[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                      COMPETITION ON THE INTERNET

=======================================================================


                                HEARING

                               BEFORE THE

                    TASK FORCE ON COMPETITION POLICY
                           AND ANTITRUST LAWS

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 15, 2008

                               __________

                           Serial No. 110-193

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov



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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
MAXINE WATERS, California            DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
ROBERT WEXLER, Florida               RIC KELLER, Florida
LINDA T. SANCHEZ, California         DARRELL ISSA, California
STEVE COHEN, Tennessee               MIKE PENCE, Indiana
HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio                   STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota

            Perry Apelbaum, Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel
                                 ------                                

          Task Force on Competition Policy and Antitrust Laws

                 JOHN CONYERS, Jr., Michigan, Chairman

RICK BOUCHER, Virginia               STEVE CHABOT, Ohio
ZOE LOFGREN, California              RIC KELLER, Florida
SHEILA JACKSON LEE, Texas            F. JAMES SENSENBRENNER, JR., 
MAXINE WATERS, California            Wisconsin
STEVE COHEN, Tennessee               BOB GOODLATTE, Virginia
BETTY SUTTON, Ohio                   CHRIS CANNON, Utah
ANTHONY D. WEINER, New York          DARRELL ISSA, California
DEBBIE WASSERMAN SCHULTZ, Florida    TOM FEENEY, Florida
                                     LAMAR SMITH, Texas, Ex Officio


            Perry Apelbaum, Staff Director and Chief Counsel

      Sean McLaughlin, Minority Chief of Staff and General Counsel


                            C O N T E N T S

                              ----------                              

                             JULY 15, 2008

                                                                   Page

                           OPENING STATEMENTS

The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Chairman, Task Force on 
  Competition Policy and Antitrust Laws..........................     1
The Honorable Steve Chabot, a Representative in Congress from the 
  State of Ohio, and Ranking Member, Task Force on Competition 
  Policy and Antitrust Laws......................................     2
The Honorable Zoe Lofgren, a Representative in Congress from the 
  State of California, and Member, Task Force on Competition 
  Policy and Antitrust Laws......................................     3
The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ex Officio Member, Task Force on 
  Competition Policy and Antitrust Laws..........................     3

                               WITNESSES

Mr. Michael J. Callahan, Executive Vice President, General 
  Counsel and Secretary, Yahoo! Inc.
  Oral Testimony.................................................     6
  Prepared Statement.............................................     9
Mr. Brad Smith, Senior Vice President, General Counsel and 
  Corporate Secretary, Microsoft Corporation
  Oral Testimony.................................................    19
  Prepared Statement.............................................    21
Mr. David C. Drummond, Senior Vice President, Corporate 
  Development and Chief Legal Officer, Google Inc.
  Oral Testimony.................................................    35
  Prepared Statement.............................................    38
Mr. Frank Pasquale, Professor, Seton Hall University School of 
  Law
  Oral Testimony.................................................    46
  Prepared Statement.............................................    48
Mr. Tim Carter, President and CEO, Askthebuilder.Com
  Oral Testimony.................................................    62
  Prepared Statement.............................................    64
Mr. David Sable, Vice Chairman and Chief Operating Officer, 
  Wunderman
  Oral Testimony.................................................    68
  Prepared Statement.............................................    70

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Sheila Jackson Lee, a 
  Representative in Congress from the State of Texas, and Member, 
  Task Force on Competition Policy and Antitrust Laws............     5


