THE BLOG
07/13/2012 02:49 pm ET Updated Sep 12, 2012

"Say It Ain't So, Joe, Again, and Again, and ...": An Economic Analysis of the Legacy of Continued Bad Behavior at Google

Although I did not intend it when I started writing on misbehavior at Google and abuse of the public trust, it is turning into an op-ed series.

I wrote my first column on Google's misbehaving, "Say It Ain't So, Joe": Of Google and Some Serious Misbehaving, after Google settled a Department of Justice criminal investigation of illegal drug importation. In its nonprosecution agreement Google accepted the accuracy of all charges detailed in sections 2 (a) through 2 (q) and agreed that it would not contest them; as restitution it refunded all revenues obtained through these activities. There were no fines, there were no criminal charges, and there was no jail time for anyone associated with the string of ongoing criminal activities that had gone for years.

I wrote my second column on Google's misbehaving, "Say It Ain't So, Joe, Again, and Again, and Again ...": A Legacy of Continued Bad Behavior at Google, in response to Google's new privacy policy and why we should all be concerned.

This time I'm writing because Google violated a consent decree on privacy. Not content with abusing the privacy of its own users, Google hacked around the privacy settings of Safari users on iPhones. This time, at least, there is some fine; it looks like Google will pay a $22.5 million fine for violating a 20-year consent decree it signed with the FTC last October. This does look like a lot of money. However, the penalty imposed for violating the consent decree was estimated by the Wall Street Journal to be $16,000 per occurrence per day; doing the arithmetic suggests that the consent decree has been violated 1,400 times. Does this mean that Google has violated the consent decree an average of 6 or 7 times every day since it was signed? Surely, Google did not wait long into the progress of a 20-year consent decree to begin systematically ignoring it. One should not have much confidence in the remaining 19 1/2 years of the consent decree.

Why is Google behaving this way?

Google's senior executives are smart people, and they are also significant shareholders in the company.

They violated the consent decree, and they consistently abuse the public trust, because they calculated that it is profitable to do so.

When I was an undergraduate in Massachusetts, many of my friends chose not to pay for off-street parking. Cambridge parking tickets were only a couple of dollars a night, and my friends knew that they were unlikely to get caught every night; their analysis suggested that parking illegally every night for a year was cheaper than renting off-street parking for a year. Eventually the City of Cambridge decided that it really was important to be able to plow major streets, and began to impose significant fines for parking illegally; only then did my friends decide to find legal rather than illegal places to park their cars.

I suspect that despite Eric Schmidt's tweet, the Boys at Google are still in need of "adult supervision," and that this supervision is not going to come from Eric Schmidt or from their board. And I suspect that the Boys have decided that as long as the profits from misbehaving outweigh the penalties, we are going to have to live with their behavior.

I have written that punitive damages are not unfairly punitive when they serve a greater purpose for society, and that this is especially true when executives rationally make economic assessments that are good for their firms but that predictably harm society. Draconian fines or even criminal proceedings against executives may be necessary to change Google's behavior. In this case I would suggest that the FTC consider fines of $16,000 per violation per day, precisely as the fines were specified in the October Consent Decree. I doubt that Google violated the privacy of no more than 6 or 7 Apple iPhone Safari users per day, and I suspect that fines of $16,00 per violation per day might total hundreds of millions of dollars. A massive fine like this would indeed get the Boys' attention. And, perhaps, it would get the attention of Google's shareholders and Board members. If the fines eventually imposed by the FTC were large enough to affect shareholders wealth, Board members would start worrying about prosecutions for violating their fiduciary responsibility.

In the absence of massive fines or criminal proceedings, regulation of search may be necessary. Surely adult supervision must come from somewhere. And I am beginning to despair of it coming from Google itself.

I would prefer not to write a fourth column in this series. Or a fourteenth.