The backstory on Senate's Google-Yahoo hearing

Microsoft plans to assert that the ad deal may be "illegal," which is what Google said about the planned Microhoo deal. If it really is illegal, why don't these companies sue?

The U.S. Senate is holding a hearing Tuesday on the antitrust implications of the Google-Yahoo ad deal , and the two companies, along with Microsoft, are testifying. You should expect sober, selfless discussions conducted with the public's best interests in mind.

Or not. In reality, Microsoft will offer fanciful claims about the alleged detrimental impact of a Google-Yahoo partnership, just as Google offered fanciful claims a few months ago about the alleged detrimental impact of a Microsoft-Yahoo combination.

According to his prepared testimony, Microsoft general counsel Brad Smith will call the Google-Yahoo deal possibly "illegal under the antitrust laws." His statement predicts the combined "market share would harm competition."

If this sounds oddly familiar, it's because he is echoing what Google vice president David Drummond said in February. Drummond suggested in a blog post that Microsoft would exert "inappropriate and illegal influence" over the Internet. A combination "equals an overwhelming share" of the market, and would harm competition, he said.

Five months ago, when Microsoft seemed ready to make a deal with Yahoo, Google invoked the specter of antitrust law, and Microsoft downplayed its significance. But now that the situation is reversed, so are the political positions.

This is no surprise. It costs relatively little, in time and money, for technology executives to lobby antitrust subcommittee chairman Herb Kohl (D-Wis.) in hopes he'll ask the administration to do something. That would not merely provide political cover for the Federal Trade Commission or the Justice Department; it would actually make action more likely.

Kohl surely knows that one additional congressional hearing raises the probability of an FTC merger challenge, for instance, by approximately 4.2 percentage points. What's more, the political influence tends to happen at the higher levels of the agency. It turns out that Washington bureaucrats are political creatures after all.

The underlying problem is that antitrust law is so malleable that it can be bent into virtually any shape that its practitioners desire. Given nearly any set of hard-nose business practices, some economist can be hired to claim that "predatory" prices are illegally low (hurting competitors) or illegally high (hurting consumers). No wonder Lester Thurow, the former dean of MIT's business school, concluded that "the time has come to recognize that the antitrust approach has been a failure. The costs it imposes far exceed any benefits it brings."

And no wonder that some state attorneys general are now sniffing around to see if there's a way for them to join the antitrust hunt.

Microsoft claims that "the Google/Yahoo agreement contemplates significant, ongoing coordination between the dominant provider of search advertising and its chief rival. Together, Google and Yahoo control an estimated 90 percent of search advertising, with Google alone accounting for over 70 percent... The effect of this agreement would be to further entrench the control of the dominant supplier of search advertising and, in the process, reduce choice and innovation and increase prices."

If Microsoft truly believes that "illegal" activity is happening, it doesn't need to wait for Washington. It has the ability to launch a private antitrust lawsuit against Google and Yahoo. Redmond knows firsthand how this works: Sun Microsystems filed a private antitrust suit that Microsoft settled for $1.95 billion in 2004.

Similarly, if Google truly believes that Microsoft is, say, violating the law with the way Windows Vista search is configured, it has the option of pursuing a private antitrust lawsuit.

But it tends to be cheaper and less risky to lobby government officials to spend tax dollars suing your competitor rather than doing it yourself. Another bonus is you gain the imprimatur of a government suit that supposedly protects the public interest. Which are two reasons these discussions about ostensibly "illegal" activities have been taking place in political circles--instead of the normal venue of a lawsuit between two companies that happen to disagree.

Disclosure: Declan McCullagh is married to a Google employee

 

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