                      COMPETITION ON THE INTERNET

                              ----------                              


                         TUESDAY, JULY 15, 2008

              House of Representatives,    
           Task Force on Competition Policy
                                 and Antitrust Laws
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Task Force met, pursuant to notice, at 1:41 p.m., in 
room 2141, Rayburn House Office Building, the Honorable John 
Conyers, Jr. (Chairman of the Task Force) presiding.
    Present: Representatives Conyers, Lofgren, Jackson Lee, 
Waters, Cohen, Sutton, Wasserman Schultz, Smith, Sensenbrenner, 
Goodlatte, Chabot, Cannon, Keller, Issa and Feeney.
    Staff Present: Anant Raut, Majority Counsel; Matt Morgan, 
Majority Staff Assistant; and Stewart Jefferies, Minority 
Counsel.
    Mr. Conyers. The Committee will come to order.
    We are delighted that all six of witness are as 
distinguished and recognized and well-known and favorably 
received in the Congress as they are.
    This Antitrust Task Force is concerned about competition on 
the Internet because this technology has changed the way people 
interact with the world around them, and what started as a 
research project in the Department of Defense 40 years ago has 
now become not just a pervasive element of our society, but has 
worldwide implications. Over a billion people use the Internet. 
Seventy-one percent of all Americans use the Internet. Every 
year, we send in this country somewhere in the neighborhood of 
three trillion e-mails; and it is also quite lucrative.
    But, today, we have three of the most significant players 
on the Internet testifying before us: Yahoo, Google and 
Microsoft, each one of whom dominates a different aspect of the 
Internet. A half million users come to Yahoo's Web pages, 
Google has become synonymous with on-line research, and 
Microsoft continues to be the most dominant software company on 
Earth.
    For the last 6 months, Microsoft and Yahoo have been in 
frustrating negotiations. Microsoft initially attempted to 
purchase Yahoo and was not favorably received. Last month, 
Yahoo and Google reached an agreement to display Google ads on 
Yahoo Web pages. Microsoft had a response for that. They 
brought in Carl Ichan to try buying Yahoo and break it up.
    Given how these powerful companies are in any consolidation 
has raised the potential of anti-competitive effects. The 
Department of Justice is scrutinizing the Google-Yahoo deal. So 
are dozens of attorneys, State attorneys across the country, 
and Attorney Generals. And so we come here this afternoon to 
consider what impact the proposed Yahoo-Google deal could have 
on competition.
    For their part, Google and Yahoo note that their 
transaction is nonexclusive and that any company, including 
Microsoft, is free to pursue a similar arrangement.
    But then you need to ask why is it that the Members of this 
Committee cannot be trusted to see the signed agreement, and 
why we were offered access to the agreement, but only if we 
viewed it at a law firm with no notes allowed and a signed non-
disclosure agreement?
    By contrast, the Committee was given more ready access to 
the documents surrounding the President's terrorist 
surveillance program. Every Member was allowed access. We were 
allowed the right to review it. We were allowed to take notes. 
We weren't forced to sign any agreements of non-disclosure.
    And so I would ask the distinguished counsel for Yahoo to 
reconsider how these things should be worked on with the 
Committee on Judiciary, as friendly a group of Members of 
Congress as I've ever encountered.
    And then we need to consider the larger competitive reality 
of the Internet, what the competitive landscape would look like 
if Microsoft is ultimately successful in acquiring Yahoo or, 
looking at it differently, would it be wise to allow a company 
that controls more than 90 percent of the operating system 
market and 73 percent of the browser market to combine forces 
with the largest seller of display advertising on the Internet? 
Would the combined company simply serve as a counterweight to 
Google or would that allow them to leverage their market power 
into other aspects of the Internet?
    And so this Committee, the Antitrust Task Force of the 
House Judiciary Committee, is pleased to have all of you here 
to join in this discussion.
    I turn now to our Ranking Member, Mr. Chabot of Ohio, for 
his comments.
    Mr. Chabot. Thank you very much, Mr. Chairman.
    I would like to thank you for holding this important 
hearing today and also to thank our witnesses for taking the 
time out of their busy schedules and also being with us here 
this afternoon. I will be brief so that we can get on with the 
witnesses as we have a very distinguished panel here.
    It seems a bit redundant to talk about the rise in the 
Internet use and its increased importance to consumers and 
businesses. Most of us use the Internet today, but there are a 
couple of points that I think are worth noting, particularly in 
light of today's hearing topic.
    First, search engines are playing a bigger and bigger role 
shaping the information made available to consumers and 
businesses. Through paid listings, search engines are dictating 
search results at increasing rates. These listings set the 
parameters for the type of information to which consumers have 
access.
    This leads me to my second point, and that is the need to 
maintain competition in the on-line advertising industry to 
keep search engines operating as a neutral tool, as the Boston 
Globe would put it.
    We can see the influence that advertising has on Internet 
search results through the revenue generated in the industry. 
In 2007, on-line advertising generated more than $8 billion; 
and it is expected to more than double in just the next few 
years.
    As with the success of any industry, the on-line 
advertising industry is shifting. Google's proposed advertising 
agreement with Yahoo is just one of a number of recent moves 
that has the potential to change the market quite dramatically.
    Our role on this Task Force is to examine those shifts and 
the impact that they could have on competition and on 
consumers. Like I have said in previous hearings, the heavy 
hand of government does not belong in the marketplace. However, 
when consumers are impacted as a result of anti-competitive 
practices, we are obligated to weigh in. This hearing will 
hopefully shed some light on the facts and just where we stand 
in this particular proposal and what should be done about it.
    I look forward to hearing from our witnesses, and I yield 
back the balance of my time.
    Mr. Conyers. Thank you, Mr. Chabot.
    A senior Member of the Committee on Judiciary and a 
Chairwoman in her own right, the gentlelady from California, 
Zoe Lofgren.
    Ms. Lofgren. Thank you, Mr. Chairman. I will be brief.
    I would just like to welcome so many people from my 
constituency in Silicon Valley. It is great to have you here, 
and I hope we will have a very useful and interesting 
discussion.
    I am mindful that one of the key elements of analysis for 
antitrust is the barriers to entry to a particular type of 
endeavor. And I remember I was first elected in '94, took 
office January 4th of 1995. At that time, Jerry Yang was still 
in the dorm room at Stanford. I don't think Sergey had even 
been admitted yet. So I remember going to Google pre-IPO. Eric 
Schmidt was so excited about it. The Google team had built 
their own servers with stuff from weird stuff and fries.
    And so that was just less than a decade ago. So things move 
quickly in the Internet, and we are going to keep that in our 
minds as we evaluate all of the enticing and interesting issues 
that are before us.
    But one of the exciting things about representing the 
district that I do is that there are so many smart people who 
are so creative; and we can't even think of the next thing that 
they are going to invent that is going to be changing the way 
we are able to be effective and productive people, not only in 
Congress, but Americans, really citizens throughout the world 
who are well served by all the cool stuff being invented in the 
Valley.
    I just wanted to say that, Mr. Chairman; and I thank you 
for having this hearing. I look forward to the further 
proceedings, and I yield back.
    Mr. Conyers. Lamar Smith, Ranking Member of the full 
Committee, from Texas.
    Mr. Smith of Texas. Thank you, Mr. Chairman.
    I don't think it was intentional, but I notice that my 
prepared remarks pretty much track your opening remarks as 
well, with the possible exception of your reference to the 
Administration surveillance policy.
    Today, we will hear testimony from individuals associated 
with some of the most famous names of the technology era: 
Google, Yahoo and Microsoft. Together, they have revolutionized 
the way that we work, communicate and find information.
    Recently, two of these companies have been involved in a 
highly publicized battle for the future of Yahoo, one of the 
pioneers of the Internet as we know it today. Microsoft 
initially made a bid to acquire all of Yahoo and was rejected 
by Yahoo's board. Microsoft later made a revised offer, which 
was also rejected. Recent news reports indicate that Microsoft 
has made a third offer together with investor Carl Ichan, who 
is engaged in a proxy fight with Yahoo's board of directors.
    In the face of this corporate intrigue, on June 12th, 
Google and Yahoo announced a deal that will allow Google to 
place some of its search-based advertising on Yahoo's Web 
