preferred not to comment, saying it was scared it may damage its standing with the search giant by speaking to the media.

Google’s “go direct” approach in this market is worrying, as it could realise the death of a local search marketing industry still in its infancy, and which to date has not realised significant skills transfer or development that benefits the previously disadvantaged.

At the time of the interview with Masie, Google did not appear to have any plans in place for the transfer of skills to PDIs, the seeding of PDI agencies nor any other equity or development programmes. When investigating this story in mid-November, Masie was asked:

* Are the five agencies working with Google empowered or BEE compliant in terms of the DTI’s empowerment code?
* For detail on Google’s policy regarding equity and diversity in this region.
* Whether Google worked with empowered service providers in this region?
* What Google is doing to promote entrepreneurship in SA, and to promote diversity in an industry that is not representative of diversity?

Despite being promised feedback in mid-November, there was no response from Google to these questions. However, it did state: “Google is committed to the overall black empowerment objectives and transformation of South Africa. We concur with the broad-based black economic empowerment (BBBEE) objectives and guidelines published by the South African Department of Trade and Industry. While we await the delivery of the final BBBEE charter relative to the South African ICT industry, Google remains committed to empowering, enabling and adding value in Africa. As we mature our footprint in South Africa, this includes applying appropriate BBBEE principles and implementing internal diversification strategies for employment equity, corporate social investment, procurement, and ecosystem partnerships.”

By way of comparison, HP, which has a similar market cap to that of Google’s, has sought to work with government to alleviate the ICT skills shortage by creating a multimillion-rand institute that promotes entrepreneurship, offers skills development to PDI SMEs, and trains graduates to work in those SMEs.

Revenue taken offshore
Then there’s the issue of Google’s commitment to developing the local economy. Google has a legal entity in SA called Google SA Pty Ltd, with offshore directors. This entity serves to pay bills and salaries. See the CIPRO document that corroborates this.

None of the directors of this operation sit on South African soil. It is alleged by sources in the search industry that all revenue-generating contracts with local agencies circumvent Google’s SA office and go directly to Google Ireland. This means Google SA shows a loss in this region, while raking in significant revenue that originates from SA through the behemoth’s Ireland office.

This was confirmed by Masie, who says this practice is a norm in the IT industry and was a structure used at Novell when he was country manager of the global software company.