Google's Antitrust Trouble

Amid government scrutiny of the Web search giant's deal with Yahoo, opponents of the agreement—including advertisers—sound off

by Catherine Holahan

U.S. government pressure on Google is building. Regulators across the country are stepping up their scrutiny of Google's role in the market for online advertising, and antitrust experts say they've got cause for concern.

Recent signs that the government is getting serious about Google (GOOG) came from a Sept. 9 report in The Wall Street Journal that the Justice Dept. had hired former U.S. antitrust chief and former Walt Disney (DIS) Vice-Chairman Sandy Litvack for a possible antitrust case. The department had already said it's examining an online advertising partnership between Google and Yahoo! (YHOO), announced in June. Meantime, attorneys general in at least 11 states are conducting their own investigations to determine whether the deal gives Google too much control over the online advertising market, hampering competition.

Whether the government is focusing narrowly on the Yahoo-Google agreement or more generally on Google's position in online advertising isn't clear. The Justice Dept. declined to comment on the scope of its investigation. No matter, says Norman Hawker, a Western Michigan University professor of finance and commercial law. Hawker is writing a white paper on the deal on behalf of the American Antitrust Institute, a Washington-based nonprofit think tank that promotes competition.

The Yahoo-Google deal alone will give Justice Dept. officials plenty of fodder for concern, says Hawker, who plans to submit his paper to the department in as soon as a month. Under the partnership, Google will sell and place ads on Yahoo pages and share the revenue with Yahoo. Both companies argue the alliance won't quash competition or result in higher prices for advertisers; rather, the deal will benefit advertisers by giving them access to a wider range of potential customers. "We are able to essentially create more access and better ROI [return on investment] for the advertisers," Hilary Schneider, executive vice-president of Yahoo U.S., said during a Sept. 11 presentation to journalists (BusinessWeek.com, 9/11/08).

Advertisers Fear Higher Rates

What's more, say the deal's defenders, the arrangement is limited in scope and nonexclusive, meaning it doesn't preclude either from forging comparable deals with other companies. Yahoo says it isn't planning to cede its roughly 20% share of the search market to Google, which commands 70% of Web searches.

The concern for regulators isn't a limited partnership, but the potential that Yahoo may have little choice but to cede control of an ever larger share of the search market to its bigger partner. Google often does a better job than Yahoo of placing and making money from ads that appear alongside search results. If Yahoo can cut costs and generate a higher return by ceding a small slice of its business, why not turn over all of it? "It is pretty basic antitrust economics that businesses tend to go where the financial incentives are," Hawker says. "The reality is that Google will have a whole lot more freedom to dictate the terms of online advertising when they have a 92% share than when they have a 70% share."

Some advertisers oppose the Yahoo-Google deal, too. They fear that wider Google control is inevitable. In that case, Google could set higher prices for search ads. "This is not a good environment for advertisers," says Bob Liodice, president and CEO of the Association of National Advertisers, an industry group that has sent a letter to the Justice Dept. opposing the deal (BusinessWeek.com, 9/8/08).