pages. The amount of advertising that Yahoo outsources to 
Google is at Yahoo's sole discretion.
    In addition, Yahoo and Google agreed to enable their 
respective instant messaging services to interoperate. A user 
of Google's IM service will be able to contact someone on 
Yahoo's IM service and vice versa. This agreement is not 
exclusive and allows Yahoo to enter into similar agreements 
with other advertising providers, including Microsoft. In 
addition, Yahoo will maintain relationships with its own 
advertising customers and will continue to rely exclusively on 
its own advertising program outside of the U.S. and Canada.
    Microsoft and on-line advertisers have raised concerns that 
this arrangement will give Google a dominant share of the 
search advertising market. There has already been considerable 
consolidation in the on-line advertising world with Google 
acquiring DoubleClick and Microsoft and Yahoo purchasing their 
own advertising platforms.
    The operative question here is whether on-line search 
advertising is a separate market. If so, then this deal 
implicates the number one player, Google, which has about 70 
percent of on-line search advertising, and number two player 
Yahoo, which has about 20 percent. Microsoft is a distant 
third.
    While the deal is not exclusive, it is important to 
determine whether this arrangement will cause Yahoo to become 
more or less competitive with Google in page search 
advertising. Also, there is much that remains unknown about how 
this deal will affect on-line advertising and whether it will 
encourage any competitive behavior.
    I hope the hearing will address some of these 
uncertainties, so I look forward to hearing from our witnesses 
today.
    Thank you, Mr. Chairman. I yield back.
    Mr. Conyers. Thank you. We will include everyone else's 
statements.
    [The prepared statement of Ms. Jackson Lee follows:]
       Prepared Statement of the Honorable Sheila Jackson Lee, a 
 Representative in Congress from the State of Texas, and Member, Task 
             Force on Competition Policy and Antitrust Laws
    Thank you, Mr. Chairman, for your leadership in convening today's 
very important hearing on the state of competition in the internet. I 
would also like to thank the ranking member, the Honorable Louie 
Gohmert, and welcome our panelists. I look forward to their testimony.
    This hearing will address the specter of growing concentration in 
our most powerful new form of media: The Internet. Today, we're already 
seeing rapid consolidation in the various industries that provide the 
American people the news and information they need to be responsible 
citizens and voters. We continue to see consolidation in traditional 
forms of media, such as newspapers, radio, and TV stations. And now, we 
are also seeing consolidation in newer forms of media, such as 
satellite radio and the Internet.
    This development troubles me, because America thrives on the 
freedom and the ability of its people to hear and consider different 
points of view, no matter how unpopular, and to make up their own 
minds. If the availability of news, information, and different 
viewpoints is controlled by too few entities, this precious freedom at 
the foundation of our nation is put into jeopardy.
    Today, the Internet is fast becoming the prime source of news and 
information for many people. And indeed, many of these people who look 
for their news and information on the Web start first by typing in a 
keyword in a search engine. More likely than not, that search engine is 
Google.
    Imagine my concern, then, when I learn that Google, which controls 
about 70% of total search queries, now wants to partner with its 
closest competitor, Yahoo!, which controls about 20% of all search 
queries. That would mean, essentially, that one company would control 
nearly all of the search queries made by Internet users today.
    This is a lot of power to give to one company. This company now 
will have the power to tell us what content to see--and potentially, 
what to believe.
    Google is fast on its way to controlling the Internet. Not only 
does it control the majority of search queries that Internet users, but 
it also controls the purse strings--in the form of search advertising 
revenues. Those are the dollars that search engines like Google get 
from advertisers who want to reach the millions of Internet users who 
type in those keywords to find content and sites on the Internet.
    Today, Google takes in 70% to 75% of search advertising revenues--
the advertising which helps fund the creation of content and services 
on the Internet that we enjoy today. With Yahoo!, Google-Yahoo! would 
control some 90% of search advertising revenues.
    The only way to ensure that one company does not control what 
Americans read, hear, or see is through marketplace competition and 
choice. The American people need alternatives to Google from which they 
can access content and services on the Internet. Only through 
competitive alternatives can we ensure that we can have access to 
diverse points of view that are so important to the functioning of our 
nation.
    The issue of broadband is vital to communities across the country, 
and yet is often overlooked for communities of color. Every American 
should be focused on it right now--especially given the current 
economic crisis and the overwhelming investments that are being made in 
communities across the country.
    It has been widely reported that the recent Google and Yahoo! 
Agreement will provide new opportunities for Americans. But as I 
sharing today with you, there are two sides to every story. I hope that 
we can better understand what this merger will mean for the state of 
competition on the internet.
    On June 13, 2008, Google announced that it reached an agreement 
that gives Yahoo! the ability to use Google's search and contextual 
advertising technology through its advertising programs. Under the 
agreement, Yahoo! has the option to display Google ads alongside its 
own natural search results in the U.S. and Canada. In addition, Yahoo! 
can serve contextually targeted ads on its U.S. and Canadian web 
properties as well as on its current publisher partner sites while 
operating its own search engine, web properties and advertising 
services.
    In addition, Yahoo! and Google agreed to enable interoperability 
between their respective instant messaging services bringing easier and 
broader communication to users. It is expected that this agreement will 
provide Yahoo! with the opportunity to deliver more relevant ads to 
users and provide advertisers and publishers with better advertising 
technology to aid their businesses.
    This non-exclusive agreement allows Yahoo! to engage in similar 
agreements with other advertising providers. Also, Yahoo! will maintain 
relationships with its own advertising customers and continue to rely 
exclusively on its own advertising program outside of the U.S. and 
Canada. The agreement lasts up to ten years: a 4-year initial term and 
two 3-year renewals at Yahoo!'s option. Financial terms between the two 
companies were not disclosed.
    Economics teaches us that in a competitive market, high profits are 
a signal for ``would be'' rivals to enter the market and ``compete 
away'' excessive earnings. This has not happened in the Google 
situation. Google's profitability has remained high. In terms of 
percent return on invested capital, Google was 8.5 times more 
profitable than Comcast; in terms of percent return on equity, Google 
was 3.5 times more profitable than Time Warner; in terms of percent 
return on assets, Google was over 6 times more profitable than eBay or 
Verizon; in terms of price to cash flow, Google was 5 times larger than 
the top four Internet Service Providers and twice the major drug 
companies--Merck, Abbott, and Bristol Myers; and in terms of price to 
earning ratio, Google was 4 times the size of Exxon. Google's 
profitability exceeds other web companies, such as Yahoo!, eBay, and 
Amazon, and other ISPs and other major corporations, such as Exxon and 
Merck. In short, Google stands alone.
    Google's marketshare has only grown. This suggests a lack of 
competition and competitive entry. Beyond it's sheer market power, 
there is evidence that Google might be using its dominant market share 
to harm competition. The evidence lies in Google's manipulation of the 
placement of its ads. For example, Google's policy council Alan 
Davidson admitted to Multichannel News (6/12/2006) that consumers using 
a particular ``search term'' would see an organization's ad calling for 
the regulation of Google's potential competitors. This admission was 
also conceded by Google Spokesperson Jon Murchinson in Technology Daily 
PM (6/13/2006). The DC Examiner reported in October 2007 that Senator 
Susan Collins' ads were banned by Google; ads that were intended to 
defend her against attacks by a group sharing mutual policy interests 
with Google. The evidence might suggest that Google can direct 
consumers to ads that are favorable to its public policy positions over 
paying advertisers.
    To stem market power, public policies need to encourage inter-
industry rivalry, IT investment, and increased consumer choice, 
including the market for search and online advertising. The question 
becomes what steps should the Members of Congress take to correct the 
state of competition on the internet?
    Therefore, I urge not only the members of this task force to 
scrutinize the proposed Google-Yahoo! deal closely, but also our 
federal regulators. Thank you, and I yield the balance of my time, Mr. 
Chairman.

