Why “final offer arbitration” is Russian Roulette for Google

The legislated “bargaining” process between Google and News Corp is unmoored from reality. Its “final offer arbitration” is unsuited to the task.

In the debate over the federal government’s news media bargaining code, rather strange things have happened.

The most obvious is that Australian law now requires some sites to pay to link to other sites – effectively a tax, since there’s demonstrably no transfer of value from linkee to linker.

But another strange event is that the actual news media “bargaining” has been mostly ignored.

That’s a pity. Because the new law employs an interesting and unusual mechanism for resolving disputes: final offer arbitration.

And final offer arbitration looks thoroughly, disastrously, 100 per cent ill-suited to this situation. It essentially refuses to state any principle for setting the bizarre new price on links to news sites, and then asks Google to guess at what a government-appointed arbitrator might say.

In other words, it legislates an unquantified tax whose value it says a court will rule on later. It thus  effectively asks Google to play Russian Roulette.

No wonder the company is cutting deals. You would too.

Final offer arbitration: fine for baseball

Arbitration applies to a dispute under the new code if the two sides can’t agree a price for links to the news site. It’s the bottom line on the code, the condition that dictates everyone’s conduct.

What’s final offer arbitration (or “pendulum arbitration”)? It’s essentially a game-theoretic solution to the question of how much search engines should pay to post links to the websites of News, Nine and other media organisations covered by the code. In a negotiation between News Corp and  Google, say, each side makes one offer. Then an independent arbitrator simply chooses whichever offer he thinks is closer to being right.  Bang! We’re done.

In the right situation, final offer arbitration seems a neat solution. It encourages both parties to make a reasonable offer, for fear that the arbitrator will choose the other offer as more reasonable. Ideally, the two final offers end up very close together.

Now, this can certainly work well in situations where there’s a lot of market data pointing towards an appropriate settlement – price data, existing case law, a long history of prices and conditions. It has been suggested as a way to settle various labour disputes, and actually embraced in US Major League Baseball.

A final offer nightmare case

But in some situations it looks likely to work badly, introducing enormous uncertainty. And that seems likely to be how a dispute between News Corp and Google could end up.

Here’s why. Right now, there’s pretty much no data that links from Google to News Corp benefit Google more than News Corp. This is very different from US baseball, where there’s widespread agreement that players add some value (obviously!), a long history of payments, and relatively narrow disputes about quantum.

Actually, there is some data. But what it suggests is that the benefits run the other way, and that News Corp is getting the better of the current situation.

For a start, right now no news media anywhere get paid for links from anyone. In other words, the law says that arbitrators would have to decide how much Google should pay News Corp, when reality suggests that if anyone pays anyone, for links, News Corp should pay Google.

This is not just because the Internet got into some strange non-paying habit. It’s because money flows the same way value flows. And when a search engine links to a news site, all the evidence is that the news company gets the better of the deal.

Indeed, to the extent that money ever flows in these circumstances, it flows the other way: media companies pay search engines. (It’s accepted that decent search engines only allow this by marking each link clearly as “Ad”. Media companies get away with putting the ads under a more ambiguous heading, like “Promoted” or “Sponsored Content”.)

If you don’t believe me, take a look at this additional post. But to summarise that post here:

• The media companies disclose the true value of links in the price they charge everyone else: no more than $0.
• The media companies show they want digital giants’ links by refusing to bar them from their sites using simple robots.txt files.
• The media companies show they want those links described in detail by packing their HTML meta tags with information.

The reality: no-one knows how an arbitrator would decide

So the obvious starting point for negotiations on the price for links is that Google should pay News Corp $US0.

But in the world we’re in, could Google offer that? With final-offer arbitration, would an arbitrator agree?

The reality is that there’s no real way for anyone to know what an arbitrator would do. Arbitrator A, an economist, might look at the market and decide $0 is a very reasonable offer in all the economic circumstances. Arbitrator B, a lawyer, might decide that 10 cents per story is just fine. The strength of final offer arbitration is also its weakness: the arbitrator has to accept one of two offers. When the society can’t agree on the basic principles of fairness in a particular situation – when the subject of the arbitration is unmoored from economic reason – then everything becomes a crap-shoot.

Now, Google can’t really take that risk. It can’t be expected to just gamble that an arbitrator will come up with some non-zero number, whether for well-thought-out reasons or, just as likely, somewhat weird ones.

Effectively, Google is being asked to ignore the market signals and just guess at what might go through an unnamed arbitrator’s head if the issue ever came before them. And that’s why Google is cutting deals on news.

It’s possible that the ACCC has some reasoning on final offer arbitration that I haven’t seen yet. I want to cut it some slack: over the years it has played a constructive role in Australian society, and ACCC chief Rod Sims has been a model public servant. Yet right now, its utterances on this issue seem bizarre. Likewise the federal government – but I like to think the ACCC can be held to a higher standard.

The bottom line

Google may be guilty of various sins – for instance, gradually shrinking the prominence of the “ad” warnings on paid links. But on the numbers, underpaying for linking to News Corp sites doesn’t seem very likely to be one of those sins.

Yet Google has effectively been confronted with a bizarre commercial choice: pay up, or play Russian Roulette on final offer arbitration.

Footnote: Game theorist Joshua Gans, a great Australian economist (and great writer) at Rotman, is ideally placed to assess this. He argues in a tweet thread that the arbitration mechanism ends up pushing Google and media sites into anti-competitive deals. “Where they can, by agreement, subvert the public interest with less competition, they will … the code drives them there.” Gans sees a good chance that the ACCC has pretty directly degraded media competition here, with smaller sites the losers. Read the whole thread or look at his blog post.