Coop's Corner

Go big or go small.

That's the question facing lawyers from the U.S. Department of Justice investigating Google. Sources who have provided testimony to the government say a departmental debate revolves around whether antitrust regulators should challenge Google's proposed revenue-sharing deal with Yahoo, or go for the whole enchilada--and haul Google into court on broader charges related to its dominance in search advertising.

The latter tack would be the more ambitious--and fraught--choice. Ten years ago, the government prosecuted Microsoft for alleged antitrust violations, but ultimately settled the case in return for the company's agreement to make minor behavioral modifications.

"My sense is that they're considering something larger," said one source who met with DOJ lawyers. "They're finding that with the specifics of the Yahoo deal, it's difficult to create a set of proofs (around the case), such would satisfy a judge."

The source, who asked to remain unidentified, said investigators feel they have evidence to proceed, based upon received complaints from advertising executives regarding Google's influence.

"It's also control, from both an advertising and societal view," the source added. "There is growing concern about what happens if Google becomes the predominant gateway to information, if information passes through a single enterprise, characterized by a series of commercial algorithms that do what they do--and those algorithms are not subjected to outside review."

That would come as a surprise to Google. Until now, the company says its conversations with government lawyers have focused strictly on the Yahoo ad deal. Yahoo expects that its 10-year Google ad search pact, signed in June, will raise revenue by $800 million in its first year and provide an extra $250 million to $450 million in incremental operating cash flow. The companies voluntarily agreed to postpone closing the deal until October to let the government complete its regulatory review.

So far, the sources say the government has not decided how--or whether--to proceed. A spokeswoman for the Justice Department declined to comment.

A Google spokesman declined to comment on the DOJ's possible next moves, but repeated the company's position that the Yahoo deal did not violate antitrust law.

Another source debriefed by antitrust lawyers said that a key question for the government is whether search should be considered a market unto itself, or a subset of the larger digital advertising space.

"They are definitely having a struggle around that issue," said the source, who similarly asked to remain unidentified. "If it is a subset of a market, then even if the search market would become unattractive, you could substitute another form of advertising. But if it is distinct, then you have a completely different issue.

"I've been clear in what I've said to them. My view is that anything that can be defined as a query is different from the rest of the advertising market--it's different from TV or direct mail, etc. There's something specific about someone typing a query in the search bar. The key issue is whether this partnership would allow Google to exercise undue influence over the search market. Would this further tip the balance toward creating monopolistic control over the search market?"

For its part, Congress is letting the DOJ carry the ball by itself. A staff member from the House Judiciary Committee said with just a few weeks left in this session, it's unlikely the committee will hold any further hearings on the matter.

Meanwhile, Sen. Arlen Specter (R-Pa.), minority leader on the Senate Judiciary Committee, similarly adopted a wait-and-see approach to the investigation.

"There is no doubt about the significant impact on the economy by an agreement between Google and Yahoo, the dominant companies in Internet advertising," he said. "This issue is being reviewed by both the Department of Justice and the Senate Judiciary Committee and it may be that the courts will have to decide whether there is a violation of antitrust laws."

Senator Orrin Hatch (R-Utah), the ranking member of the Senate's antitrust committee, said the question of whether the DOJ should intervene was a "moot point because Yahoo and Google submitted their proposal to the Department of Justice. I look forward, along with my colleagues on the Senate Antitrust Committee, to hearing the Justice Department's conclusions."

Stephanie Condon contributed to this story.

While trustbusters in the U.S. government debate whether to pursue an antitrust investigation, Google continues to pad its lead in domestic search.

Google accounted for just more than 71 percent of all U.S. searches during the four weeks ending August 28, according to Hitwise. By comparison, the next biggest companies in the sector included Yahoo with an 18.2 percent share, MSN at 5.3 percent and Ask with 3.5 percent.

It was obviously happenstance, but Hitwise issued its report just as dozens of tech start-ups, each one of them aching to emerge as the next Google, congregated at separate launch events. Maybe there is a diamond in the rough waiting to be discovered--or in this case making its elevator pitch in front of the crowds either at the Demo or TechCrunch forums.