    Mr. Conyers. I am happy to welcome all of you. I am 
especially sympathetic toward the nonlawyers that are here as 
witnesses. David Sable, Tim Carter, a hands-on type of person, 
Professor Pasquale, Attorney Drummond, Attorney Smith.
    Mr. Conyers. We will begin with Mr. Michael Callahan, 
Esquire, Executive Vice President, General Counsel and 
Corporate Secretary for Yahoo. You can begin.

  TESTIMONY OF MICHAEL J. CALLAHAN, EXECUTIVE VICE PRESIDENT, 
           GENERAL COUNSEL AND SECRETARY, YAHOO! INC.

    Mr. Callahan. Is this on? It is. Thank you.
    Thank you Chairman Conyers, Ranking Member Chabot and 
Members of the Task Force. My name is Michael Callahan, and I 
am Executive Vice President and General Counsel of Yahoo. I 
appreciate the opportunity to be here today to discuss the 
dynamic and growing Internet advertising space and the 
commercial agreement between Google and Yahoo.
    Yahoo welcomes this hearing; and we are confident that the 
more one learns about this agreement the more clear it becomes 
that it is good for competition, good for consumers, good for 
advertisers and, yes, good for Yahoo.
    The purpose of this commercial arrangement and the intent 
of Yahoo moving forward is to help make our company an even 
stronger competitor to Google, to Microsoft and to others in 
the dynamic and rapidly growing on-line advertising world.
    As I am sure you know, this has been an interesting time 
for our company, to say the least. While I don't want to dwell 
on the very public proxy fight in which we are currently 
engaged, I want to spend a brief moment on it because it will 
give you a flavor for how intensely competitive the search 
business has become.
    All of the companies at this table are laser focused on 
being significant players in search. With this business 
arrangement, Yahoo will continue to execute on its long-term 
corporate strategy. Microsoft, on the other hand, has turned to 
activist shareholder Carl Ichan, in the apparent hope that this 
will force a fire sale of Yahoo's core strategic search 
business.
    Our priority is to build value for our stockholders. That 
continues to be our core mission. What we will not do, however, 
is allow our business to be dismantled or sold off piecemeal on 
terms that would be disadvantageous to Yahoo stockholders and 
to the market as a whole.
    I trust that this will give you context to understand the 
extraordinary value we all place in the paid search portion of 
the on-line advertising business and how very competitive it is 
and will remain and why there are so many misconceptions 
advanced by our competitors about the agreement we have entered 
into with Google.
    Let's start by reviewing what this agreement is not as well 
as what it is.
    First, this is not a merger. Far from it. We will 
increasingly compete with Google and they with us. This is a 
commercial arrangement between two companies who will remain 
autonomous and compete aggressively in search and display 
advertising, in mobile, in news, in e-mail, in finance. You 
name it. Yahoo is here to stay; and we intend to compete across 
countless platforms, including search, for years to come.
    Second, Yahoo not exiting search, nor are we ceding any 
portion of that space to Google. This will not, as some claim, 
result in Google controlling 90 percent of the search business. 
To the contrary, we will continue to do everything we can to 
grow our share and also strengthen our competitiveness in 
search and search advertising. This deal is just one more 
important step along that path; and, with all due respect to 
Google, we have every intention of fighting them and winning in 
this and in other areas for years to come.
    Furthermore, this agreement does not affect ``algorithmic'' 
search at all. When a user comes to Yahoo and performs a 
search, the algorithmic results returned will still be entirely 
Yahoo's. Yahoo serves close to a quarter of the searches that 
consumers make today, and we expect to be serving that or more 
after the deal is implemented.
    Third, this agreement is nonexclusive and gives Yahoo 
complete discretion over if, how, where and when we will choose 
to show Google advertising on our sites. There are no minimum 
requirements either, and Yahoo is free to make similar deals 
with other companies. In other words, this gives Yahoo the 
option to show Google ads but does not tie our hands in any 
important respects.
    Fourth, the claim some have made that Yahoo and Google are 
price fixing is entirely false. Prices for search terms are set 
by open and fair market-based auctions, and advertisers only 
pay when consumers click on the ad. This agreement is truly 
win-win. It benefits consumers, advertisers, publishers and 
Yahoo. Consumers will now get more relevant advertising on 
Yahoo's site. Advertisers will reach more consumers. Yahoo will 
become an even stronger competitor in the broad advertising 
marketplace.
    To put this agreement is perspective, it is helpful to 
recall until 2004 Yahoo completely outsourced algorithmic and 
sponsored search to a variety of companies, including an 
algorithmic search to Google. And, more recently, other 
companies have outsourced their search functions to Yahoo. In 
fact, Microsoft outsourced its sponsored search to Yahoo just a 
few years ago and still does so in some places around the 
world.
    In 2004, Yahoo made the strategic decision to bring 
algorithmic and sponsored search in-house, and that decision 
has not changed. Since then, we have invested hundreds of 
millions of dollars to improve our search products and compete 
better in the marketplace. For example, just last week, we 
announced BOSS, an open platform build-your-own search service, 
which we believe will unleash a wave of innovation. And our 
efforts to create a robust, open exchange should bring 
publishers and advertisers together are also well on their way. 
These efforts are consistent with our complete commitment to 
continued growth in search and display advertising.
    With the additional operating cash flow from this 
agreement, anticipated to be between $250 million and $450 
million in the first year, Yahoo will accelerate our innovation 
and better compete against Google, Microsoft and others in the 
on-line advertising marketplace.
    Over the coming weeks, Yahoo will continue to work with our 
advertisers, our users, outside groups and government 
authorities to explain this agreement and address any questions 
about the facts of the arrangement. We have kept the United 
States Department of Justice informed every step of the way and 
will continue to cooperate with them and with this Task Force. 
We are confident that the more one knows about this agreement 
the more it becomes clear that it will increase competition, 
stimulate creativity, benefit consumers, advertisers and the 
on-line advertising industry overall.
    Thank you again, Mr. Chairman, for inviting me to appear 
here today; and I look period to answering any questions the 
Task Force has.
    [The prepared statement of Mr. Callahan follows:]
               Prepared Statement of Michael J. Callahan




















    Mr. Conyers. Brad Smith is the Senior Vice President, 
General Counsel and Corporate Secretary for Microsoft; and we 
welcome you today.

