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Google And Microsoft Spar Over Yahoo Ad Deal

The two tech giants trade statements ahead of today's Congressional hearing on the Google's advertising pact with Yahoo.

Thomas Claburn

July 15, 2008

7 Min Read

The U.S. House of Representatives Judiciary Committee on Tuesday plans to review Google's advertising pact with Yahoo. Google remains bullish on the deal but plenty of people would like to see it derailed.

In June, Google and Yahoo announced a non-exclusive advertising arrangement to allow Google to run ads alongside Yahoo's search results.

Omid Kordestani, Google SVP of global sales and business development, said in blog post at the time that the partnership promoted completion. "The truth is, this kind of arrangement is commonplace in many industries, and it doesn't foreclose robust competition," he said. "Toyota sells its hybrid technology to General Motors, even though they are the number one and number two car manufacturers globally."

The Department of Justice is also reviewing the agreement between the Google and Yahoo, an investigation that Google has characterized as a routine.

Antitrust officials at the U.S. Department of Justice and in several states have begun issuing subpoenas for information as part of a review of the proposed search-advertising partnership between Yahoo Inc. and Google Inc., according to a person familiar with the investigations.

The MarketWatch Web site reported this morning that antitrust officials at the U.S. Department of Justice and in several states "have begun issuing subpoenas" for information as part of a review of the proposed deal between Yahoo and Google.

Google's position hasn't changed since the deal was announced. What has changed is the company's willingness to question Microsoft's motives and role in the controversy surrounding the deal.

In prepared remarks to be presented on Tuesday, David Drummond, Google's chief legal officer and SVP of corporate development, insists that the deal is good for everyone. "My message to you today is simple: While there are other threats to the continued competitiveness of the Internet, the online advertising marketplace is competitive, robust and dynamic," his statement says.

Among those other threats is Microsoft.

"Microsoft continues to maintain dominant positions in desktop computing that could be leveraged to harm competition online," Drummond's statement says. "For example, Microsoft maintains more than 90% share in operating systems, more than 95% share in productivity applications through Windows Office, and approximately 80% share of the browser market through its Internet Explorer browser that comes bundled with its other software."

Drummond's remarks point to Microsoft's long history of abusing and extending its market position through anti-competitive tactics, its desire to control technical standards or to deny interoperability, its licensing abuses, and resistance to data portability.

"While it's easy to imagine using a different search engine -- others are just one click away, and millions of people use different search engines every day -- Microsoft has locked consumers into its PC-based software monopolies," Drummond's statement says. "For years, Microsoft has been working to leverage that lock-in onto the freer and more open world of the Internet."

Microsoft, meanwhile, has much the same to say about Google.

In prepared remarks to be presented on Tuesday, Brad Smith, SVP and general counsel at Microsoft, warns that Google has become the dominant gateway to the Internet. "Google and one of its chief rivals, Yahoo, have teamed up in a deal that affects approximately 90 percent of all search advertisements sold in this country," Smith's statement says. "If permitted to proceed, we believe the Google/Yahoo agreement would effectively create a monopoly in search advertising -- to the extent one does not already exist -- and further reduce competition."

Smith goes on to attack the analogy both Kordestani and Drummond cite to help explain the Google-Yahoo deal, a scenario in which Toyota sells technology to GM.

"... Google has represented that this kind of arrangement is commonplace in many industries and has compared the deal to Toyota selling its hybrid engine technology to rival General Motors," Smith's statement says. "This analogy simply does not hold water. Google is not selling Yahoo a part (analogous to a hybrid engine) that Yahoo needs to build a product (a completed car). Google is replacing Yahoo as the seller of the product itself -- search advertising. If anything, it is more like Toyota selling GM the whole car and the two companies agreeing to sell Toyotas in GM showrooms in instances where Toyotas can fetch a higher price! The reality is that GM and Toyota could no more enter into such an agreement than Google and Yahoo. This is anything but a standard supply agreement."

