A German Court Just Made Google Liable for Its AI | Plus: Temu & Shein Fall Off a Cliff

Episode Transcript

00:00:00

Mike: Welcome to another episode of Growing Ecommerce. I am one of your hosts, Mike Ryan.

00:00:04

Chris: And with me, as always, Chris. Showing a Red Bull here. Yes, I went too far to back down now—I’m a Red Bull family member. You’re steadfast, you know that. We’re not getting any sponsorship money for this. You reiterate on that because it’s true, but you’re trying one as well because you bought it for me. Thank you, Mike.

00:00:24

Mike: So in today’s episode, we are going to talk about a precedent set in a German courtroom that could have impacts on Merchant Center feeds all over the world. A big one, yes, absolutely. And then we’ll move on to taking a little bit of a victory lap, to be honest. We got it totally right with Temu and Shein and the impact of tariffs, and we’re going to give you an update there. So let’s get into it.

00:00:46

Chris: Two great topics. I’m always pumped when we talk about the Chinese marketplaces. I don’t know why, because for me you’re still Mr. Temu. Don’t say it too loud. I love whenever I see them squirming, and they’re squirming right now—both Temu and Shein. But probably we do it as the last point of today. That’s certainly massive news.

00:01:06

Mike: Let’s start with the ruling, which might be way bigger than a lot of people think. Yes, absolutely. You want to shed some light on it?

00:01:26

Chris: Sure, I’ll kick it off. So, there was a suit brought against Google. It was actually a little while back—court cases take a while—but the ruling just landed, so it’s fresh. This was brought to a rather small regional court in Germany. But as we know, things can spread fast in Europe. We’re fast at regulating, we’re fast at court cases. We’re world champions.

00:01:47

Mike: Everyone’s good at something, Chris. We’ll talk about that again with Temu later. But this is quite interesting. Basically, two publishers—really more or less one publisher and a subsidiary—filed a libel suit against Google AI Overviews. Libel is just slander in written form.

00:02:12

Chris: As a non-lawyer here, if you make a disparaging claim or a claim that can inflict monetary harm against someone and it’s false, you’re not allowed to do that. A very important side note here is the precondition that you literally have to own the statement, so you’re responsible for the statement. You’re not just quoting someone or signing something. It’s basically your own idea.

00:02:33

Mike: That’s right. AI Overviews stated that these publishers were doing shady business practices, scams, and that kind of stuff. The details are not too important, but what happened was Google said, “Hey, this is just AI Overviews. It’s based on information synthesized from the web, and AI can make mistakes.” They say in every response that AI can make mistakes and that you are using an AI feature. But the court said that disclaimer is insufficient.

00:03:04

Mike: Google has been protected in the past on their general search engine results page for surfacing sometimes objectionable content because they can’t really be held liable for that. But this is text that was generated by Gemini, by Google’s AI models. The court decided that those are your own words, and your disclaimer does not protect you from making slanderous or libelous statements. So, you are on the hook for what AI Overviews say.

00:03:34

Chris: You hit the nail on the head here. The fact that Google was in court again is not big news, but that they lost is big news because they barely lose. The reason why they were basically protected for such a long time with regards to the results on the search result page was because everything was rooted in data they were getting from some structured source, like the website itself.

00:04:04

Chris: This time they said, “Hold on, guys. This was generated by a product you created, which is Gemini.” And to make matters worse, my understanding is that it was a hallucination. It was not true. Everything we read about it indicates it was literally not true.

00:04:28

Mike: Exactly, it was a hallucination. We’ve known from the early days of Bard that these companies were moving fast with this technology and that there could be exposure. Where I think this gets interesting for e-commerce specifically—again, I’m not a lawyer, but I’m going to go out on a bit of a limb here based on what I’ve seen living in Europe the last ten years—is that jurisdictions are very collaborative. They will often cite each other’s precedents and learn from each other.

00:05:26

Chris: Court cases get replicated. If one has been successful in one market, it’ll quickly get replicated. There might even be active cases in other markets right now, given the shared common law in Europe. These things can quickly spread like wildfire.

00:05:47

Mike: The other thing is that a precedent like this could quickly spread to consumer protection, shopping, and things like that. There are existing directives and plenty of precedent establishing that you are not allowed to make misleading statements about product characteristics, price, or availability. This is highly frowned upon as a retailer or a marketplace, which Google is in this case—some kind of hybrid between a content outlet and a marketplace.

00:06:18

Mike: You could sum it up as false advertising. If someone buys a product and Google made misleading statements about it or recommended it based on misleading premises or hallucinations, I’m pretty sure we’re not too far away from a scenario where Google will be on the hook for this stuff.

00:06:49

Chris: You mentioned you’re willing to go out on a limb here, and what you said makes perfect sense. I’ll tell you why. Another reason why Google basically had no issues with inaccurate product data in the past was because everything was rooted in the data feed, right?