TESTIMONY OF BRAD SMITH, SENIOR VICE PRESIDENT, GENERAL COUNSEL 
         AND CORPORATE SECRETARY, MICROSOFT CORPORATION

    Mr. Smith. It is my pleasure to be here on behalf of 
Microsoft this afternoon.
    I will be the first to acknowledge that Microsoft is not 
disinterested when it comes to the questions before this 
Committee. No competitor ever is. But we do know a lot about 
this market, and we're hoping to share our knowledge in the 
hopes that will help sharpen the focus on the important 
questions that are being considered.
    The principal question before this Committee today is not 
what might have happened or what could happen, it is what has 
happened. And so far only one thing has happened. There has 
been an agreement between Google and Yahoo. The question 
therefore is whether it is lawful, whether it is appropriate 
for the largest company in the search advertising market to, in 
effect, take control of pricing of 90 percent of the market for 
search advertising by entering into an agreement with its 
second-largest competitor.
    The technology is complicated, but the antitrust issues 
are, in fact, straightforward. It really starts with the role 
that search is playing today.
    Search is the gateway to the Web. For many Americans, using 
a PC on the Internet today involves sitting down in front of a 
computer, typing in a search request, getting the information 
that comes back and using that to decide what to look at, what 
to read, even what to buy.
    Search advertising has become an important part of the fuel 
for all of the free content that is on the Internet. It has 
become a very substantial market. Search advertising is 
projected to become a $16 billion market by the year 2011. Now 
that will start to approach the $20 billion that is spent today 
on all advertising on all cable television in the country 
combined.
    Now we are, in our view, at an historically important 
moment in time for the future of the Internet. Because right 
now, when it comes to search advertising, there are only three 
principal companies. Google has a market share of 70 percent. 
Yahoo has a market share of 20 percent. Microsoft has a share 
of less than 10 percent. So the fundamental question is, what 
will this agreement between Google and Yahoo mean for the 
future of competition on the Internet?
    We believe it will mean four things:
    First, it will lead to an unprecedented level of 
concentration when it comes to search advertising. It will 
bring together 90 percent of the market. In the history of 
advertising, no entity has ever been in a position to control 
pricing of 90 percent of the market--not in television, not in 
radio, not in publishing. It shouldn't happen on the Internet.
    Second, this agreement will mean fewer choices for 
advertisers. Today, there are advertisers who may choose to buy 
ads on Yahoo in addition to or instead of ads on Google. But 
under this agreement, Yahoo is going to send some of these ads 
to Google instead, and these advertisers are going to have no 
choice but to do business with Google.
    Third, this agreement will increase prices. Studies 
released just this morning predict that prices will go up by as 
much as 22 percent.
    Yahoo has been clear in the information they filed with the 
Securities and Exchange Commission. They said this will enable 
them to better monetize ads. That is a fancy way of saying this 
will lead to a price increase. And that price increase, to the 
tune of $800 million of additional revenue, is going to be paid 
for out of the pockets of American businesses, large and small, 
across the country.
    Fourth and finally, this agreement has important 
implications for on-line privacy. If search is the gateway to 
the Web--and most people agree that it is--then this agreement 
puts Google in the position of starting to have access to as 
much as 90 percent of the on-line searches that are conducted. 
In the same way that that is unprecedented when it comes to 
economics, it is unprecedented when it comes to privacy.
    If this agreement takes effect, this Congress may not need 
to enact a new Federal privacy policy. We will have a national 
privacy policy. It will simply be Google's privacy policy.
    We recognize that the Internet is very dynamic. We 
recognized the technology is changing. But for 118 years, since 
the enactment of the Sherman Act, one rule of the road has 
remained constant. We are all encouraged to work hard to 
succeed. We are all encouraged to innovate faster and offer 
customers a better product. But no one is permitted to buy 
their way to 90 percent of the market by entering into this 
type of agreement with their single largest competitor. The 
question before this Congress, and indeed before the Department 
of Justice and the country, is whether that principle should be 
abandoned now.
    Thank you very much.
    Mr. Conyers. You know, I never felt so sorry for poor 
little old Microsoft.
    Mr. Smith. We appreciate your sympathy.
    Mr. Conyers. I am stunned by the fact that these big 
predator competitors are about to swallow you guys up. You put 
this in a completely----
    Mr. Smith. Well, the good news is we do have some other 
businesses that are still doing pretty well.
    Mr. Issa. Mr. Chairman, 20 years ago, if General Motors had 
said that Toyota was going to become the number two and perhaps 
number one auto company, what would you and Detroit have said 
then? Would you have felt sorry for General Motors when they 
predicted that?
    Mr. Conyers. I am busy staying sorry for General Motors 
right now, my friend.
    [The prepared statement of Mr. Smith follows:]
                    Prepared Statement of Brad Smith




























    Mr. Conyers. David Drummond is a cultural aficionado of 
music. His brother is a professional musician known to many of 
us. But Attorney Drummond is Senior Vice President for 
Corporate Development and is the Chief Legal Officer of Google. 
He leads Google teams for legal, government relations, 
corporate development and new business development.
    We welcome you here today.

    TESTIMONY OF DAVID C. DRUMMOND, SENIOR VICE PRESIDENT, 
   CORPORATE DEVELOPMENT AND CHIEF LEGAL OFFICER, GOOGLE INC.

    Mr. Drummond. Thank you, Chairman Conyers, thanks, Ranking 
Member Chabot, Members of the Task Force. Thank you especially, 
Chairman Conyers, for reminding everyone how little talent I 
have compared to my brother. And I am very glad to be here 
today.
    The Internet is a dynamic and competitive environment, and 
that is due to the openness that has been its hallmark from its 
inception. Our nonexclusive commercial agreement with Yahoo 
will maintain and expand that competition. It creates new 
efficiencies that will benefit consumers, advertisers and 
publishers, while protecting privacy and spurring innovation.
    When Yahoo chooses to use our technology, consumers will 
see more relevant ads that better connect them to the products 
and services that they are interested in. Advertisers will 
benefit from better ad matching capability, improving the way 
they that they reach customers. And Web publishers who place 
ads on Yahoo's sites, Yahoo ads on their sites, will also see 
more revenue from better ad matching. That's why large and 
small advertisers, ad agencies and publishers have expressed 
their support for this deal, including Publicis, Digitas, 
Overstock, and even Microsoft's own in-house ad firm, Avenue A 
Razorfish, who recently called it, ``good news for 
advertisers.''
    The fundamental point I would like to make today is that 
this agreement promotes ongoing competition and on-line 
advertising. Let there be no doubt about this point. Google and 
Yahoo will remain fierce competitors in search and on-line 
advertising and many other products and services.
    Yahoo has said that it will reinvest the revenue from this 
agreement into improving its search engine and improving its 
other services. This continued competition will help fuel 
innovation that's good for the Internet users, good for the 
Internet and good for the economy.
    Now the fact that this arrangement is made between 
competitors is not unusual. Commercial arrangements between 
competitors are commonplace on line and in many other 
industries. As Mr. Callahan said, amongst the parties at this 
table, we have had such relationships in the past, and they are 
ongoing. I trust authorities have recognized that customers can 
benefit from these arrangements, especially when one company 
has technical expertise that enables another to improve its 
product.
    We are also excited that, as part of this agreement, Yahoo 
will make its instant messaging network interoperable with 
Google's. That a big step forward in making instant messaging 
more like e-mail, with users able to communicate against 
different platforms more easily.
    Now, I would like to clear up a few things about the 
agreement.
    First, unlike the other alternatives that are being 
discussed, such as Microsoft acquiring Yahoo's search assets or 
taking over all of Yahoo, this agreement will not remove a 
competitor from the playing field. Yahoo will remain in the 
business, in the search advertising business and its other 
businesses and continue to be a vigorous competitor in all of 
them.
    Some would have you agree that this agreement will result 
in Google controlling nearly all search advertising. The 
agreement does no such thing. Yahoo will continue to operate 
its own search platforms. It will sell ads to its long-standing 
deep base of advertisers and continue to operate its own ad 
auction. The agreement merely gives them the option to show 
some Google ads in cases where Google ads are likely to 
generate more overall value, that is, increase the pie for 
everyone.
    It is important to note that this agreement is limited to 
the U.S. and Canada and excludes emerging fields such as 
mobile. Simply put, Yahoo will have every incentive; and, as 
you have heard from Mr. Callahan, they have every intention of 
remaining in the business and indeed expanding their business 
in search and on the rest of the Internet.
    Second, the agreement does not increase Google's share of 
search traffic, because Yahoo will continue to run its own 
algorithmic search engine.
    Third, the agreement does not set an illegal price floor. 
Microsoft would have you believe that the additional revenue 
that Yahoo and Google might generate from this agreement will 
be solely the result of higher prices. Nothing could be further 
from the truth, and it really reflects a fundamental 
misunderstanding of how search monetization works.
    This is a very important point. The fact is, we expect a 
primary driver of additional revenue will be more relevant ads 
being delivered to more users who will then click on those ads 
in greater numbers. In other words, we are not looking to sell 
ads at higher prices; we are looking to sell more ads. With 
better targeted advertising what you wind up is with more leads 
for advertisers, more conversions for them and greater value.
    Again, the pie is bigger than it was before. This is good 
for everyone. Users see more relevant ads, advertisers connect 
with more interested users, and Yahoo and its partners sell 
more advertising space.
    Fourth, the agreement also upholds Google's deeply held 
commitment to protecting user privacy. As Google supplies ads 
to Yahoo and its partners, personally identifiable information 
of Internet users will not be shared between the companies.
    Let me conclude today with some frank talk here. The most 
energetic critic of this agreement is Microsoft, who, of 
course, is a major competitor of ours and not exactly a mom-
and-pop shop. This is the same Microsoft whose CEO said he was 
going to ``kill Google'', along with some other salty language 
that I can't repeat here. It is the same Microsoft that has a 
90 percent share of operating systems, a 95 percent share of 
productivity software and 80 percent share of the browser 
market. You get the picture. A desktop monopoly that Microsoft, 
frankly, could use to harm the next phase of the Internet, a 
very important phase of the Internet that we call cloud 
computing.
    Most importantly, this is the same Microsoft that's 
actively trying to buy or at least destabilize, from what we 
can tell, Yahoo and eliminate them as a competitor. So if you 
think all of that gives them a bit of incentive to oppose the 
agreement, you are right.
    In conclusion, let me just say that openness, 
interoperability and competition is central to our culture at 
Google. It is central to vibrancy of the Internet and the 
growth of free markets. Unlike on the desktop, competition on 
the Internet has always been and will continue to be a click 
away.
    Thank you, and I look forward to answering your questions.
    [The prepared statement of Mr. Drummond follows:]
                Prepared Statement of David C. Drummond
















