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has threatened to remove its search function in Australia and Facebook warned it would pull news content if a new law requiring the tech giants to compensate media organisations is passed.
The proposed law, introduced to the Australian Parliament in December, will force Facebook and Google to negotiate fees with news companies whose stories appear on their platforms.
The world-first code states that if a negotiation breaks down then an independent umpire will step in and decide the fee based on a 'final offer' method, which chooses one side's position as the resolution.
Mel Silva, the Managing Director of Google Australia and New Zealand, said the company may be forced to pull its search function out of Australia if the code goes ahead
Google and Facebook are fighting the code, claiming it is 'unworkable' and poses an existential threat to their business models.
Australia's battle with Big Tech is being keenly watched by governments across the world, not least in London, Washington DC and Brussels, where concerns have been raised over the 'advertising duopoly' of Google and Facebook.
Australian regulators found that for every $100 spent on digital advertising, $53 goes to Google, $28 to Facebook and only $19 goes to others.
Google turns over $4.9billion in Australia, with $4.3billion of that from advertising - while many Australian publishers are struggling to make money.
The company only paid $59million in Australian corporate tax last year.
In a hostile public hearing before senators on Friday, Mel Silva, the Managing Director of Google Australia and New Zealand, said the company may be forced to pull its search function out of Australia if the code goes ahead.
'The principle of unrestricted linking between web sites is fundamental to search and, coupled with the unmanageable financial and operational risk, if this version of the code were to become law, it would give us no real choice but to stop making Google Search available in Australia,' she said.
'That would be a bad outcome for us but also for the Australian people, media diversity and the small businesses who use our products every day.'
Prime Minister Scott Morrison hit back, saying Google will have to respect the law.
'Australia makes our rules for buy adsense account -VCCReseller.Com things you can do in Australia.
That's done in our parliament. It's done by our government. And that's how things work here in Australia. And people who want to work with that, in Australia, you're very welcome - but we don't respond to threats,' he told reporters on Friday afternoon.
Facebook vice-president of public policy for Asia-Pacific, Simon Milner appears via video link before a senate inquiry
Ms Silva said forcing Google to pay for snippets of news to appear on Google Search poses an 'untenable' risk to the business.
She said the company has been unable to work out how much it would be forced to shell out to media companies.
Ms Silva also said news searches only make up 1.25 per cent of Google searches and that paying news organisations would be unfair to other companies that appear on Google Search.
Facebook Public Policy Asia-Pacific Vice President Simon Milner said the company may have to stop showing news content to Australian users if the law is passed.
'I can reassure the committee that this does not mean that Facebook would no longer be available... but we have explained that that is something we have to seriously consider giving the nature of this unworkable code,' he said.
Mr Milner said the code gives publishers 'complete control' of negotiations and encourages them to make unreasonable claims.
He also said publishers freely choose to put their content on Facebook and have generated an estimated $394million from referral traffic from January to November last year.
Mr Milner claimed news content generates 'almost no commercial value for Facebook' and represents only five per cent of users' newsfeeds.
But he said the potential cost to Facebook posed by the code was 'unknowable and uncapped'.
In questioning, Independent Senator Rex Patrick compared Google to the Chinese government which has blocked trade with Australia after Mr Morrison called for an inquiry in the origins of coronavirus.
He said: 'The Chinese response was to threaten our market, to threaten our trade...
We've got a similar situation here where our government steps out first and the very large organisation that is Google threatens to leave our market, do you think that's proper conduct for a large international corporation?'
Ms Silva replied: 'It is the only rational choice if this law were to pass for us.'
Senator Patrick said the code was going to go world-wide.
'You're going to pull out of every market are you? Or is this about stopping the precedent?'
Ms Silva scoffed and said the code posed an 'untenable risk to our Australian operations.'
Greens Senator Sarah Hanson-Young accused Google of threatening Australia by suggesting it would leave the market.
'Why come here and threaten the Australian people with cutting off their search results,' she asked.
Ms Silva replied: 'We are outlining the worst case scenario, we don't want that to happen.'
The director admitted that Google is worried about the precedent the code will set, amid fears other countries - who have been struggling to regulate Big Tech - could adopt a similar model.
She said Google has never shared full news articles and that it helps publishers by 'providing them free traffic every day.'
Liberal Senator Andrew Bragg accused Google of 'blackmailing Australian consumers and policymakers'.
Last week Google banned Australian news content from appearing in its search as part of what it called an 'experiment'.
A representative for Nine Entertainment Company, one of Australia's largest media companies, said this showed Google was so powerful it could 'hold Australians to ransom'.
'They have shown they are not afraid to bully and intimidate and make changes to their service,' he said.
A representative for Guardian Australia said Google's power was 'dangerous' and the code was needed to redress a market failure where Google and Facebook receive 81 per cent of digital advertising revenue.
The organisations, together with News Corp, rejected Google and Facebook's claims their operations were under threat by the code.
They said the companies have made them offers for their content but they are too low to be considered.
Every month 19million Australians use Google and 17million use Facebook.
Chris Cooper, executive director of Reset Australia, a group that aims to counter digital threats to democracy, said Google's threats to leave the market proved that regulation was needed.
'Today's egregious threats show Google has the body of behemoth, but the brain of brat,' he said.
'When a private corporation tries to use its monopoly power to threaten and bully a sovereign nation, it's a surefire sign that regulation is long overdue.'