Why Google faces antitrust scrutiny.
Published May 23, 2009- From the magazine issue dated Jun 1, 2009
We all know how an auction works. The auctioneer sits up front and keeps calling for higher bids until there's one bidder left—and that person wins. Now imagine an auction where the auctioneer won't let you see the other bidders, but assures you they are there, on the other side of a curtain.
The auctioneer won't tell you who the other bidders are; you're only told a range of prices that others have bid. And there's another twist: simply paying the most doesn't guarantee you'll win, because the auctioneer has created a system that lets some bidders win even when they pay less.
You may not like this system, but you must participate because this auctioneer controls the bulk of the market.
Imagine that, and you have imagined Google. Most people think of Google as a free search engine—and it is that. But the real genius of Google was that it figured out that advertisers would pay to have their messages pop up when someone types in a keyword. For instance, a hotel chain might pay to show ads to anyone who types in "hotel in Phoenix." Those search ads now represent the biggest chunk of all Internet advertising. Google gets the lion's share, which has allowed it to amass such power that it may end up the target of a federal antitrust investigation.
The Feds are already sniffing around. The Department of Justice is examining possible antitrust issues in a deal Google has reached with authors to sell millions of books online.
The Federal Trade Commission is investigating issues connected to the fact that Google and Apple share two board members, one of whom is Google CEO Eric Schmidt. Last year, when Google tried to make a search pact with Yahoo, federal regulators came close to bringing antitrust charges until Google walked away from the deal.
Microsoft, a bitter rival, is pushing regulators to rein in Google—and it may or may not be a coincidence that one of Microsoft's outside law firms also represents TradeComet, a tiny New York company that in February sued Google, alleging antitrust violations. (Microsoft says it has nothing to do with that litigation.)
Finally, the new head of antitrust enforcement in the Obama administration, Christine Varney, has vowed to take a tougher stance on antitrust than the Bush administration did. Last summer, speaking at a conference, Varney expressed concerns that Google had acquired a monopoly in Internet advertising.
Why all the fuss? Two thirds of all U.S. Internet searches take place on Google, while its nearest rivals, Yahoo and Microsoft, handle 20 percent and 8 percent, respectively, according to researcher eMarketer. If you hope to sell products over the Internet, you pretty much have to advertise on Google.
To get placed at the top of the list of search results, you must outbid other advertisers. Google tells you only the range of prices others are willing to pay. And Google assigns each advertiser a "quality score," based on the relevancy of its ad. If Google deems your ad to be relevant, you pay less for the keyword than a bidder whose ad Google considers not very relevant.
The idea, Google says, is to keep spammers from winning keyword bids and pulling users off to junky Web sites. (Yahoo and Microsoft assign quality scores too. The only difference is that Google has more market clout.) Google won't disclose the formulas it uses to assign quality scores, saying this would let spammers game the system. But who knows? You could be getting ripped off. An extra penny here and there could be worth millions to Google.
Google, of course, is the "Don't be evil" company, and it swears that it is operating in good faith. "We understand that as we get larger and more successful, there's going to be more scrutiny and more questions," says Adam Kovacevich, a Google spokesman. "[But] we think we have a good story to tell—we've done a lot to promote competition online."