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Google (NASDAQ:GOOG) faces serious legal problems right now on two fronts, the government threats over its new privacy policy and the Apple (NASDAQ:AAPL) lawsuits involving Android.

How seriously should shareholders take these problems?

The privacy issue is mainly one of botched messaging, but government officials are still having a field day with it. FTC chair Jon Leibowitz called it "a brutal choice." U.S. House and state attorneys general have both sent nastygrams. EU data protection agencies have stated flatly that Google is breaking the law.

When I addressed this in January, I noted that Google's messaging had fumbled what's really a pretty good privacy policy. It is much better, on balance, to know what is happening to your clicks across a large number of sites than to have to guess what's going on at every specific site.

The fumble came in the difference between "we're using it" and "what we're using it for." Privacy "advocates" imagine a Philip K. Dick dystopia in which Google knows what you're thinking and uses those secrets against you. In fact all the company is trying to do is use software and algorithms to turn advertising into a service, which has been the holy grail of publishing since it started.

If I can put relevant ads in front of you, ads that speak to what you might want to buy when you might want to buy it, those ads become more valuable to both sides of the transaction. It's just what Seeking Alpha does when they collect readers who care about stocks and then place brokerage ads next to the content. Or what McDonald's does when it advertises coffee in the morning and sandwiches at lunch.

It's in recognition of this messaging problem that Google has hired Susan Molinari as its chief lobbyist. She can do TV. She can go on "Morning Joe" and explain the difference between what Google is really doing and what its opponents believe it to be doing. In clear, simple English. Since Google touches so many people it has to play macro-politics now, not just the micro-politics of seeking tax breaks or regulatory tweaks.

The Apple (AAPL) problem is more serious. Details aside the basics here are simple. Courts and regulators are steadily tossing aside Google's efforts to use existing standards against Apple's phones, and taking seriously Apple's efforts to wipe usability features from Android kit. Features like how you open a "locked" phone that doesn't have a flip-top, or how you deal with photos and other content.

Apple's patents in these areas, which Microsoft (NASDAQ:MSFT) has already worked around with its Metro interface (and existing patent portfolio), represent a clear threat to Google's designers. And the potential for big awards against Google's use of similar features is real.

Even if Google manages to invent-around these patents, they're still asking consumers to learn two different ways to do nearly everything they might do with a smartphone. This raises the marketing hurdle, and keeps OEMs from offering anything like an Apple look-and-feel in their ads. It's not just a legal challenge, but a marketing and design challenge, that is going to cost Google billions of dollars to meet down the road. And billions more each time Apple makes a change, then gets to the patent office with it first.

This danger is far more real than the privacy issue. It needs to be addressed by investing in Motorola, in finding other ways to do what Apple does, and going to the patent office with those methods before rolling them out to the public. And this issue is going to keep Google's hardware margins compressed for some time.

Can they be dealt with? Yes. But it's going to cost money. And it could mean slower growth, a lower PE, and smaller gains for Google going forward than would otherwise be the case.

Source: How Serious Is Google's Legal Jeopardy?