    Mr. Conyers. Professor of Law, Frank Pasquale, Seaton Hall 
Law School. His research on search engines has been widely 
reported, featured in the New York Times, San Francisco 
Chronicle, Los Angeles Times and other publications and media.

            TESTIMONY OF FRANK PASQUALE, PROFESSOR, 
              SETON HALL UNIVERSITY SCHOOL OF LAW

    Mr. Pasquale. Chairman Conyers, Ranking Member Chabot, 
thank you very much for giving me this opportunity today.
    This is a very complex area, but what I would like to do 
today is to boil down the considerations of this issue into two 
large problems and three potential solutions to them.
    The first problem that I think has already been highlighted 
by Attorney Brad Smith here today is Google's increasing 
domination of the search advertising market and view of the 
search market in general.
    Now I have acknowledged in my testimony that this may well 
be a natural monopoly. There may well be forces in this 
industry that lead to there to be one dominant standard 
overall, and we have to be cognizant of that. But we also have 
to be cognizant that there are some anti-competitive basis, 
some restraints on trade that are also driving this 
development.
    For example, Professor Ben Edelman of Harvard Business 
School has done some terrific research looking at the data 
portability and the lack of data portability for AdSense 
customers. Essentially, to make a long story short here, Google 
makes it very difficult for AdSense customers to effectively 
port data that they have cooperatively created through the 
AdSense program to potential competitors.
    Now, fortunately, this particular problem of data 
portability I think is relatively straightforward to solve. As 
Professor Edelman has said, we could condition or the relevant 
regulators could condition the deal on that type of data 
portability. I think it is only fair. Cooperative data creation 
should lead to sharing.
    The larger issue here that I really hope the Committee will 
focus on and the regulators will focus on is to think about the 
lack of transparency in terms of search engine practices here 
overall. And here I think we need to step back a little bit and 
think about what is a search engine.
    I would propose to the Committee--and I think there is lots 
of work to support this--a search engine is fundamentally a 
voting machine. It is a way of tabulating and processing the 
billions and billions of actions on the Internet in order to 
organize the Internet. The unfortunate thing about these voting 
machines today is they are a bit like the voting machines that 
we have come to suspect in some elections, both Republicans and 
Democrats. They are extremely opaque.
    What I would like to ask the Committee today to consider, 
for example, if an advertiser sues Google over some, say, 
business dispute and then gradually finds that its rank goes 
down further and further and organic search for its paid 
searches just aren't being accepted, does it have any way of 
finding out exactly why that is happening? Because of the trade 
secrecy that Chairman Conyers has brought up with respect to 
this agreement today, I believe it does not.
    Think further about what happens if a politician, say, is 
investigating Google and then finds that there might be some, 
say, form of retaliation or potential retaliation, that the 
search results about them focus primarily on, say, some minor 
scandal, as opposed to the dominant interest of their career. 
That is another problem, actually entertainingly talked about 
in Cory Doctorow's story Scroogled. That is the stuff of 
science fiction, but I still think there are lots of issues 
here involving the transparency of search engines that should 
give the Committee pause.
    I think that we have existing, within our legal frameworks, 
ways of dealing with these problems and ways of dealing with 
issues that need to be kept secret that we should think about. 
I have talked about a parallel to the Pfizer court, and I 
believe that if we have something like the Pfizer court, which 
potentially puts our national security or national secrets, 
exposed them to a small select group of people, we should not 
be afraid doing a similar sort of fact-finding, regularized, 
administrative fact-finding about data pools and about proving 
that there is no abuse within search engines within the Federal 
Trade Commission. Some leading scholars have called for this.
    I also believe that we have to think about--just in 
response to the points that have been made about not setting 
prices, I do wonder about whether reserve prices are set in the 
auctions. For example, there has been economic work about 
reserve prices set in auction for search terms. If I, say, own 
the trademark to 2bigfeet.com, it is not as if--there are 
probably not many people going to be bidding for that 
particular trademark because I own the trademark.
    But it is not as if I will be entering into an auction and, 
say, there will only one or three people there, there most 
likely will be a reserved price set. I believe that is a form 
of price setting, and I believe that this type of concentration 
does give the dominant entity that will result a lot of power 
over that type of price setting.
    And, therefore, I proposed in some of my work and I have 
seen it done in some other work annotation remedies that would 
give some rights to trademark holders, if they think the search 
results were unfair, to annotate trade results, to search 
results, to put an asterisk next to those results to indicate 
that they are the ultimate owner of that trademark that was a 
search term.
    In conclusion, I would like to recommend to the Committee 
or just to ask the Committee to think of these companies as 
fantastic innovators, as wonderful guides to the Internet. But 
also think of them in some ways as Tom Sawyer companies. 
Remember that Tom Sawyer got others in the great Mark Twain 
story to paint the fence for him. Ultimately, what search 
engines do is they use data that we all create, actions that we 
use on the Internet to create a map of the Internet. We have 
all created this map together, and we all deserve a voice in 
how it is processed and how it is presented.
    Thank you.
    [The prepared statement of Mr. Pasquale follows:]
                  Prepared Statement of Frank Pasquale




























