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."
CEO Eric Schmidt: A court date in the offing?
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.
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.
Kent Walker, VP and General Counsel
(Credit: Google)"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.
(Credit:
CNET News)
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.
MIT Prof. Richard Schmalensee
(Credit: MIT Sloan School of Management)
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?
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