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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 News.com. "DoubleClick is to Google what FedEx or UPS is to Amazon.com. 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.

Microsoft spokesman Jack Evans added in an interview on Wednesday, referring to the proposed merger: "We believe it raises some serious questions about the future of competition in the online advertising market. It raises concerns about consumer privacy, security, and copyright protection."

After their own recent high-profile acquisitions, however, it's required some careful political legerdemain for Microsoft and other Google rivals to argue against the DoubleClick purchase. Yahoo . AOL bought German ad-serving firm Adtech AG and Tacoda, which does online behavioral targeting. Microsoft spent $6 billion buying advertising firm Aquantive, a DoubleClick rival, and online advertising exchange AdECN Inc.

Chairing Thursday's hearing will be Sen. Herb Kohl, a Wisconsin Democrat with a personal net worth of about a quarter-billion dollars and whose family made its fortune with the Kohl's department store chain.

Kohl can be more free-market than most Democrats on taxation, but tends to be regulatory when it comes to antitrust topics. He strongly opposed the merger of XM and Sirius Satellite Radio and said in 2001 that "vigorous application of well-established antitrust laws" would stabilize prices in the oil industry.

Kohl has indicated that privacy concerns--DoubleClick has long been a bete noire of privacy organizations--would be part of the hearing and has invited Marc Rotenberg of the Electronic Privacy Information Center to testify.

EPIC and two other liberal groups opposed Google's acquisition of DoubleClick, telling the FTC that "the proposed acquisition will create unique risks to privacy" to "more than 1.1 billion Internet users around the world."

"Privacy has been integral to the FTC's reviews of online advertising in the past, and it should be to its review of the Google-DoubleClick merger," Rotenberg said Wednesday evening. "I think we have a very solid case. It's solid in two different respects. First, it relies on the FTC's precedent. Second, it's based on very detailed filings we've made with the FTC about Google and DoubleClick's business practices. I think the FTC will either block or modify the deal."

For its part, Google has described its DoubleClick purchase as a way to protect privacy. In Drummond's written testimony, he says that Google will include an opt-out mechanism prohibiting advertising cookies from being placed on their computer and extend its current partial-anonymization policy to apply to wiping DoubleClick log data after 18 months.

"We make privacy a priority because our business depends on it," Drummond wrote. "If our users are uncomfortable with how we manage the information they provide to us, they are only one click away from switching to a competitor's services. If you don't believe me, recall that before Google, users clicked on an earlier generation of search engines like Excite, Altavista, Lycos, and Infoseek--each extremely popular in its time."

CNET News.com's Declan McCullagh is married to a Google employee.

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