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"Overstock.com Released From Google Penalty Box"

That’s the headline coming out of Salt Lake City this morning, in a two-sentence press release from Overstock.com. CNNMoney provides some important context in its coverage of the news:

What’s the penalty box? It’s the time-out corner where Google sends naughty websites that have tried to game its search algorithms.

The vast majority of Google’s search results are automated. But the company can — and often does — take manual action to bury sites that are running afoul of its rules. Google’s powerful webspam team serves as its search referees. Incur their wrath, and online oblivion follows.”

While we’re glad “the O” is back in Google’s good graces, the incident is a disturbing reminder of what can happen to companies when Google and “its search referees” decide to tighten their grip. If a site is deemed to be in violation of Google’s rules – even if the site has, in fact, done nothing wrong – there’s often little recourse.

Google is judge and jury.

And because of its dominance in search, Google has the ability to render a company invisible on the web by lowering its ranking in search results. Websites like Sourcetool.com and FairSearch.org member Foundem learned that lesson the hard way. Many legitimate sites damaged by the company’s recent algorithm update are experiencing it right now. (And Google’s heavy-handed tactics aren’t just limited to search – check out Skyhook’s complaint against the company on the mobile side.)

It’s worth noting that Overstock.com competes with Google’s own shopping search product.

If Google’s penalty could bury Overstock.com in search results (causing a 5% drop in revenue) – even temporarily – what could it do to lesser-known competitors?

Bottom line: It’s clear Google has the ability to use its monopoly power in search to punish competitors. It’s the responsibility of regulators, the press and consumer advocates to make sure they don’t abuse it.