Microsoft, Google square off in Washington

Thursday will mark the opening round in the heavyweight fight over Google's acquisition of DoubleClick.

Google and Microsoft's bitter and long-standing rivalry in the Internet search and advertising markets is spilling over into Washington.

Senior executives from both companies are scheduled to show up before a U.S. Senate panel on Thursday afternoon to argue their respective cases for why Google should--or should not--be allowed to purchase DoubleClick for $3.1 billion. The acquisition was announced in April but is still undergoing a review by the Federal Trade Commission and by regulators in Europe and Australia.

The hearing could mark a turning point in Google's relationship with Washington. It is the first time that Congress has seriously scrutinized the fast-growing company's business strategies, and the first time that a proposed acquisition by the company has encountered such concerted political opposition.

It also represents the result of months of private lobbying and public agitation against the merger by Google's most dangerous business rivals. No stranger to antitrust issues, Microsoft has ordered its legendary army of lobbyists to torpedo the deal, and AT&T, Yahoo and Time Warner have also expressed concerns.

During Thursday's hearing, Google is planning to stress the differences between text-based advertising (its specialty, of course) and graphical display ads (DoubleClick's forte). A second argument is that the companies participate in different parts of the advertising sales and delivery process and are therefore complementary.

"Our purchase of DoubleClick does not raise antitrust issues because of one simple fact: Google and DoubleClick are complementary businesses, and do not compete with each other," Google Vice President David Drummond is expected to tell the panel, according to prepared remarks seen by CNET "DoubleClick is to Google what FedEx or UPS is to Our current business involves primarily the selling of text-based ads--books in our analogy. By contrast, DoubleClick's business at its core is to deliver and report on display ads."

Drummond is stressing the difference because it matters to the Federal Trade Commission lawyers and economists who are reviewing the deal. If they eventually determine that Google and DoubleClick are in different enough lines of business, and their products are therefore not substitutes for one another, the purchase will receive less scrutiny.

Ever since the early 1980s, the FTC and Justice Department have tried to evaluate whether a proposed merger will unreasonably create or enhance market power by evaluating whether the merger will increase how concentrated the market is, whether it will have adverse competitive effects, and whether there is a presence--or absence--of serious competitors.

To make their arguments about market power, Microsoft and Google have hired not just lobbyists, but economists too. Stanford University economics professor Robert Hall has , supplementing lobbyists in the Washington office of the law firm Brownstein Hyatt & Farber (including Makan Delrahim, a former top Justice Department antitrust official).

Microsoft and AT&T fired back with their own economists on the eve of the Senate hearing. A paper written by Robert Hahn and Hal Singer and released Wednesday says: "Google's proposed acquisition of DoubleClick would enhance Google's market power in the market for search and publisher-based advertising tools."

It also suggests that a mathematical calculation of the concentration of the market would be above the federal government's warning level. "The implication of such a finding is that a combined Google-DoubleClick would likely have an incentive to increase the price of DoubleClick's offering relative to a stand-alone DoubleClick, thereby harming online advertisers," the paper says.

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