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Google chief executive Eric Schmidt walked into the lion’s den yesterday, speaking at the annual Newspaper Association of America’s meeting in San Diego to assure publishers of struggling newspapers across the country that the search giant is their friend.

But these are not good times for newspapers and other periodical publishers, such as the New York Times and eWeek. The recession is causing advertising dollars to plummet and falling circulation numbers are making traditional publications less attractive to marketers. Online advertising was supposed to replace print display ad dollars, but online ads are dependent upon traffic, and Google is the largest supplier of traffic to newspaper and magazine Web sites.

The issue is fair use of content. Google indexes publishers’ Web site content, making it easier for Web users to find the information they’re looking for. Some would argue that Google has become the world’s largest information publisher, even though it generates very little content of its own.

The Associated Press this week announced that it would be cracking down on illegal use of its content by Web sites, and singled out Google as a target. Other newspapers have groused about Google unfairly using pieces of its content to entice Web users, but few have challenged Google in court for fear of losing and setting a legal precedent.

In Google’s defense, Schmidt argued that the search engine sends huge amounts of traffic to newspaper and magazine Web sites, which publishers monetize through advertising. Publishers counter that Google capitalizes on that traffic first, doesn’t have to pay for the content that it’s using, and they lose traffic because Google provides users with enough information that they often don’t have to go to a newspaper Web site.

“I was surprised that the publishers really let Google off the hook,” said Jim Chisholm, a consultant with iMedia Advisory, in an interview with the New York Times. “While Google News generates a lot of audience, ultimately, the question is going to be who is going to make the money out of that: Google or the publishers.”

While newspaper and magazine publishers wrestle with fair use of content and who owns Web traffic, newspapers are likely to face another Google threat: localization. Google has begun presenting search results based on the users location, which means Main Street businesses and publishers are now a target for Google Adsense programs.

As Channel Insider reported, Google has an entire local marketing channel strategy in the background. While Google is building out its reseller channel for its Google Apps software-as-a-service (SAAS) suite, it plans to tap local resellers and solution providers to enable Main Street businesses to leverage its local search marketing services.

>> Click here to read “Google’s Grand Channel Designs”

While Google also plans to tap local newspapers and marketing companies for their local Adsense channel, the search engine believes VARs and local Web developers present the best opportunity since they’re already advising small businesses on Internet and technology uses.