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When Google sneezes, the internet gets flu

Algorithms don't help solve the net's biggest problems

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Much of the web-based new economy hinges on the behaviour of how one company deals with two mammoth challenges next year. Both are potentially lethal, and a poor response to either will have dire consequences for many operations doing business on the internet.

Fortunately, that company is supremely well-equipped to deal with problems of a technical nature, employing some of the best scientific brains in the world. Unfortunately, neither of these two potential company-crushers has a technical solution: and the answers the brains come up with are only likely to make the problem worse.

The company in question is Google, of course, and here are the two problems.

The first is that most of Google's wealth - and with it the earnings of businesses large and small who depend on the advertising broker for the majority of their income - is generated from a system Google controls.

The self-service contextual classified advertising operation is a black box. It looks like a "market" - with buyers and sellers negotiating a price - but it's a market that Google dominates. Google ultimately sets the price, and when it comes to disputes it's hanging judge and jury too.

This doesn't particularly appeal to Wall Street. Not because capital has suddenly been overcome with a dose of ethics - there's nothing it loves more than a sure monopoly - but markets needs arbitrage. When they're presented with an opaque model, there's no way to measure the risk, let alone hedge it.

Google has been most fortunate in that its technological prowess - which we've been reminded of constantly over three years of near-hysterical Googlemania - has proved a successful distraction. The deep questions aren't being asked about its business (and that of Yahoo! of course, too) because the people who usually ask the questions hadn't realised it yet. But that's changing.

(When we raised this issue in June, making the Enron comparison, the mailbag drew two very different responses. An injured contingent of fans wrongly assumed we were suggesting Google's profits are a fiction - of course, they're very real. But a second set of respondents - from financial institutions - confirmed that this is a make-or-break issue.)

Internet advertising is ripe for fraud, and Google - let's assume - is doing everything it can to prevent it. But everything might not be enough. From the Church of the Algorithm, there isn't an algorithm that can help, so long as Google remains judge and jury.

Google's cultural legacy of secrecy, and it's sheer geeky pleasure in cranking the handle of its black box, is also evident in this tale Nick Carr relates. Like a casino owner, Google bets with the house's money to promote its own products, rigging the market. When attention is drawn to its behaviour, it first protests its purity and innocence - then overturns the routlette table. A picture is worth a thousand words, so here's an illustration of how Google tips the playing field in the direction of its choosing.:

Screenshot of Google search results for ‘yahoo calendar’

In a decade defined by the hedge fund, how curious it is to see what's called the "future" of online business given a pass by the risk business.

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