    Mr. Conyers. President and CEO of AsktheBuilder.com, Tim 
Carter, who has a Web site that educates consumers on how to 
best invest their money into their homes. He was named Hotshot 
of the Year by the International Society of Online 
Entrepreneurs in 2004 and the Entrepreneur of the Year by 
ContentBiz in 2005. Welcome.

          TESTIMONY OF TIM CARTER, PRESIDENT AND CEO, 
                       ASKTHEBUILDER.COM

    Mr. Carter. Thank you and other Members of the Task Force. 
I really appreciate the opportunity to address you about this 
very important topic.
    The future of the Internet advertising is brilliant. In 
fact, some might say it is possibly one of the fastest-growing 
segments of our national economy. The proposed agreement 
between Google and Yahoo, as seen from my eyes as a consumer 
and Internet publisher, is a very good idea. There are many 
more winners who benefit from this business transaction than 
those who make claims about being harmed.
    People like you and me have problems each day. We seek out 
solutions to those problems, and with the advent of the 
Internet it has never been easier or faster to discover precise 
and accurate solutions to those problems.
    In my opinion, one of the reasons for Google's success 
stems from the fact that they are an excellent matchmaker. They 
created a streamlined search engine that displays search 
results as well as contextual advertising that matches the 
exact search term typed by tens of millions of consumers each 
day, many of whom are your constituents.
    Google is not the sole search engine that does this. The 
advertising that is part of the search results is purchased by 
small and large companies alike. To the best of my knowledge, 
this method of displaying a highly targeted ad is quite 
possibly the key component to the paradigm shift that is 
happening right now in the advertising industry.
    Never before could companies be in front of so many 
consumers who needed their product or service at that exact 
instant in time. The old methods of advertising usually had 
some type of delay built in.
    Billions of dollars are being spent on Internet 
advertising, and the market is growing. It is growing because 
it is a win-win situation. Consumers who quickly solved their 
problems win, the companies selling the solution to the 
consumer wins, the Internet company that sold the ad wins, and, 
finally, a Web site that displays a syndicated ad wins.
    Yahoo has valuable real estate on their Web site pages that 
is seen by tens of millions people each day. They can sell or 
lease that virtual real estate to whomever they please or even 
fill the space with things they create. I do the exact same 
thing at AsktheBuilder.com, filling my pages with my columns 
and my videos, ads sold by others or ads I sell myself.
    Yahoo is a public corporation, and it is paramount that 
they do what is best for their stockholders. If they can lease 
space on their Web site to some other company and derive 
revenue for doing virtually nothing, why would you or anyone 
else stop them? Who is getting harmed? Surely not the people 
who are clicking the ads. They willingly click them hoping to 
discover a solution to the problem they have.
    Let's take this one more step down the antitrust pathway. 
When and where will you stop sliding down the slippery slope?
    I had a discussion with a fellow Internet entrepreneur 
named Dan Gray. He said, Tim, are you next? When you become the 
most visited home improvement Web site on the Internet, will 
the government come in and tell you that you can't display 
Google ads? If that were to happen, it would be the most 
unAmerican thing I could imagine.
    Dan was right. If memory serves me right, antitrust actions 
were initiated when some company or a small group of companies 
enriched themselves at the expense of many others who were 
harmed financially by the actions of the company or companies. 
That can't be said about the proposed deal between Google and 
Yahoo. The tens of millions of consumers each day who visit the 
Yahoo Web site are going to see ads that solve their problems. 
Many will click those adds. Hundreds of thousands of businesses 
who sell products and services to these consumers will increase 
their revenues when those ads are clicked. Those companies end 
up paying more taxes in our economy growth.
    Who is harmed in this transaction? Perhaps some other 
company or companies that decided to follow a different pathway 
in the business jungle.
    My father-in-law taught me long ago there is no substitute 
for brains. Furthermore, I discovered that healthy competition 
is a great thing.
    In closing, the proposed deal has the potential to increase 
the revenues of Yahoo by hundreds of millions of dollars each 
year. The ad revenue that Yahoo receives from Google will flow 
into Yahoo with virtually no expenses. If the management of 
Yahoo is wise, they will reinvest this money back into their 
company to provide the healthy competition that we as consumers 
want and need.
    The deal may also force other companies in the Internet 
business world to work a little harder. My experience as a 
builder is that a little hard work never really hurt anyone.
    Thank you again for taking the time to consider my opinion 
in this very important issue.
    [The prepared statement of Mr. Carter follows:]
                    Prepared Statement of Tim Carter








    Mr. Conyers. Mr. David Sable is the Vice Chairman and Chief 
Operating Officer of Wunderman, a direct marketing agency. Does 
he have the clients: Microsoft, Citibank, Kraft, Hewlett 
Packard, IBM, Colgate Palmolive, Bausch and Lomb and the United 
States Postal Service. Welcome.

