Google Faces Possible Anti-Cartel Investigation

Google may appear to be ready to take over the world, but it still has some major regulatory issues to confront. Its advertising deal with Yahoo has anti-trust agents in both the US and Europe up in arms, to say nothing of Microsoft and certain advertising organizations. Keep reading to find out what the fuss is all about.

Do Google’s troubles have no end? The company must be wondering at this stage whether there is any wisdom at all in the old saying about trouble coming in threes. After the recent difficulties over its privacy policy, being sued for a cool $1 billion by Viacom and then the Chrome browser licensing furor, Brin and Page must have been hoping that the end was in sight.

No such luck. If anything, things got a whole lot worse with the announcement in September that the US Justice Department has hired Sanford Litvack to head up an anti-cartel investigation into the search giant’s activities. The case revolves around the profit-sharing advertising deal Google made with Yahoo in June which, it has been suggested, could give Google a greater than 80 percent share of all online advertising in the USA.

Litvack, whose credits include time spent at Hewlett Packard and Compaq during the acquisition of the latter, is no stranger to the kind of arrangements that prevail in the IT industry. Nonetheless, he could have his work cut out for him, given how experienced Google is being forced to become at defending itself in court. The company’s "Do No Evil" philosophy is starting to sound more than a little hollow as its appetite for scooping up an ever greater share of the IT industry shows no signs of being satisfied.

The Yahoo deal has been vigorously opposed by large sections of the industry including – ironically, given its own anti-trust history – Microsoft, and the Association of National Advertisers, while more reserved caution has been expressed by the International Advertising Association and the American Association of Advertising Agencies. Opposition to the deal is based mainly on the claim that it will seriously reduce competition and lead to price increases in the online advertising market. Microsoft in particular has taken a robust line, accusing Google of being the only company in the history of advertising to have the opportunity "to control prices on up to 90% of advertising in a single medium."

Additional opposition to the deal has come from a more surprising quarter: the World Association of Newspapers, which recently published a lengthy article on its web site accusing Google, with its "ever-tightening grip on internet traffic, its unbridled use of online content, and its dominance in online advertising," of posing "a very real threat to the continued viability of the independent content generation industry."

The article goes on to make the point that the newspaper business as a whole has a deep dependence on both Google and Yahoo for advertising revenue and for generating traffic, and that an effective merger between the two threatens the stability of this situation, in turn undermining the healthy competition that has kept the industry honest. However, opposition to the arrangement is by no means universal, with the influential American Advertising Federation – America’s oldest national advertising trade association – remaining neutral on the subject.

Google’s response to Litvack’s appointment has been a curious combination of reticence, stout defense, and slight but unmistakable signs of paranoia. An official statement from the company immediately following the announcement of Litvack’s appointment unsurprisingly played down the significance of the Yahoo deal, describing much of its anticipated effect as "speculation" and claiming that "it would be premature for regulators to halt the agreement before we implement it and everyone can judge the actual impact." The company also voluntarily suspended implementation of the deal for three and a half months while it is investigated by regulators.

These announcements were followed by a series of blogs from Tim Armstrong, Google’s North American President of Advertising and Commerce, in which his attempts to refute the various criticisms of the deal come across more as an exercise in spin than an honest attempt to engage with the issues it raises. For example, Armstrong’s argument that the arrangement will somehow incentivize Yahoo to maximize the number of its own adverts because "they get to keep all of the revenue from those ads" and only "a part of the revenue from ads served by Google" is disingenuous to say the least. Why would Yahoo have entered into the agreement in the first place if this were the case?

In another column Armstrong neatly evades the issue of whether the agreement is likely to raise ad prices in the longer term with the argument that ad prices are determined at auctions "where an advertiser only bids what an ad is worth to them." This, of course, says nothing about the possible effect of the deal on what winning advertisers will need to bid in an effectively monopolistic environment. Armstrong declares that Google and Yahoo will not conspire to artificially inflate minimum bids in order to raise revenues, but how this will turn out in practice remains to be seen.

