My newspaper column is about Google's aggressive tactics in negotiating tax breaks for a new facility in Lenior -- and the harm those tactics could do to a company that derives a lot of value from its "do no evil" reputation.

(Read the whole thing after the jump.)

Meanwhile, Nick Carr continues to be all over this story, linking to news that Basnight wants hearings on incentives, and rounding up all sorts of commentary on the deal.

Google's tactics belie its image

by Edward Cone
News & Record
2-11-07

Google is a company with a cute name and a cuddly reputation; 30-percent profit margins and a market capitalization of $144 billion; and a freshly inked, sweetheart deal to build a data center in the Caldwell County city of Lenoir.

Google's reputation is one of the keys to its financial success. People trust the company, which uses "Don't be evil" as its unofficial corporate motto, to safeguard their privacy and provide accurate, unbiased information as they search the Web and use its other online services. If Google comes to be seen as just another soulless moneymaking machine, it might lose some of its competitive advantage.

And that's what makes the California company's behavior as it negotiated its Tar Heel deal so hard to understand. Google strong-armed the public partners with which it worked on the incentive package, in ways that would be unseemly even for a company that doesn't publish a lengthy Code of Conduct that says things like, "Being a Googler means holding yourself to the highest possible standard of ethical business conduct. ... When it comes to ethical conduct, we believe in erring on the side of caution."

Except, apparently, when an annualized amount equal to two-tenths of 1 percent of its profits for the trailing 12 months is on the line.

Glorified warehouse

At first, the tax incentives offered to the cash-gushing Internet firm by the state of North Carolina and the down-at-the-heels county -- at least $165 million over 30 years, or about $800,000 for each of the 200 jobs that are expected to be created -- drew only knowing snickers from the digerati. A data center is basically a climate-controlled warehouse full of computers, with a seemingly limited capacity to create excellent jobs or kick-start further business growth around it.

Snarked the tech industry blog Valleywag, "The Google server farm, despite the search engine's status as icon of the new digital age, will need electricity, air-conditioners -- and thorough mopping."

The economic development folks, eager to replace Lenoir's departed furniture-factory jobs with, well, anything, had gone even lower on the technology food chain than they did in shelling out big bucks for Winston-Salem's Dell assembly plant. Beyond the tax breaks, Google gets cheap and reliable power for its energy-hungry facility; beyond the data-center jobs, Caldwell County and North Carolina get a supersized construction project -- a big payoff in and of itself -- and a lot of national publicity as locales willing to put out for the rich and famous.

Not the best deal imaginable for the home team (that would be the relatively low-dollar snagging of Honda's mini-jet plant by Greensboro and Guilford County), but not a complete disaster, either.

'Arrogance'

But it turns out that there was a lot more to the story. Google leaned hard on North Carolina lawmakers and officials, not just to get the fattest deal possible but to choke off the flow of information along the way.

According to documents obtained by The News & Observer of Raleigh, the company went beyond reasonable expectations of confidentiality to demand absolute secrecy while negotiations were under way, even asking participants to sign nondisclosure agreements; some legislators and local officials did so, but Department of Commerce officials did not. Google executive Rhett Weiss badgered Commerce Secretary Jim Fain about the state's adherence to process, complaining, for example, when lawmakers wanted an estimate of the cost to North Carolina in lost tax revenue, and threatening to kill the whole thing if Google didn't get its way.

Businesses need some measure of confidentiality when putting together this kind of transaction. Fair enough. But this is the people's business, and Google's high-handedness is an affront to the people of this state.

And then there's that whole "Don't be evil" thing. Google spokesman Barry Schnitt told me that the company's negotiations with the state were "very standard." If that's the case, and this is standard operating procedure for the company, then something has gone wrong in Silicon Valley.

"Google displayed an arrogance that belies its public image," wrote technology sage Nicholas Carr at his Rough Type blog. "You have to wonder whether saving $100 million over the course of 30 years was really worth it."

Reputations are fragile things, for companies and governments as much as for people. North Carolina comes out of this with mixed results, in terms of perceptions of both our business savvy and our backbone.

Google, which has done much to earn its good reputation, looks penny wise and pound foolish when it comes to that most valuable of assets; if it allows itself to be just another company, it won't be Google anymore.

© News & Record 2007

Edward Cone (www.edcone.com, efcone@mindspring.com) writes a column for the News & Record most Sundays.

Comments

[beth]

Great article Ed... I like the fact you pointed out this is basically going to be an empty warehouse void of any workers. I don't think alot people realize what a server farm is.

[gs]

If that's the case, and this is standard operating procedure for the company, then something has gone wrong in Silicon Valley.

I grant that the natives are smart and hard-working, but my impression is that many of them are focused on picking up as much easy money as possible as fast as possible--perhaps by harvesting long-term R&D performed as far back as decades earlier.

