Wednesday, December 12, 2012

Google Chairman makes no apologies for hiding profits from the tax man, says company will continue to give away Android to attract ads; Bufffett's newspaper chief, meanwhile, says the company will give away nothing

I'm sure this quote will come back to bite Google in the rear at some time: “We are proudly capitalistic. I’m not confused about this,” said Google Chairman Eric Schmidt of the companies admission that it avoided paying $2 billion in taxes to governments by moving $9.8 billion into a Bermuda shell company.

"We pay lots of taxes; we pay them in the legally prescribed ways,” Schmidt told Bloomberg. “I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate."

He may be proud, but governments, forced to enforce austerity measures because pro-business politicians continue to push lower taxes for businesses and high income earners, are now looking around for added income and finding U.S. companies may be the best target. As the Bloomberg report states, European countries in particular are getting a tad aggressive in investigating the tax avoidance behavior of major U.S. corporations such as Google and Starbucks.

In another Bloomberg report this morning, the financial news outlet talked to Terry Kroeger, the CEO & President at Omaha World-Herald Company, and the man tasked by Warren Buffett to run his new newspaper chain.

"You can’t spend millions of dollars assembling something and then give it away," Kroeger said in justifying his company's paywall strategy.

And it all makes sense – that is, unless you read that first Google story. Because in the Google story, Eric Schmidt makes no apologies for giving away Android in order to attract users and then sell advertising.
"The core strategy is to make a bigger pie," Schmidt said.

So what is the right course? Give away one product, news or search, in order to attract users so that you can sell advertising? Or is it to charge for news to get revenue from readers?

As a newspaper veteran, with both advertising and circulation management experience, I can't help but think that Google's approach is closest that used by newspapers in the past – basically give away the paper to attract advertising. But the trick, you see, is selling that advertising. Unless you know how to sell ads online you can't make it work, and newspapers are no longer run by ad executives.