An Unrepentant Google Basically Taunts DOJ/State AGs to File an Antitrust Suit in the Future

-By Scott Cleland

Google remains its own worst enemy

After dodging a certain DOJ antitrust suit from the most lenient antitrust enforcer in the modern era by withdrawing from the Yahoo ad agreement, Google’s CEO essentially spit at DOJ/State AG prosecutors by publicly and gratuitously saying: Google would have beaten the DOJ in court, nothing has changed, and that they were happy they reached out to Yahoo.

Google’s unrepentant stance was captured well in the New York Times article by Miguel Helft: “Google and Yahoo Say Deal Would Have Survived a Suit.”

  • Google CEO Schmidt: “…we believe we ultimately would have won.”
  • Yahoo’s spokesperson; “Yahoo strongly believes we would have prevailed in court if the Department of Justice had filed suit…”
  • “Mr. Schmidt said his company’s approach to deal-making would not change.”
  • Google CEO Schmidt: “I am very happy that Google reached out to Yahoo and did our best to come up with alternative that would benefit advertisers, and I feel very strongly about that.”

What Google is bluntly telling DOJ/State AG prosecutors and its customers is that:

  • DOJ was wrong in concluding that the proposed ad agreement was anti-competitive and illegal and that a court of law would have fully vindicated them;
  • #1 Google and #2 Yahoo strongly believe they did nothing wrong in collaborating so closely and that they would not change their competitive behavior; and
  • Google and Yahoo do not respect DOJ’s antitrust authority, but only that of a Federal Court.

In essence, Google and Yahoo are telling the DOJ that if they want to enforce antitrust law — they must file suit in court — because Google and Yahoo do not respect the DOJ’s authority by itself.

Like shoving red in front of an angry bull, these taunting public statements are awfully close to publicly calling DOJ investigators and prosecutors wrong-headed, incompetent and toothless. Google’s deeply-held antipathy to authority has reared its ugly head again.

If Google was trying to avoid Microsoft’s antitrust fate, they may actually have accomplished the opposite.

If the DOJ believes that its investigation was thorough and competent, its judgment legally sound based on the law, precedent and the facts, and its authority and deterrence important to protect competition and the American consumer, the DOJ will be compelled in the future to file suit to ensure:

  • Google and Yahoo do not continue to collaborate/collude covertly;
  • Google can not continue to thwart the ability of its competitors to become more formidable competitors;
  • Google cannot continue to monopolize the Internet search advertising market; and
  • Google cannot continue to cartelize the Internet search syndication market.

Google is naïve, arrogant and unwise if they:

  • Think and act like this DOJ threatened prosecution never happened;
  • Continue to behave in the anti-competitive ways embodied in the Google-Yahoo agreement;
  • overtly collude to divide up the Internet search advertising/syndication markets, reduce supply or fix prices; and
  • Believe the DOJ will look the other way, not enforce the law, and not file a variant of the lawsuit that the DOJ was one hour away from filing on November 5, 2008.

Google also doesn’t understand how the Microsoft antitrust analogy actually applies to Google in this instance.

The Google-Yahoo enforcement action was analogous to Microsoft’s attempt to acquire Intuit, the financial services software company, not the Sherman Section II monopolization case DOJ filed a few years later against Microsoft.

The in-depth investigation of Microsoft in the context of the Intuit review is analogous to the Google-Yahoo DOJ review in that it provided a pretext, and a legitimate avenue for DOJ to become intimately familiar with:

Google as a company and a competitor, The competitiveness/concentration of the Internet search advertising and Internet search syndication markets, and the extent and durability of Google’s market power.

In short, DOJ now has the intimate knowledge, expertise, evidence, facts and motive to ensure that Google does not further monopolize Internet search advertising or cartelize Internet search syndication.

This DOJ statement is particularly noteworthy as a precedent because it was made by a DOJ antitrust chief who is widely regarded as the most lenient enforcer of antitrust in the modern era. What this means is antitrust scrutiny of Google will only increase under the new Obama administration, which has made it clear that it will more strictly enforce antitrust law than the Bush administration.

Political chatter in the blogosphere that Google’s closeness to the Obama campaign and transition might earn Google an antitrust pass for the next four or eight years, unfairly and irresponsibly impugns the integrity of the Obama administration and disregards all the established ethical, legal and procedural checks and balances in the law enforcement system to prevent and detect attempts by companies to politically influence the outcome of enforcement actions different from what the facts, the law and procedure dictate.

What is different now as a result of the demise of Google-Yahoo?

First, the DOJ has concluded that Internet search is not that competitive — dismissing Google’s claims to the contrary.

“The Department’s investigation revealed that Internet search and Internet search syndication are each relevant antitrust markets and that Google is by far the largest provider of such services, with shares of more than 70% in both markets. Yahoo is by far Google’s most significant competitor in both markets, with combined market shares of 90 percent and 95% in the search advertising and search syndication markets respectively.”

What this means is that the DOJ has officially concluded: Google has monopoly market power in both the retail and wholesale markets of search advertising, which together comprise the primary monetization engine for most all digital content on the Internet.

Google was proposing to illegally collude/cartelize with by far its biggest competitor to divide up the market, reduce supply and fix prices, in order to dominate much of the remaining part of the search business Google does not already control.

