FTC allows Google-DoubleClick merger to proceed

The Federal Trade Commission announced Thursday that Google's controversial $3.1 billion merger proposal with DoubleClick can proceed, despite earlier complaints raised by competitors and privacy advocates.

FTC regulators had been reviewing the proposed merger for eight months for possible antitrust violations, after Google announced plans in April to acquire the online ad-serving company. The commission, in issuing its decision to let the merger move forward, said the companies are not direct competitors in any relevant market.

"The markets within the online advertising space continue to quickly evolve, and predicting their future course is not a simple task...Because the evidence did not support the theories of potential competitive harm, there was no basis on which to seek to impose conditions on this merger," according to an FTC statement.

The approval for the merger came in a 4-1 vote by regulators. In her dissent, Commissioner Pamela Jones Harbour said she was inclined to make "alternate predictions about where this market is heading, and the transformative role the combined Google/DoubleClick will play if the proposed acquisition is consummated." She said she determined that the two companies' product markets overlap in key ways that could "substantially lessen competition" down the road.

Rivals such as Microsoft have challenged the merger, complaining that it would give Google an unfair advantage in search and publisher-based advertising tools.

Google, in its response to the FTC ruling, cited the merger's potential benefits for consumers.

"The FTC's strong support sends a clear message: this acquisition poses no risk to competition and will benefit consumers," said Eric Schmidt, Google's chairman and CEO. "We hope that the European Commission will soon reach the same conclusion, and we are confident that this deal will deliver more relevant ads for consumers, more choices for advertisers, and more opportunities for website publishers."

On Wednesday, Microsoft and entertainment media giant Viacom announced a $500 million advertising agreement that Google cited as evidence of a "highly competitive" market for online ads.

The search titan said it cannot formally close its DoubleClick acquisition until it gets clearance from European regulators, who are expected to announce their findings on April 2. The Australian Competition and Consumer Commission approved the deal in October.

Serving up ads
Both Google and DoubleClick have an ad-serving business, when defined in a larger sense. But when drilling down, the two companies operate in different segments of the ad-serving market.

Google's AdSense serves up to Web sites within its publisher network, offering up pay-per-click text ads that are generated from keyword searches, or based on the context of a Web site. DoubleClick, which markets a product called Dart to publishers, advertisers and corporate customers, places banner ads on Web sites. It also runs an advertising exchange, which matches advertisers and advertising networks with Web sites that sell ad space, and it operates search-engine marketing business Performics.

The FTC's decision to allow the Google-DoubleClick merger to proceed falls in line with actions over the past three decades, regarding nonhorizontal, or vertical, mergers. These mergers involve companies in adjacent businesses and are designed to push the buyer into a new market, whereas horizontal mergers involve two companies in exactly the same line of business and result in the removal of a competitor.

The commission evaluated the Google-DoubleClick under three nonhorizontal merger theories that examine potential harm to competition.

Under one theory, the FTC determined the two companies were not direct competitors and, as a result, would not eliminate substantial or direct competition between the two.

Second, regulators reviewed the merger to see if it would eliminate potential competition that would be beneficial. The FTC found that even if Google were successful in its efforts to enter the third-party ad-serving markets, there are a number of players in the industry and competition is likely to become fiercer.

Third, despite concerns that mergers involving a dominant market player would take away an important "tool" used by other players, FTC officials found that DoubleClick lacks market power in third-party ad-serving markets. As a result, the FTC said, it's unlikely that Google could "manipulate DoubleClick's third-party ad-serving products" as a means to put Google's competitors at a disadvantage in the ad intermediation market.

Privacy pressures
And although the FTC has said it is solely focused on competition issues when reviewing mergers, privacy advocates and lawmakers weighed in on the proposal, citing concerns of whether the combination of the two companies would result in Google holding a treasure trove of users' personal information, potentially presenting privacy invasions giving it an unfair advantage in having a more effective means to target ads to users.

Reception on Capitol Hill has been mixed since the deal was announced. A U.S. Senate panel charged with overseeing antitrust law held a hearing on the matter this fall that involved a public clash between top Google and Microsoft in-house attorneys--but also a concerted effort by the few politicians present to stay neutral. As the months went on, however, House Republicans launched not just one, but two very public shows of concern, ostensibly about what the deal means for consumer privacy.

House Democratic leaders never got around to holding their own hearing this year. Rep. Bobby Rush (D-Ill.), who leads a House consumer protection panel, said in a statement late Thursday that he plans to "investigate" the merger's privacy implications--and online behavioral advertising practices more generally--when Congress reconvenes next year.