Smith's remarks also suggest that approval of the deal would further embolden Google, with access to even more consumer data, to push the privacy envelope.

At the conclusion of his planned testimony, Smith acknowledges "that the presence of Microsoft at this hearing must strike some as ironic, given our own antitrust history." Nonetheless, he says Microsoft believes the deal raises serious concerns and may well be illegal under anti-trust law.

Others share Smith's doubts.

Benjamin Edelman, assistant professor at the Harvard Business School and a noted technical researcher, prepared testimony about the Google-Yahoo deal. But when the hearing was rescheduled, he could not attend. Though he won't be appearing at the hearing, he published his planned remarks on his Web site.

Edelman believes the deal will increase costs to advertisers, leave consumers without recourse if they disagree with Google's content policies, leave publishers with no viable alternative to Google should Google decide to pay less, and impose anti-competitive API restrictions.

Edelman states: "Once Google controls a substantial share of inventory at Yahoo, advertisers' search advertising options will be severely limited: Save for Google, advertisers will have few viable choices for search advertising. Google will then obtain substantial power to increase prices: If Google increases prices, advertisers will be unable to shift to a competing provider to obtain a comparable quantity of traffic. Shifts to other kinds of advertising -- be they banner ads, TV, or print -- are similarly unavailing; for typical online advertisers, these are poor substitutes."

In an e-mailed statement, Mike Leo, president and CEO of Operative and the co-founder of aQuantive -- the advertising company bought by Microsoft last year -- also decried the deal. "Regardless of the face Google and Yahoo try to paint on this partnership, I doubt this deal will pass regulatory approval," he said. "Search advertising is one of the largest segments of online advertising, and our customers, who include some of the world's largest digital publishers, are extremely paranoid that putting all of their eggs in one basket will limit their options in servicing advertising customers.

"With this deal," he said, "Google is trying to be the master of all trades. The innovation curve in our industry is extremely steep, and from our view, it should be. To the degree that this deal stifles innovation, it just doesn't make business sense for anyone but Google or Yahoo."

Network engineer Richard Bennett said in an e-mail that he believes the deal will grant Google a monopoly and that it will reduce Yahoo's incentive to innovate. "If [Yahoo] can collect checks from Google for Google ads simply for putting the Yahoo name on Google search, why bother with all the headaches in maintaining a network of server farms and a staff of programmers to support a search engine of their own?" he said, "The deal may also be intended to discourage Microsoft from pursuing Yahoo as a takeover target, but that's not clear how effective it will be."

But Google is not without supporters. Drummond cites several individuals who have expressed public approval of the plan, among them: Maurice Levy, chairman and CEO of Publicis Groupe, Geoff Atkinson, VP of tactical marketing at Overstock.com, David Kenny, CEO of Digitas Inc., and Matt Greitzer, VP of search marketing at Avenue A/Razorfish.

Avenue A/Razorfish was acquired by Microsoft as part of its purchase of aQuantive. And Drummond makes mention of this in his remarks. "When Microsoft's own ad firm -- the group within Microsoft that knows online advertising best -- confirms the benefits of the agreement for advertisers, we should rest our case right there," his statement says.

About the Author(s)

Thomas Claburn

Editor at Large, Enterprise Mobility

Thomas Claburn has been writing about business and technology since 1996, for publications such as New Architect, PC Computing, InformationWeek, Salon, Wired, and Ziff Davis Smart Business. Before that, he worked in film and television, having earned a not particularly useful master's degree in film production. He wrote the original treatment for 3DO's Killing Time, a short story that appeared in On Spec, and the screenplay for an independent film called The Hanged Man, which he would later direct. He's the author of a science fiction novel, Reflecting Fires, and a sadly neglected blog, Lot 49. His iPhone game, Blocfall, is available through the iTunes App Store. His wife is a talented jazz singer; he does not sing, which is for the best.

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