00:07:22

Chris: Almost every campaign draws information from the product feed, and the liability was fully on the side of the online retailer. Google was quite heavy on them to stick to these rules. In these new AI-enchanted surfaces, the shopping assistant goes deep.

00:07:46

Chris: I’m using it almost every week and you get real additional information and recommendations. It’s like talking to a person, so I feel like there’s way more room to make an error because we’re talking about literal recommendations. For example, if I have issues with my leg and want the best fitting running shoe, and a bad recommendation leads to a rupture, that’s a serious problem. There are many lawyers out there looking at this case and thinking about thousands of similar cases where they can learn from this. That’s why this case might be so much bigger than a lot of people think.

00:08:30

Mike: Absolutely. E-commerce has been a rich target. For example, there are accessibility laws in Europe. There are law firms that set up scripts that run on e-commerce websites to look for little violations and just file suit—it’s like a big bank machine for them. These are businesses operating in good faith, but that’s another topic.

00:09:02

Chris: To human nature, we know how it is. Just one thing, Mike, before I hand over to you: the big difference here is, as far as I see, we are potentially not talking about standard inaccurate product data. If the price is inaccurate, that’s one thing. But the real issue here will probably look like getting a recommendation from Gemini that leads to something bad. That is a whole different story, and I don’t know how much Google might be protected in the future looking at this very case.

00:09:49

Mike: We’ve mentioned in the past that Google could face liability, and I think that’s moving from theory closer to practice. To your point, the feed has been this deterministic anchor. That content is owned and provided by the merchants, and shopping ads just use it as Lego blocks. That’s changing. They’re going to be writing titles more and stuff like this. By the way, there are new terms of service as of July, which might have some protective language in there because a lot of it is about AI creatives.

00:10:39

Mike: On Google Shopping, if you look at the European Union, they have a statements of reasons database. It looks exactly at content moderation. Google is the most heavily regulated platform in Europe by far—10 to 20 times more than other e-commerce platforms like Amazon. It’s insane. Everyone has seen disapprovals and so on. But when we’ve talked in past episodes about conversational attributes, that’s why there is this push to anchor to the feed. They could crawl your page, but they don’t want to take the risk because the risk of hallucination is too high.

00:11:23

Mike: It’s not only a bad experience from a consumer satisfaction standpoint—like having a bad experience shopping on Gemini and not wanting to do it again—but it could be a liability from a consumer protection standpoint. So this stuff is going to be critical, for sure.

00:11:41

Chris: We covered this topic a couple of episodes ago. To quote you, Google is applying a strategy based on the idea of having Gemini running on grounded data. You could say they are basically outsourcing all this information architecture required for a good experience to the merchants. This will probably cost them some time-to-market because Google could just crawl the data somewhere as of today, but they don’t want to because the risk-reward ratio is probably not worth it. It makes perfect sense now. Still, losing the case doesn’t help.

00:12:28

Chris: When you told me this, I was like, “This might be big.” I think it’s going to be a massive precedent for Google on the publisher side, but for e-commerce as well. We saw OpenAI having these same problems in the past. They were scraping Google Shopping because it’s a well-structured, deterministic system. We’ll see where this all heads. One last statement I just can’t hold back: I bet when Google got the information that they were being sued, the lawyers of Google were probably like, “In which country? Germany? Oh, damn it.” Because let’s face it, the whole atmosphere with regards to big tech companies is not good in Europe in general, and Germany was probably the worst-case scenario to get in front of a court.

00:13:39

Mike: Publishers are pissed about AI Overviews in the first place, so it makes sense that a publisher brought the suit. Europe likes to use courts and regulation for market protection against big tech. This is a perfect segue to our next topic: how to protect the market against Temu and Shein.

00:13:59

Chris: May I start with something? Dear listeners, this very charming gentleman in front of me has a tendency to undersell himself. I think this is something our company does in general—we are sometimes way bigger and smarter than we think we are.

00:14:27

Mike: Now you have the tendency to oversell me! We need to balance it out.

00:14:45

Chris: I’m not even overselling it. I’ve been 16 years with this firm, and I still have days where I feel proud to be part of this company. Being quoted by Reuters in a big headlining article is a testament to your hard work, Mike. I’m proud of this.

00:15:10

Mike: Thanks, Chris. It means a lot. Austria is known for skiing and mixing beer and lemonade, but not necessarily as the center of the universe for e-commerce, so it’s cool. Five weeks back on this podcast, we talked about how these new tariffs landing in Europe on July 1st are going to break the business models of companies like Temu, Shein, and AliExpress.

00:15:57

Chris: Previously, everything below a €150 basket value had no tariffs on them. That was ruled against, and now we have this de minimis act with a minimum fee.

00:16:21

Mike: Right. The way this works is actually a temporary measure because, beginning next year, they’re going to have a digital infrastructure that powers a true closure of the de minimis exemption. In the meantime, because it takes time to build that infrastructure, they found this other approach. And it’s actually way worse for them. You probably pay anywhere between 8% to 12% on imports, but instead, for packages under €150, they’re applying a €3 fee per declaration item.