I wonder what the attendees at both venues think about a possible government move against Google. After all, the company is only 10 years old, and it's already a candidate for getting hauled into court. If Uncle Sam actually sues--that's not to say it will win its case--antitrust arguments are hard to prove. What's more, there's a difference between the court pyrotechnics--the big show put on for the judge and jury--and the more nuanced complexities involved in sifting through thousands of pages of evidence. Oddly enough, we're nearing the exact anniversary of opening arguments in the Microsoft antitrust case, which began on October 19, 1998, in Washington's E. Barrett Prettyman Federal Courthouse.

All that fall and into the spring, I spent months sitting in the courthouse watching that drama unfold. In the end, however, I'm not really sure what got accomplished. Yes, the lawyers on both sides billed their clients a fortune. And it was fun watching David Boies turn sundry Microsoft witnesses into stuttering idiots. I still have my notebooks in which I kept tabs each time Judge Thomas Penfield Jackson nodded off like an amiable manatee.

But it was an unsatisfying denouement for all concerned. The government convinced the court to find Microsoft a predatory monopolist, but most of the decision got neutered by an appellate court. Microsoft claimed throughout that it never violated the law, but then agreed to rein in its behavior under court supervision. You can argue that Microsoft has never been the same since, though there obviously are myriad other reasons why it failed to dominate this decade the same way it dominated the 1990s.

The government has an obligation to step in to keep the playing field even. But if the Justice Department is mobilizing to battle Google, it better make sure that it's got a airtight case. Otherwise, it's going to be another fruitless exercise, one that also will leave disillusioned entrepreneurs wondering whether this is the inevitable reward for building a better mousetrap.

Barring some unlikely bolt of inspiration at Microsoft, Google should continue to pad its already formidable lead in search advertising. And now that Google CEO Eric Schmidt says the company intends to turn its attention to display ads, who of sane mind would bet against its chances?

We're still quite a way from the point where regulators conclude that Google is too big for its britches, but just for fun, I typed the question, "Is Google a monopoly?" into my search engine. (Wanna guess which search engine I use?) My query brought back 461,000 responses. Clearly, people have debated this question for quite some time, even as the company continues to grow ever larger.

But Google obviously doesn't agree that size and market dominance pose even remote antitrust parallels with IBM in the 1960s or Microsoft in the 1990s. The chief reason: the markets in question are very different. Earlier Friday, Google's general counsel, Kent Walker, and Dana Wagner, the U.S. competition counsel, got on the phone to explain why.

"The nature of the Internet is just a fundamentally different world from the sale of packaged software or the bundling of software with OEMs (original equipment manufacturers)," said Walker, "The standard line we have is that competition is just one click away,"

Walker offered what he called both a "structural" answer as well as the "behavioral" answer.

I agreed with much of his argument. The parallels with Microsoft are off. In Microsoft's case, the company got into trouble because it used its desktop monopoly to force companies to adopt Internet Explorer. Still, is there not a point --call it 70 percent market share or 90 percent market share, or somewhere in between--where Google opens itself to the title of monopolist, even if it got there by virtue of building a better mousetrap? Wagner took a crack at that question, countering that the magic number fascination "was a little bit of a red herring."

Google does acknowledge its role as a "disruptive company," but Walker suggests that the real battle is between desktop-based computing, including operating systems and productivity applications, and cloud-based computing. To the degree the latter trend emerges, he said, that spells trouble for Microsoft. "In a sense that's the real market, if you will," he said. "It's how do people use technology to do what they need to do. That can be search to find things more broadly on the Internet. But more broadly, it's to use the Internet, to use the network to share information to create new goods, tools and services."

But will advertisers see their rates go up as a result of the Yahoo-Google search deal? There have been reports suggesting as much. And of course, one of the filters regulators use for antitrust review is to what extent it hurts customers, or, in this case, advertisers. Not surprisingly, Wagner argues that advertisers' costs will head in the opposite direction.

Since antitrust decisions get decided in Washington, it's not surprising, then, to learn that lobbyists for Google and its rivals are shadowing each other in the corridors of power. Google's Walker suggests that most of the noise around competition issues is being generated by competitors like Microsoft--but also the cable and phone companies who don't like Google's position regarding Net neutrality.