Google withdrew from the ad agreement with Yahoo because it did not want to sign a DOJ consent decree which would have forced Google to legally admit its market power, and which, in turn, would have made Google a potential piñata for private and/or State AG antitrust suits.

Second, Google is in effect on antitrust probation and thin antitrust ice given the taunting and disrespectful stance discussed above.

Even if Google and Yahoo choose to ignore the DOJ’s conclusions, for all practical purposes, Google’s competitive playing field now has antitrust boundaries that Google and others did not recognize before.

With an officially recognized dominant share of the Internet search advertising market, Google must be careful not to engage in any agreements going forward with third parties that anti-competitively increase its market power in Internet search advertising or search syndication.

Any significant new agreements with third parties or potential competitors will garner close antitrust scrutiny and encourage closer examination of Google’s existing agreements that extend Google’s market power — like the agreements with AOL, Ask.com, MySpace, Craigslist, Amazon, eBay, Adobe or the Mozilla Foundation – to see if they are inhibiting competition.

This is especially problematic for Google because it enjoys at least 26 network effects that are naturally increasing Google’s market power and making it a de facto search advertising monopoly;

And many of those network effects are enhanced by Google’s agreements with AOL, Ask.com, MySpace, Craigslist, Amazon and eBay – that the Google-Yahoo search syndication agreement was partially modeled after; Simply, if Google tries to enter into future agreements with competitors, it will bring unwelcome scrutiny on all the agreements Google has cut with actual and potential competitors.

While the DOJ statement does not preclude Google from future acquisitions, it certainly makes them more risky, given the protracted FTC 4-1 Google-DoubleClick approval and the DOJ disapproval of the Google-Yahoo ad partnership.

Potential Google acquisitions include: Adobe (ADBE), AOL (part of TW), Ask.com (IAC), Craigslist (private) , Amazon (AMZN), or eBay (EBAY); or cloud computing services competitors: Salesforce.com (CRM), Intuit (INTU), Netsuite (N), RightNow (RNOW), Constant Contact (CTCT), Vocus (VOCS).

Third, Yahoo is obviously now a reluctant competitor. They wanted to go forward with the agreement with Google and force DOJ to stop them. They were the ones willing to take a slimmed down agreement. This signals that Yahoo is desperate and that they essentially put all their eggs in the Google basket.

Wall Street chatter is also misplaced thinking that Microsoft is likely to buy Yahoo outright. Yahoo CEO Yang made it abundantly clear in his actions that he is more than willing to destroy Yahoo before allowing it to become part of Microsoft.

Yahoo’s founders have proven to be philosophically, socially, politically and emotionally in Google’s “open” camp, a camp which informally defines itself as anti-Microsoft.

Wall Street and Yahoo shareholders have been wrong that Yahoo is trying to maximize shareholder value. In effect, the Yahoo shareholders that backed CEO Yang this past summer, effectively gave Yahoo CEO Yang carte blanche to pursue a value minimization approach.

Bottom line:

DOJ should be very concerned that Google and Yahoo have essentially dismissed the DOJ and their antitrust risk. If Google is true to pattern, it will continue to push the competitive/anti-competitive envelope in the months and years ahead as it inexorably increases its market power.

The DOJ might be wise to keep Sandy Litvack around for awhile to monitor Google and Yahoo’s behavior in the months ahead.

Marketers/Advertisers should remain very worried because both Google and Yahoo still believe that their customers are not very smart — basically incapable of understanding what’s best for them.

Per NYT: “Mr. Schmidt said that search advertisements are sold through an auction in which Google and Yahoo have no control over pricing. If marketers “fundamentally don’t believe that’s how the advertising works, it is very difficult to convince them of the goodness of this deal, he added.”

The cartelistic disdain these suppliers (that combined have 90% and 95% control of Internet search advertising and Internet search syndication markets, respectively, per the DOJ) have for their customers is truly breath-taking.

It’s not a stretch to be concerned that Google and Yahoo might tacitly collude going forward, if they believe the DOJ is not competent enough to stop them and marketers are not smart enough to understand their ‘auction’ business.

DOJ, State AGs and Google/Yahoo customers would be wise to stay vigilant and in close contact. If large advertisers/marketers remain concerned about competition and Google’s auctions not being true auctions, they should consider filing a private class action antitrust suit to ensure that:

  • Google’s opaque auction process be open, transparent and truly competitive; and
  • Google and Yahoo don’t collude to divide up their market, reduce supply and increase prices.

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Scott Cleland is one of nation’s foremost techcom analysts and experts at the nexus of: capital markets, public policy and techcom industry change. He is widely-respected in industry, government, media and capital markets as a forward thinker, free market proponent, and leading authority on the future of communications. Precursor LLC is an industry research and consulting firm, specializing in the techcom sector, whose mission is to help companies anticipate change for competitive advantage. Cleland is also Chairman of NetCompetition.org, a wholly-owned subsidiary of Precursor LLC and an e-forum on Net Neutrality funded by a wide range of broadband telecom, cable and wireless companies. He previously founded The Precursor Group Inc., which Institutional Investor magazine ranked as the #1 “Best Independent” research firm in communications for two years in a row. His latest op eds can be seen at www.precursorblog.com.


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