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 both 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 roulette 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.:

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.

We can remember it for you wholesale

The second issue is so unmentionable it’s rarely raised in polite company. Again, it’s an area in which we find Google not to be the unique company facing the problem – but uniquely ill-equipped to deal with it.

It’s the question of how much we are prepared to disclose to an anonymous, friendly looking computer system.

Earlier this year, AOL Research quite deliberately and not without some pride, released the search queries of more than half a million users. It wasn’t long before the anonymised queries were matched to their authors. AOL then expressed its horror, and dismissed the staff who it had encouraged to disclose the information (a fine example in its own right of corporate responsibility).

But the cat was out of the bag. The story confirmed that people today choose to disclose information to Google that they wouldn’t tell their husband or wife – and a search engine never forgets this intimate knowledge. They would almost certainly not disclose it if they thought it would be released – or available for casual perusal by cops (which it is).

Similarly, bloggers who blurt away only to be “discovered” are often shocked to learn their writing was visible. Did they think they had some super-selective invisibility cloak?

Technology evangelists of a utopian bent – people who believe this great detritus of disclosure now being collected by information systems such as Google will prove to be of great importance to us – argue that the future is safe. We’ll adapt to the machines, they say. But history tells us that the opposite is true: computer systems that fail to be trusted, fail to be used.

Google’s own experience corroborates this.

Usenet is a medium not too dissimilar to many blogs today, where people wrote informally. The half-life of a Usenet posting was several weeks – it depended on the popularity of the newsgroup – but in most cases archives were not maintained, or easily accessible. And Usenet continued in rude good health long after its demise was predicted. Then, Google took over the creaking archive from Deja, and made searching the entire historical record trivially easy. People simply stopped using it. Usenet died the day Google turned it into a database.

Technical assurances are little use when the trust is lost – or was never there in the first place.

In another example, few countries think a nationally-accessible medical records database is a good idea, and the revolt in the UK against the proposal to create one has led to an opt-out campaign and some (cosmetic) concessions from the government.

People expect records to be computerised – but they don’t want them to be confidential on a need-to-know basis – and not available to any browsing employer, insurance company, bureaucrat, or cop, which they effectively would be given the current state of security.

The saga briefly resurrected HR.4731, Rep Markey’s bill to “Eliminate Warehousing of Consumer Internet Data”. Then Markey went back to lobbying on behalf of Google for “net neutrality” – and the bill remained stalled.

Google’s response to this issue has been a public relations offensive and some muscular lobbying – to prevent more bills like Markey’s.

“We are reasonably satisfied…that this sort of thing would not happen at Google, although you can never say never,” was Google CEO Eric Schmidt’s response to the AOL scandal.

Obsessively secretive, and determined to hoard every piece of data it mines from us, Google appears ill-equipped to restore confidence in the relationship between surfers and the systems we use.

The company initially fended off attention by pointing to its inate goodness. These days it points to its own cleverness. Neither virtue nor engineering talent can solve either problem, however.

Regulation looms in both areas.