I did a double take recently after listening to Microsoft CFO Chris Liddell acknowledge that his company was ready to lose even more money in online services in the near term, if that's what it takes to catch Google. During the company's earnings call last week, Liddell indicated that Microsoft is pouring hundreds of millions of dollars into its online advertising business, an investment he allowed would be "a drag" on the rest of the company.

Outside of the occasional fit of Monkeyboy inspiration, Microsoft's managers are a sober bunch. They don't decide things haphazardly and they don't rush in reaction to current events. But their willingness to dig deep into Microsoft's (enviably deep) pockets in pursuit of Google was a remarkably telling comment. Much like WordPerfect and Borland and Novell, which at one time sought unsuccessfully to play catch-up to Microsoft, the shoe's now on the other foot-- and it's irritating the hell out of Microsoft.

Just how far ahead of everyone is Google? Consider the following, courtesy of Efficient Frontier Insights: Google now enjoys more than a 77 percent share of the search ad market.

Advertisers are putting all of their new search dollars into Google, and pulling money out of Yahoo Search and Microsoft Live Search.

That kind of information was seized upon by Microsoft's top lawyer, Brad Smith, during his recent testimony before Congress. Testifying on the proposed search advertising between Google and Yahoo, he said it was possibly "illegal under the antitrust laws." Monopoly anyone? Of course, there's nothing wrong with being a monopoly, per se. It all depends upon context and behavior. But considering Google's dominance and Microsoft's inability to significantly close the gap in the search business, I'm sure rivals would be thrilled if Uncle Sam finally declared Google a monopoly. That may be wishful thinking.

For an answer, I sought out the opinion of a renowned antitrust expert, Richard Schmalensee, of MIT's Sloan School of Management.

I chose Schmalensee because of his unique vantage point. During Microsoft's antitrust trial a decade ago, Schmalensee testified as an expert witness for the defense, spending hours on the stand sparring with lead government attorney David Boies about the precise definition of a monopolist.

"There are the standard numbers people throw around but I think most people would say you have to decide whether search ad is a market for antitrust proposes. If it is, that's a high enough share. But you also have to look at issues of entry and issues of fragility. How stable is that share and how intense is that market," Schmalensee said.

"There's no magic threshold but with high share levels, you get to be concerned," he continued. "On the other hand, monopolists are allowed to compete. The question is whether the arrangement would stifle competition."

There's the proverbial $64,000 question, isn't it?

"And next time, don't forget to eat your vegetables--or else!"

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The Academy Awards show is over and done with, but European Competition Commissioner Neelie Kroes is making a strong bid to win an Oscar as "Best Supporting Scold."

The EU's regulatory czar has socked Microsoft with an 899 million euro ($1.35 billion) fine for failing to comply with a March 2004 antitrust ruling and for charging "unreasonable" prices to rivals seeking documentation for workgroup servers. In the statement from the European Union, Kroes singled out Microsoft as the first company in the last half-century of EU regulation fined for failing to comply with an antitrust mandate:

"I hope that today's Decision closes a dark chapter in Microsoft's record of non-compliance with the Commission's March 2004 Decision and that the principles confirmed by the Court of First Instance ruling of September 2007 will govern Microsoft's future conduct."

Steve Ballmer's not looking to reprise the role of industry bully. Remember the blowback after his "the hell with Janet Reno" yowl in the late 1990s? He will write the check and order his legions to move on.

There's not enough upside to fight Kroes over what, for Redmond at least, is essentially chump change. Besides, he's anxious to gain EU goodwill for Microsoft's pledge last week to open up its APIs and protocols. The idea was to foster the impression that Microsoft was trying to be more open and not impede rivals seeking to make their products more compatible.

And, of course, to get Kroes off its back.

The EU is within its rights to wield a big stick. Whether this really was necessary is another story. While U.S. regulators took a powder when the Bush team took over the Justice Department, European trustbusters remained aggressive and actually forced changes in Microsoft's behavior (or at least got Redmond's braintrust to sign off on paper).

But pouring salt on the wound--and that's what it is--doesn't change anything on the ground. Microsoft's already paid big fines, and so now it will pay another one. Kroes made her point for the cameras and guaranteed a boatload of press attention over the next 24 hours.