Google Defends Itself Against Antitrust Regulation

Google's "Competition and Openness" world tour came to San Francisco on Wednesday, bringing the message that the company is not an anti-competitive monopoly.

For several months, Google has been explaining to regulators and journalists that, contrary to the predatory image painted by competitors, the company is fragile. It has made its case in Washington, D.C., New York, and Brussels, hoping to dissuade the U.S. Department of Justice and European regulators from bringing an antitrust case against the company.

After the lax regulatory atmosphere of the Bush administration, the Obama administration appears to be increasing its scrutiny of corporate behavior. Christine Varney, the new head of the Justice Department's antitrust division, said in a recent speech that the department would be taking a more aggressive approach with companies that use their dominant position to stifle competition. In a speech last year, before her appointment to the Justice Department, she said that Google had acquired a monopoly in online advertising.

Google also faces Justice Department scrutiny over its proposed settlement with book publishers and authors, Federal Trade Commission scrutiny over board members who also serve on Apple's board, and a Justice Department inquiry into the possibility that Silicon Valley companies such as Google and Apple colluded to avoid poaching employees from one another. Last year, Google abandoned a planned advertising deal with Yahoo to avoid an antitrust showdown with the Justice Department.

During the Google presentation, Adam Kovacevich, the company's senior manager of global communications and public affairs, acknowledged that the company's success has brought increased scrutiny. But he insisted that Yahoo was in a similar position a decade ago, citing a 1998 Fortune article that declared, "Yahoo has won the search engine wars."

"We also know our position is fragile," he said.

In keeping with Google's emphasis on data and metrics, Google legal counsel Dana Wagner, who coincidentally used to work in the antitrust division of the Justice Department, offered an anecdote in support of this claim.

In January, he recounted, a programming error led Google to place malware warnings on every Web site shown in search results. "During the short time this was going on, our traffic went down significantly," he said. "Yahoo has confirmed that their traffic went up significantly."

In its presentation, Google makes the significance of this event clear: "Competition is only one click away." Wharton business school professor Eric Clemons characterizes Google's outreach campaign as a battle for public opinion. "I consider antitrust action likely at this point," he said in an e-mail. "More to the point, so does Google. They have, not surprisingly, figured out the points that will be key and are already starting to address them."

Many of the points Google is making, however, aren't germane to antitrust issues. Google engineer Brian Fitzpatrick, for example, walked the assembled journalists through Google's open source efforts and its commitment to data portability.

"We think that open source is a way of enhancing competition and letting more people compete on a level playing field," he said.

And without a doubt, Google is generous in many respects, in terms of the code it makes available, the free services it provides to consumers, and its commitment to responsible environmental business practices.

Such overall benevolence reflects Google's awareness that user trust is critical, but it has little to do with whether or not the company dominates online search advertising.

The key issue for Google and the Justice Department is defining the relevant market. Google claims that it's a minor player in the overall advertising ecosystem, with only 3% of general advertising revenue and 30% of online advertising revenue. The Justice Department, if it does bring an antitrust case, is likely to argue that the relevant market is the subset of online advertising known as online search advertising.

"If the DOJ is trying to make an affirmative case, they're going to try to make a narrow market definition," Wagner acknowledged.

"Google has gone right to the heart of the matter, which is if the relevant market is all of advertising, their position is inconsequential," Clemons said in a phone interview. "If the relevant market is Internet search, then there is a very real possibility in their minds that they can lose an antitrust lawsuit. So they're doing a massive disinformation campaign."

Clemons dismissed Google's contention that the relevant market is all advertising. "Have you ever tried clicking on a TV ad to get to a hotel reservation Web site?" he asked. His contention is that search advertising is not interchangeable with other forms of advertising. "Microsoft originally tried to argue that it had less than 3% of the world software market, and ultimately was found to have closer to 95% of the relevant market, the market for Intel operating systems," Clemons said in his e-mail, referring to the antitrust case that Microsoft settled in 2001.

There's also the issue of harm, something Google isn't addressing at this point.

"Almost everyone I've spoken to believes that Google is free and offered without charge," said Clemons. "Users don't know that they're paying for search."

Clemons characterizes search as a tax on trademark owners, noting that trademark owners have to buy their trademarks back by bidding on them as keywords to avoid the lower profitability of business gained through aggregators.

"Hotel aggregators charge 15%," he explained. "But consumers don't know that. So if a consumer tries to [search for] 'Holiday Inn in Arlington,' ends up at Arlingtonhotels.com, and books the Holiday Inn anyway, the consumer's argument is no harm, no foul, the search was free. Except that if enough people do that, Marriott, Holiday Inn, they have to raise their prices by 15%. So going through more extensive distribution has a huge cost for commerce. Even bidding for your own trademark has a huge cost for commerce."

That may be, but such a position presumes that search engines should grant trademark holders privileges not necessarily guaranteed by trademark law. Trademark holders may want the efficiency and profitability of a direct relationship with consumers. Whether search engines are obligated to facilitate that desire at the expense of aggregators and middlemen is likely to be an area of ongoing contention.

Google's story is that it could fail at anytime. "We're very successful at doing search," said Wagner. "But we really do have to win users back on a regular basis. We don’t know where the next big threat to us is going to come from."

Chances are it's coming from Washington, in the form of an antitrust lawsuit.

"My expectation is Google will do a really very effective public relations campaign," said Clemons. "The only thing the DOJ has going for it, since it's outfunded and outgunned, is that Google is wrong."

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