Although the FTC's scrutiny was limited to competition issues, "my primary concern, throughout, has been the privacy of consumer information," Rush said in a statement. "Those concerns are as strong today as they were eight months ago when this merger was first announced."

The European Commission, which is also taking a deeper look at the merger proposal, recently said it will hold hearings to consider privacy issues relating to the merger before it announces its decision on the deal on April 2.

And European regulators won't necessarily be swayed by the FTC's decision. In 2001, for instance, General Electric announced plans to acquire Honeywell International. U.S. antitrust regulators signed off on the merger, but the deal was blocked by European antitrust monitors. The companies eventually withdrew their merger plans, given its difficult to operate as a merged company in one part of the globe and not in another.

Although a four-month gap exists between the FTC's decision and the deadline for the European Commission, European attorneys who specialize in antitrust matters do not anticipate the Commission to suddenly ramp up its review of the proposed merger.

"I don't have any reason to believe the Commission will accelerate its review," said Thomas Vinje, an antitrust attorney with Clifford Chance in Brussels. "The relevant market circumstances are different in Europe, as is the law. While Google is very strong in the relevant markets in the United States, it is far more dominant, indeed it is overwhelmingly dominant, in Europe. This deal thus would have greater consequences in Europe than in the United States, and in order to fulfill its duty to apply European law, the Commission still has very serious competition concerns to address," Vinje said.

FTC officials noted in their statement that consumer privacy issues are "not unique to Google and DoubleClick and extend to the entire online advertising marketplace."

In its majority decision, the agency said it lacks the legal authority to "require conditions to this merger that do not relate to antitrust," adding that "regulating the privacy requirements of just one company could itself pose a serious detriment to competition in this vast and rapidly evolving industry."

That reasoning drew sharp criticism on Thursday from Jeff Chester, director of the Center for Digital Democracy, which along with the Electronic Privacy Information Center petitioned the FTC to review privacy questions raised by the deal. Privacy advocates have been arguing that the FTC is well within the law to consider privacy issues in its antitrust review. Chester said the agency "sidestepped its responsibility" to protect consumers and warned advocates will ratchet up pressure on European regulators to impose stringent conditions on the deal.

"With today's decision," he said in a statement, "the FTC is helping ensure that U.S. consumers will have to live under the shadow of an even bigger digital giant, with a privacy time bomb ticking in the background."

In an attempt to mollify privacy advocates who attacked the Google-DoubleClick deal, the FTC said it would be on the lookout for broader privacy issues arising from increasingly sophisticated online advertising tactics industrywide. The agency on Thursday released a discussion paper (PDF) containing proposed "self-regulatory" principles for online advertisers who target user behavior and habits.

The ideas--about which the agency is seeking public comment--include transparency and consumer control, limited retention of user data, and obtaining "affirmative" user consent before using "sensitive" data to target ads. The suggestions were inspired by a two-day workshop it held on the subject in November.

Commissioner Jon Leibowitz, who voted to give the deal the go-ahead, attempted to amplify those potential concerns in a separate concurring statement. He called on the agency to "address the fundamental issues of consumer privacy and data security raised by online behavioral advertising, which go well beyond the two companies involved in this acquisition."

Electronic Privacy Information Center director Marc Rotenberg said he was surprised by the decision but warned that the scrutiny will not end yet. EPIC and CDD recently filed a legal request for all FTC records related to what they view as a possible problem with the deal's review: the fact that Chairman Deborah Platt Majoras declined to recuse herself from the proceedings even though her husband is a partner with the law firm Jones Day, which, until CNET News.com reports last week, said on its Web site that it was advising DoubleClick in the U.S. and EU antitrust proceedings. (Majoras, a former Jones Day attorney herself, has denied any potential conflict of interest in that scenario.)

Still, that's an issue that EPIC and CDD plan to raise with congressional oversight committees, Rotenberg said in a lengthy statement responding to the FTC's conclusions. In Rotenberg's view, the agency shirked its obligations to protect the public interest by ruling the way it did and suggested the proposed principles aren't nearly enough.

"A majority of the Commissioners chose to ignore the privacy implications of the Google-DoubleClick merger," he said, "and to propose instead the same self-regulatory approach to privacy protection that has repeatedly failed American consumers and could have been put forward whether or not a merger review was also under way."

CNET News.com reporter Elinor Mills contributed to this report.