Other than that, little has emanated from the Googleplex, although the depth of concern over the unfolding events in the corridors of the head office may be gauged by the company’s recent charm offensive. One aspect of this has seen the formation, in collaboration with Liberty Global and HSBC Holdings, of the O3b communications company that will provide satellite-based Internet access to much of the developing world. At the same time Google has announced its intention to reduce by half, to nine months, the period for which it will retain user-identifying records on its servers.

These measures are an effective acknowledgment that the company has a PR problem. Whether they will be effective in solving it is another question entirely.

Exactly what the long term significance of all this will be is hard to determine at this point. Some observers are suggesting the importance of Litvack’s appointment is being overstated, and that the Litvack himself is unlikely to recommend proceeding with litigation without weighing the evidence carefully.

Center for Digital Democracy executive director Jeffrey Chester, for example, is on record as saying that "The Justice Department is looking for political cover one way or the other," the implication being that the Department’s motivation is to make sure that whatever decision it finally reaches is seen to be above board. Which is not to say that Chester approves of the deal: on the contrary, he believes that Yahoo’s very future is in fact endangered by it, pointing out that "when an online ad company dismantles (or turns over) a core part of its search function to its leading competitor, it becomes fatally wounded."

Chester is also troubled by the privacy implications, expressing concern over Armstrong’s reassurances that neither Google nor Yahoo will make personally identifiable date available to the other. Armstrong, he argues, significantly fails to mention the array of additional information, such as cookies and IP addresses, that could be used to compromise privacy. It may well be that Chester is overstating the case, but further reassurances from Google on this would not be unwelcome in the current climate of concern over its policies and intentions.

An altogether more positive view of the arrangement has been taken by some analysts. Randall Stross of the New York Times regards it as a positive development, with an expected $800 million annual increase in revenue only likely to strengthen Yahoo. It’s hard to argue with those kind of sums, especially when you consider that on top of the extra income Yahoo will almost certainly gain access to new advertising markets.

It’s a view supported by David Kenny of Viva Ki, part of the Publicis Groupe, who compares the Yahoo deal to one which has existed for six years between Google and another search rival, Ask.com. It has clearly worked out well for both parties, and has so far managed to escape regulatory attention.

The agreement hasn’t gone unnoticed outside of the United States. Competition officials of the European Commission have announced their intention to undertake their own review. Competition spokesperson Jonathan Todd has said that as far back as mid-July the Commission took the decision to "open a preliminary investigation on our own initiative into potential effects of the Google-Yahoo agreement on competition in the European Economic Area (EEA) market."

The EC is making this move despite Yahoo’s and Google’s claim that the deal would only take force in the United States and Canada. Certainly the EC believes there are grounds for concern that the influence of it will be felt at a much wider level.

Whatever the final outcome, this kind of attention is the last thing Google needs at the end of a terrible year. The luster has finally been stripped from a company that has until now been seen as one of the good guys, even as an ally of ordinary people against big business and corporate values.

At a time when the threadbare value system of the corporate world is being ruthlessly exposed through the tribulations of America’s biggest financial institutions, Google might reasonably have expected to find itself gaining credibility. Indeed, one can’t deny the good it has tried to accomplish with the Google Foundation and other initiatives, to say nothing of its main task of helping many millions of users find useful information on the Internet.

Instead, however, Google continues to struggle to preserve its ever-diminishing reputation. As Jeffrey Chester points out, "making money shouldn’t be the sole motivation for behavior." More importantly, he believes that Google at the very least "should have been able to acknowledge that a major deal with its leading search competitor raises serious questions worthy of broad debate and critical analysis."

Sadly this seems to be a lesson the Internet’s biggest player still has to learn. For its own sake and ours, let’s hope it does so before such a realization is forced on it from above.

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