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(Updates with closing stock prices in 10th paragraph and Google defending itself at hearing in 12th paragraph.)
Sept. 21 (Bloomberg) -- U.S. antitrust enforcers are investigating whether Google Inc. illegally increased advertising rates 50-fold for rival Microsoft Corp., according to a person familiar with the matter.
The Federal Trade Commission is probing the increase, along with other allegations against Google related to advertising, as a result of complaints from Microsoft, according to the person, who wasn’t authorized to publicly comment. The complaints are being examined as part of a larger antitrust probe into Google that began earlier this year, the person said.
If true, the Microsoft allegations could be used to help the FTC build a case showing that Google abused its power as the owner of the world’s most popular search engine, violating the Sherman Act and other antitrust laws, said Andre Barlow, an antitrust lawyer at Doyle, Barlow & Mazard PLLC in Washington.
“A lot of this conduct, when put together with a firm with market power, could be viewed as a violation” of antitrust laws, said Barlow, who hasn’t been briefed on the investigation and doesn’t represent those involved.
When investigating the ad complaint, the FTC will consider the motives for the accusations by Microsoft, the world’s largest software maker and one of Google’s biggest competitors, said Barlow.
Adam Kovacevich, a spokesman for Mountain View, California- based Google, said that while company officials didn’t know the details of Microsoft’s allegations about ads, rates are usually determined in part by how closely related an ad is to a user’s search.
“One of the reasons our ad system works so well is that it is built on showing relevant ads to consumers,” Kovacevich said.
Jack Evans, a spokesman for Redmond, Washington-based Microsoft, confirmed the company had made advertising complaints against Google and declined to discuss specifics.
Google “shouldn’t be permitted to pursue practices that restrict others from innovating and offering competitive alternatives,” Evans said. “That’s what it’s doing now.”
Google fell $7.43 cents, or 1.4 percent, to $539.20 on the Nasdaq Stock Market. Microsoft fell 99 cents, or 3.7 percent, to $25.99.
Cecelia Prewett, an FTC spokeswoman, declined to comment on her agency’s investigation.
Lawmakers and competitors criticized Google at a U.S. Senate Judiciary antitrust subcommittee hearing today, saying the company favors its own services in search results over rivals. Google Chairman Eric Schmidt defended the company’s actions as helping consumers.
Microsoft first complained in September 2007 that Google drastically raised the rate for an ad for Windows Live, a predecessor to Microsoft’s Bing search engine, one of the main rivals to Google’s Internet search, according to the person familiar with the matter.
The cost increased to $5 per mouse click from 10 cents a click for placing a Windows Live ad next to search results for the word “hotmail,” Microsoft’s e-mail product, according to the person.
Google told Microsoft at the time that the rate increased because users who clicked on the ad were directed to a low- quality website, according to the person. The site was the home page for Windows Live, whose services included Hotmail, Microsoft said.
Microsoft’s complaint about the ad rate increase is similar to those raised by MyTriggers.com and Foundem, price-comparison sites that are Google competitors, in an Ohio court case and a European Union complaint respectively.
Judge John P. Bessey in Columbus last month dismissed the MyTriggers case. Bessey later allowed MyTriggers to submit an amended complaint. Google has denied it unfairly singled out Foundem or MyTriggers in raising their ad rates.
The Microsoft complaint highlights the growing battle among Microsoft, Google and other search-engine companies for control of the fast-expanding, $40 billion U.S. online advertising market, said Eric Goldman, director of the High Tech Law Institute at Santa Clara University in California.
“Who wouldn’t like a piece of that action?” he said in an interview. “There are going to be illegitimate complaints, and with an organization as large and as complicated as Google, there may be some legitimate complaints.”
The other Microsoft advertising complaints under investigation by the FTC include an accusation that Google pressured advertisers to enter into contracts that make it difficult to also advertise with Yahoo! Inc. or on Bing, the person said.
Also under review is Microsoft’s assertion that Google created technological hurdles to block advertisers from comparing the number of times potential customers click on the ads they run on Google versus those on competing sites, the person said.
Kovacevich, the Google spokesman, rejected the Microsoft complaints.
“We never forbid advertisers from advertising on other platforms,” he said. “We place no restrictions on advertisers transferring their own ad campaign data to other platforms.”
The FTC is investigating the broader issue of whether Google is abusing its dominance in online search. Google disclosed on June 24 that the FTC has begun a review of its business practices and said it would work with the agency to answer questions about its services.
Microsoft was among several companies recently subpoenaed by the FTC in the investigation, said Evans, the company spokesman. He declined to name the other companies or elaborate on the subpoena’s contents.
Last month, the agency began sending civil investigative demands, which are similar to subpoenas, to technology companies.
The FTC is examining whether Google unfairly ranks search results to favor its own businesses and is using its control of the Android mobile operating system to discourage smart-phone makers from using rivals’ applications and services, the person said.
Inquiries about Google’s advertising practices are a theme running through the FTC investigation, the person said.
Advertising made up $28.2 billion, or 96 percent, of Google’s $29.3 billion in annual revenue last year, according to company filings with the government.
“Without advertising,” Google and its rivals “don’t exist,” said Karsten Weide, a media and entertainment analyst for market researcher IDC in San Mateo, California.
Google took 59 percent of the U.S. online search advertising revenue in the second quarter of this year compared with second-place Microsoft at 9 percent and Yahoo at 7 percent, according to a report by IDC this week.
Evans disputed those figures, citing a July report from IgnitionOne Inc., a New York-based online marketing company, that said Google had 81 percent of U.S. search advertising revenue in the second quarter. Yahoo and Microsoft, which have a search engine partnership, had a combined 19 percent share, according to the IgnitionOne report.
Several companies that advertise on Google’s search results declined to comment on its advertising practices. Those declining to comment were Mark Siegel, a spokesman for AT&T Inc., Jessica Sutera, a spokeswoman for Monster Worldwide Inc., Christine Bock, a spokeswoman for Vonage Holdings Corp. and David Frink, a spokesman for Dell Inc.
--With assistance from Brian Womack in San Francisco. Editor: Justin Blum, Fred Strasser
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