However, in addition to tacky things like the Lenoir affair, the magnates of Silicon Valley are involved in risky forward-looking exploits like private funding of space exploration.

Has something gone wrong or has a typical range of human types migrated to where opportunity lies (and are these two questions equivalent)? I don't know enough to say, but I'm pretty sure that Silicon Valley is not inhabited by absent-minded idealists whose wealth is an unintentional byproduct of their altruism.

[Lex]

Silicon Valley is not inhabited by absent-minded idealists whose wealth is an unintentional byproduct of their altruism.

Quite correct, gs, and that's the way a private free market works. No problem with that.

Where the problem comes is when denizens of the private market begin to treat public goods as their private property, in attitude if not in fact, which is exactly what happened in this case. And that happens in pretty much every N.C. incentives case now that the N.C. Supreme Court has chosen (in Maready) to ignore the plain meaning of the state Constitution.

All the public can do is, through its elected officials and appointed bureaucrats, perform the most rigorous possible cost-benefit analysis and insist that those officials pull the trigger only on those opportunities that clearly, or to the highest degree discernible, will accrue to the long-term benefit of the public. Corollary: Real win-win situations generally don't have to be sold very hard, and in my experience, the more outlandish the demands for secrecy and accommodation, the more likely it is that the public is getting screwed. ("Outlandish" is, I'll grant, a subjective term, but the ratio of dollar of incentive to dollar of worker pay, or something like that, might be one good way to get at that in objective terms.)

A possibly related question just occurred to me: When a country's leaders start treating the country like a Third World entity, something to be exploited, do its corporate leaders automatically do the same? Does that dynamic exist? If so, is it inevitable? Or, if it exists, does the dynamic go in the opposite direction? Do political leaders take their cue from corporations? Ida know. Just thought I'd throw it out for discussion.

(Can you tell that blog withdrawal isn't going quite as easily as I'd hoped?)

[Caldwell]

Hold on a sec. Google's interested in getting the best deal it can before it invests what's probably an ungodly amount of cash in constructing this data center. That's not "evil", that's capitalism. If you've got a problem with capitalism, I really don't know of many (if any) successful companies that'll make you happy -- and, if you *do* know of any, I can bet that in a few years they'll disappear as well.

Google's in a cutthroat business. (Actually, it seems that *any* business that Microsoft competes in turns into a cutthroat business, but see "capitalism" above.) Keeping their major investments out of the media and away from the eyes of their competitors is important. They're not "choking off the flow of information", they're trying to keep their business deals off the front page of the newspaper (and hence off of Google News and the like) for the months that they're spending negotiating. Losing this element of suprise may be sufficiently damaging to the value of the deal that it's no longer worth doing.

You may see it as the "people's business", but if the people want to engage in business they have to *act like a business*.

[Jason]

"Google's interested in getting the best deal it can before it invests what's probably an ungodly amount of cash in constructing this data center. That's not "evil", that's capitalism."

No. Google is interested in lobbying local and state governments for subsidies and taxes breaks to give it a market advantage so that it can maintain its near monopoly marketshare before it invests a large but not ungodly amount of cash in this data center. That's not capitalism, that's mercantilism, and if the lessons of the 17th and 18th centuries haven't sunk in yet, mercantilism is evil.

[TheRandomTexan]

This would a surprise....

Office of Tax Assessor-Collector
Caldwell County
Lenoir, North Carolina

Dear Property Owner:

Surprise!

Increased construction and maintenance at the new Google(TM) Data Center requires the improvement and expansion of roads and utilities in the immediate vicinity. To fund these improvements, we are increasing the property tax rate by 10% this year. In addition, we will be conducting a special re-assessment of all private residences.

If you have any questions, call our information line at 888-555-1212 between 2am and 2:15am on alternate Thursdays.

-signed-

Acutt Offdatop
Assistant Deputy Assessor

[TheRandomTexan]

BE, BE, BE a surprise. Dang it.

[Caldwell]

First, Google is not a "near-monopoly". Not even close. They do what they do (selling ads on search) significantly more efficiently than their competitors, but it's a huge market with some mammoth competitors.

Second, if you want to argue that localities and states and countries shouldn't be allowed to subsidize major investment in their local area, I could probably be convinced to agree with you. But objecting to this deal in particular is silly. Here's the way things work across the board at present: You want a new football stadium in your city, you cut a deal with the team to offer incentives to build it. If the short- and long-term financial benefits appear to be enough that if you want a new Ford plant or Google datacenter in your district, you cut a deal for them to put it in your area, hire your people to build and staff it, use your utilities, and pay your property taxes each year. If you're sure that it's not worth it but you still make the deal, you're stupid and it's not Google's fault.

People have been making the same argument about the mammoth discounts that Wal-Mart demands from their suppliers. And the answer is the same: If the deal is sufficiently disadvantageous to you, *don't take it*.