00:17:12

Mike: To spell that out, if you order five items in five different categories, you’ll pay €3 for each of those five items. That can end up being way more than 10%, so it’s absolutely crippling.

00:17:33

Chris: This impacts these big hyperscalers the most because their average basket value tends to be significantly lower than €150 given their business model. A few weeks ago, we saw the first indications that the advertising pressure from Temu and Shein was softening because their business models are starting to crumble. Now we have new data.

00:18:03

Mike: Exactly. The new data validates that. There were signs of softness back then. I worked hard on this data, bringing it down to a daily granularity level to look at how present these advertisers are. It’s a proprietary metric showing what percentage of advertisers in a sample of 500 face daily competition from Temu, AliExpress, and so on. We’ve used this metric in the past to break news about Amazon turning off ads last summer and Temu turning off ads in the US in response to tariffs. It shows that Temu’s spend fell off a cliff at the beginning of June.

00:19:26

Mike: They became much more conservative. Shein, on the other hand, wound it down a bit and then catastrophically fell off. I’m pulling up the data here that was published by Reuters. It’s a good feeling. I’ve been a nerd forever. When I was 14 or 15 years old, I got my first email account and set up a feed from Reuters. I would read my Reuters feed every day, so it’s cool to now be published in Reuters.

00:20:52

Mike: To dig into the numbers for a second: Temu was at or above 70% of advertisers facing competition, and after July 1st, they were down to 23%. That’s a massive drop. We’ll observe how that develops over time to see if they start to come back. Shein fell from about a third of advertisers down to just 5%. Bear in mind, they’re not in as many categories as Temu, but within fashion, they were insanely dominant.

00:21:36

Chris: May I ask an obvious question? It has to be the answer to this de minimis act exemption, right? There’s no other reason.

00:21:58

Mike: Oh yeah, for sure. It’s about de minimis. There were some other regional finds they faced that might have affected Shein’s timing, but it’s primarily about de minimis.

00:22:19

Chris: The big question now is, what do I do with this information? I can tell you firsthand that last week I chatted with a very big and dominant fashion retailer in Germany. They took the decision to overspend by 70% because they saw massive market opportunities. They were directly impacted mainly by Shein. This is a big chance now. You probably have an untapped market at way more profitable CPCs. Whenever you have the flexibility in your budget, go for it because you don’t know when they are coming back.

00:23:06

Mike: Yeah, for sure. We’re going to have to see if and how they adapt to this, and they probably will. I have a call this afternoon with a very large German retailer about this topic as well, and I’m curious what we’ll hear. It varies by category. Temu dropping out affects a lot of categories, but it’s complicated because there’s a huge amount of overlap with Amazon, so Amazon is going to soak some of this up. But where Shein drops out, Amazon can’t pick that up as easily.

00:23:45

Mike: In those categories, it’s an even larger opportunity. It really varies case by case per advertiser. So to the listeners, if you’re interested in talking with us about this, we are super open to that because there’s a very high chance this has already had an impact on your account. You should look this up, and I have reporting tips to help you figure out how to find that.

00:24:08

Mike: To wrap up the Reuters article real quick: their ultimate interest in this data is different. For example, if you’re in advertising, there’s a clear reason to watch this, but if you’re watching the stock market, you might wonder what happens to Alphabet’s stock. In this case, Reuters was really interested in Shein’s IPO.

00:24:30

Chris: They’ve moved it and switched locations—it’s been a roller coaster. This hurts them badly because domestic demand in China is crumbling, or at least not growing as needed, which is why international expansion is so important for their required growth rates. I don’t think they can compensate for this massive drop in ads visibility with organic traffic.

00:25:17

Mike: Definitely not. And by the way, if you are in the UK, Australia, or Canada—certainly the UK—these are some of the last few sizable Western markets that are not yet protected from this kind of influx. To our UK listeners, talk to our teams because you might see way more pressure coming from these guys next.

00:25:43

Mike: Before we let the topic go, I did pull one more insight for Reuters that they didn’t print. I looked at what happened to the same metric in Europe last year when they got forced out of the US due to tariffs on de minimis stuff.

00:26:36

Mike: Back then, before the tariffs, they were hitting about a quarter of our advertisers (25%). Then beginning in May, that immediately jumped up to a third—the change happened in April. By June, it was at an all-time high of over half. So their presence basically doubled because the US market closed and the money went where there was profitability. If you’re in the UK right now, you can guess what happens next, and you can thank Brexit for that. To be frank, we will keep monitoring this data because it closely impacts the e-commerce world, and we’ll keep the world posted on what’s going on here.

00:27:49

Chris: Definitely. But I think we’ve chatted long enough. I always enjoy it, Mike. Thanks for the time. And listeners, if you enjoyed it too, this was another episode of Growing Ecommerce, brought to you, as always, by Smarter Ecommerce. Please give us a shout-out on LinkedIn, X, or wherever you are. We also appreciate your comments on YouTube and elsewhere. We’ll see you next time.