Bloomberg News

Google Says FTC Begins Review of Search, Advertising Practices

June 25, 2011

June 25 (Bloomberg) -- Google Inc. said the U.S. Federal Trade Commission has begun what’s likely to be a broad antitrust investigation with a review of the business practices of the world’s most popular search engine.

The company received a subpoena on June 23 “relating to a review by the FTC of Google’s business practices, including search and advertising,” according to a regulatory filing yesterday. Google said it is cooperating with the probe.

U.S. and European investigators are stepping up their scrutiny of Google, questioning whether its dominance in search blocks competition or harms consumers. The company, much like Microsoft Corp. in the 1990s, may spend years defending itself, a management distraction that may also hinder acquisitions, said Colin Gillis, an analyst with BGC Partners LP in New York.

“You have to be worried about this,” said Gillis, who rates the stock a hold and doesn’t own it. “At the best case scenario, it’s neutral. There are no positives here.”

FTC spokesman Peter Kaplan confirmed the investigation, while declining to comment further. Andrew Kovacs, a spokesman for Google said he couldn’t comment beyond a post yesterday on the company’s blog.

‘Google is a Choice’

“Using Google is a choice,” Amit Singhal, a Google fellow, said on the blog. “There are lots of other choices available to you for getting information: other general-interest search engines, specialized search engines, direct navigation to websites, mobile applications, social networks, and more.”

Google had 66 percent of searches in the U.S. during May, according to ComScore Inc. in Reston, Virginia. Yahoo! Inc. was a distant second at 16 percent with Microsoft holding 14 percent. The two smaller search players formed an alliance last year. Google had more than 80 percent market share in Germany, France, Italy and Spain during May, according to ComScore.

Google, based in Mountain View, California, declined $5.34, or 1.1 percent, to $474.88 in Nasdaq Stock Market trading yesterday. The shares have dropped 20 percent this year.

The FTC should examine whether Google doctored search results to “raise the cost of Google’s rivals, raise their advertising costs, raise their development or operating costs,” Melanie Sabo, an FTC official who is likely to play a leading role in a Google probe, said at a panel discussion in December.

‘Decrease Eyeballs’

The FTC may also want to know whether Google tried “to decrease the number of eyeballs” viewing competitors’ websites, said Sabo, assistant director for the FTC’s anticompetitive practices division. Sabo said at the time she was speaking for herself and not the agency.

Already, the FTC alerted technology companies of plans to gather information from them for the probe, three people familiar with the matter said in April. The agency is likely to examine whether Google tried to subdue rivals with threats and jacked-up advertising rates, lawyers have said. The company’s conduct in new sectors, such as mobile devices, also will probably be a focus, they said.

New York and California are in the early stages of an antitrust investigation of Google, along with Texas and Ohio, according to a person with knowledge of the matter who didn’t want to be identified because the probe isn’t public.

Officials at the European Union have also started investigations into Google’s dominance of the Internet search industry.

Admeld Review

The antitrust division of the U.S. Justice Department also is reviewing the company’s $400 million purchase of Internet advertising company Admeld Inc., two people familiar with the matter said last week.

“Nothing like Google has ever existed before,” said Bert Foer, president of the American Antitrust Institute in Washington. “We are working in new territory here. It’s good that we have two agencies looking at various aspects of Google and hopefully they are sharing some information and ideas.”

The government negotiated a settlement with Microsoft in 2001. Microsoft operated under U.S. court supervision during a U.S. review period that ended last month, and included regular checks to ensure the company gave computer makers freedom to promote rival products.

Google officials may be able to respond effectively to requests for information because “data is what they do,” said Marc Schildkraut, a lawyer at Dewey & LeBoeuf LLP in Washington and former assistant director of the FTC’s Bureau of Competition.

‘Tipping Point’

While complying with an investigation can be burdensome, the bigger challenge would come if regulators file a formal complaint, Schildkraut said.

“Just because a company gets a subpoena doesn’t mean it’s dead man walking,” Schildkraut said. “The tipping point is the filing of a complaint. That’s when it really gets serious.”

As a defense, Google may want to show how consumers benefit from its search service, said David Balto, a former Federal Trade Commission official whose Washington-based public interest law practice represents consumer groups.

“What Google does through its algorithm is protect consumers from deceptive and fraudulent misuse of search,” Balto said. “That is conduct the FTC should applaud. After they plough through the data I think they will conclude there is no wrongdoing.”

--With assistance from Karen Freifeld in New York. Editors: Lisa Rapaport, Fred Strasser

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Sara Forden in Washington at sforden@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Michael Hytha at mhytha@bloomberg.net


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