[Jason]

"First, Google is not a "near-monopoly". Not even close. They do what they do (selling ads on search) significantly more efficiently than their competitors, but it's a huge market with some mammoth competitors."

Check Google's market share versus their competitors. It's not a monopoly, but it's not far from one, either.

Further, competiton exclusion measures, which include all forms of subsidies, are never to the long term benefit of the consumers. That Google is not the only company that engages in overtly mercantilist methods does not excuse it from doing so; nor does it excuse the state and local governments from giving in to Googles demands.

Funny you should mention football stadiums as another example of mercantilist abuse, as the NFL is a true monopoly (and a heavily subsidized one at that).

[Lex]

Losing this element of suprise may be sufficiently damaging to the value of the deal that it's no longer worth doing.

Awwwww.

No. Really. If the country and the several states simply got out of the incentive business, we wouldn't even be having this conversation. Bonus: We'd be a lot closer to a free market than we are under the current arrangment, which falls somewhere between crony capitalism and extortion.

You may see it as the "people's business", but if the people want to engage in business they have to *act like a business*.

OK, let me try smaller words: The people are not in business, nor should they be. Government should ensure a level playing field. That's it. You want to disagree, fine, but first you need to run the numbers.

[Caldwell]

Lex commented:
The people are not in business, nor should they be.

Hey, like I said before, if you can find a way to magically get the cities, states, and countries out of the incentives business, I'm not going to argue the other way. I agree that the Lenoir government shouldn't be throwing cash at Google. But by giving sweetheart deals to companies in exchange for landing plants and factories, the people sure as hell *are* in business. They're just not good at it.

It's unfair to blame Google for this state of affairs when there are hundreds of other townships lining up to throw cash at them in exchange for locating a data center there. If the people *choose* to play at business -- and there's clearly nothing stopping them from doing it -- then they can't complain when their business partners request standard business practices like nondisclosure agreements.

In this instance, calling Google "evil" is off-base. Maybe "lawful neutral"?

Jason said:
Check Google's market share versus their competitors. It's not a monopoly, but it's not far from one, either.

I notice that you didn't bother to link anything there, which leads me to believe that you didn't check Google's market share versus their competitors. This report puts Google at about half the search market at present; Yahoo (in the process of completely revamping their ad system in order to compete better) has about 30% and Microsoft about 10%. I'm not sure how search advertising revenue correlates with search market share, but it's probably pretty close.

That's not remotely a monopoly.

[Colin Kingsbury]

Well, Lenoir County could focus on operating as efficiently as possible and minimizing tax burden in order to attract more organic investment on its own, but that's a lot harder to do and you don't get to brag about it at the national county commissioners' convention in Vegas the way you do if you land a deal with the company-of-the-moment. Cambridge may get by with elephantine tax rates and government expenditures, but they're living off 300+ years of investment in the whole apparatus. For a place like Lenoir to get ahead they have to think smarter precisely because they don't have the built-in advantages.

[Jason]

Caldwell:

I didn't provide a link, as it took me all of about 30 seconds to confirm what I thought with what was publicly available (on Google, no less) prior to posting my quip. The numbers in your report mesh with my own.

As for "not remotely a monopoly," 50% is a large enough market share for companies who achieve it to begin acting like monopolies. Especially when they have close to double the market share of their nearest competitor. Perhaps it's not the 85% marketshare that Microsoft has in the operating system market, but I'm also not claiming that Google is a monopoly. I'm claiming that they're large enough that they are starting to act like one, which counts as "near monopoly" in my book.

Well, I'll caveat - my first statement was hyperbole. I used the term "near monopoly" because it sounded good, not because it had any special bearing on my point.

At any rate, though, this quibbling over the status of google is immaterial. I really don't care if they qualify as a "near monopoly" or not. What I care about is that they are engaging in blatant mercantilistic rent-seeking behavior. Which is evil.

[Lex]

Caldwell: You were the one who suggested that the people want to be in business. In fact, I don't know a single government official who says that -- at least publicly. At best, they call it a necessary evil.

And I don't know a single taxpayer -- many of whom own small businesses themselves and resent the hell out of giving their tax money to out-of-state monoliths when it's their sector that creates the most jobs -- who embraces this practice publicly OR privately.

Just sayin'.

[Jon]

Ed,

I believe your indignation is misdirected.

Your article should have addressed the idiocy of our public officials agreeing to such an offer and not berated the excellent negotiating skills of the Google people.

In light of the fact that server farms are nothing more than big warehouses that consume gross amounts of energy, and utilize few employees, I'm amazed that the elected voices for the common man would have agreed to such an obscene outlay of taxpayer's dollars for this project.

[Ed Cone]

Jon, my reaction to Google's tactics needs to be understood in the context of Google's carefully cultivated and highly valuable good-guy image.

Leave aside the question of whether incentives are desirable things in general, and the fact that companies often play hardball: in this case, is the value of the incentives greater than the risk to the rep?