          TESTIMONY OF DAVID SABLE, VICE CHAIRMAN AND 
               CHIEF OPERATING OFFICER, WUNDERMAN

    Mr. Sable. Thank you. Not all current clients.
    Chairman Conyers, Ranking Member Chabot, honorable Members 
of the Task Force and distinguished panel members, my name is 
David Sable. I am Vice Chairman and CEO of Wunderman, the 
world's largest marketing services network and a leader and 
innovator in digital marketing. In that capacity, I work with 
consumer and business-to-business companies, content providers 
and, of course, all communications channels globally, including 
print, television, mail, outdoor and, of course, the Web and 
other digital carriers, using data to help our clients create 
valued relationships with their own customers and consumers.
    Microsoft, as you heard, is in fact one of my many clients, 
and Google is a channel that we are deeply involved with, and 
as such we are Google's client in this capacity.
    Thank you for allowing me the opportunity to provide a 
perspective on this deal and what I consider to be not just the 
future of Internet advertising but the future of the Internet 
as a free and open medium.
    Let me begin by stating that I am a charter Google user. I 
search. I use Picasa. I have a gmail account. I also believe 
that Google rose to success on a simple insight--simple yet 
brilliant. In a landscape populated by portals and cluttered 
Web sites, Google gave users a pure and simple way to get where 
they needed today and to find what they needed to find.
    Google created the ``entry bar'' on a plain white 
background.
    And how that bar has change our lives. Search has become 
effortless. Anyone can do it. The Google brand was easy to 
remember. It only did one thing. Soon, people were using Google 
like a nav bar, and they became the default on-line ramp of 
more and more people around the world.
    But the world changed. Business needs a model. The pure 
white morphed and advertising based on our activities began to 
appear, as did further plans for more targeted messaging and 
more applications designed to capture even more of our 
behavior.
    So far, so good. I was and still am willing to pay the 
price. Google fulfills my needs, so Google can have the data 
as, by the way, so can Yahoo and Microsoft for that matter.
    The advertising business model here is simple. Either 
consumer accept the ads in return for free or reduced cost 
service or content. It is a model we all grew up with, a model 
we all accept.
    From a professional perspective, I have no issue either. 
While many of my advertising and media colleagues worried they 
were getting disintermediated by Google and others, we saw the 
opportunity to pick up the consumer at the off-ramp as soon as 
they hit the page to which they were directed. Portals and Web 
sites as linear, click-through experiences were dead. Web users 
wanted to find specific pages, focused offers and desired the 
ability to transact as quickly and as efficiently as possible.
    Google helped to enable this desire, and the industry built 
a practice of helping clients make better use of search. Google 
was and is good for our business, make no mistake.
    So why am I being worried about this proposed deal?
    On the most basic of levels, my anti-monopoly hackles have 
risen as the market share that such a deal would represent will 
eliminate any notion of free and open enterprise. It is an 
agreement that could create fixed prices, destroy a currently 
competitive market, and possibly eradicate any sense of 
auction-style bidding.
    However, I believe it is only part of the issue. I know you 
that have covered this part of the topic in great depth. Allow 
me to take a slightly different tack.
    Search is all about the algorithm, and that is all about 
control. If you control the algorithm, you effectively control 
the information it presents. Think about it. By restricting or 
pushing potential search results--and you just heard this 
before--at the most benign level, Google could have even more 
influence on pricing, bringing up and suppressing topics at 
will.
    At another level, do we really want anyone controlling the 
answers to everything and anything we ask?
    Think about it. With few other search options and the 
built-in lethargy and inertia that Web users portray when it 
comes to switching, a monopoly in this arena is ill-advised. I 
don't believe that any single entity should ever yield that 
much power, influence or control.
    So while my objections begin with the notion of monopoly, 
it is my fear of what any company could do with that position 
of unbridled power that makes me oppose the proposed merger. I 
much prefer to see Google remain the important and competitive 
player that it is, spurring all of us to an even more 
competitive environment.
    In summary, Mr. Chairman, one, Google is a critical 
competitive catalyst for this market and should be encouraged 
to remain so. Two, the true consumer benefit is in the search 
and the accuracy of the information returned to the user.
    In fact, I checked this morning with Forester. I was 
interested in the percent of duplication between search 
engines. That number is only about 40 percent, meaning that the 
majority of users use different search engines for different 
reasons and are happy with the information that they find. We 
must allow this to continue.
    Third, lowering the cost of acquisition through competition 
is a consumer benefit as it relates to passed-on costs. Raising 
the cost of acquisition has direct impact on raised cost to the 
consumer. The promise of the Web has always been more cost-
effective acquisition.
    Finally, because the flow and accuracy of information and 
search is so closely related to monitorization, we must provide 
the consumer with choice that only competition can provide.
    Thank you.
    [The prepared statement of Mr. Sable follows:]
                   Prepared Statement of David Sable
    Chairman Conyers, Ranking Member Chabot and honorable members of 
the Task Force, my name is David Sable and I am Vice Chairman and COO 
of Wunderman, the world's largest Marketing Services network and a 
leader and innovator in digital marketing. In that capacity I work with 
consumer and business-to-business companies, content providers and 
across all communications channels, globally, helping to develop 
compelling programs that allow our clients to create valued 
relationships with their own customers and consumers. Microsoft is in 
fact, one of my many clients; and Google is a channel that Wunderman is 
deeply involved with as we are Google's client in this capacity.
    Thank you for allowing me the opportunity to provide a perspective 
on the Google-Yahoo deal and what I consider to be not just the future 
of Internet Advertising but the future of the Internet as a free and 
open medium.
    Let me begin by stating that I am a Google user. I search. I use 
Picassa. I have a Gmail account. I also believe that Google rose to 
success on a simple insight--simple yet brilliant. In a landscape 
populated by ``Portals'' and cluttered websites Google gave users a 
pure and simple way to get to where they needed to go and to find what 
they wanted to find--Google created the ``entry bar'' on a plain white 
background.
    And how that bar changed our lives! Search became effortless. 
Anyone could do it. And the Google Brand was easy to remember--it only 
did one thing. Soon people were using Google like a Nav Bar and they 
became the default on-line ramp of more and more of us around the 
world.
    But all too soon, the world began to change. Turns out Google was 
watching us and analyzing our behavior and web journeys' from Day One. 
The pure white morphed and advertising based on our activities began to 
appear as did further plans for more and ever more targeted messaging 
and ever more applications designed to capture even more of our 
behavior.
    So far so good--I was willing to pay the price--Google fulfilled my 
needs, so Google could have the data. And frankly, Google said it was 
all ``blind'' and anonymous anyway--and I believed them.
    From a professional perspective I had no issue either. While many 
of our Advertising and Media colleagues worried that they were getting 
disintermediated by Google, Wunderman saw the opportunity to pick up 
the consumer/user at the ``off-ramp'' as soon as they hit the page to 
which they were directed. Portals and websites as linear click-through 
experiences were dead. Web users wanted to find specific pages focused 
offers and desired the ability to transact as quickly and as 
efficiently as possible, Google helped to enable this desire and, 
Wunderman built a practice helping clients make better use of search. 
Google was good for our business.
    So why am I worried about the proposed deal between Google and 
Yahoo?
    On the most basic of levels my American, anti-monopoly hackles have 
risen as the market share that such a deal would represent will 
eliminate any notion of free and open enterprise. It is an agreement 
that would create fixed prices, destroy a, currently, competitive 
market and it would virtually eradicate any sense of auction style 
bidding.
    However, I believe, that is only a part of the issue and I know 
that you have covered this part of the topic in great depth. Allow me 
to take a slightly different tack.
    Search is all about the algorithm, and the algorithm is all about 
control. And, if you control the algorithm you effectively control the 
information it presents. Think about it--by restricting or pushing 
potential search results--at the most benign level--Google will have 
even more influence on pricing--bringing up or suppressing topics at 
will. At the more Machiavellian level, do we really want Google 
controlling the answers to everything and anything we ask? Think about 
it. With few other search options and the built in lethargy and inertia 
that web users portray when it comes to switching a monopoly in this 
arena, is ill advised.
    I don't believe that any single entity should ever wield that much 
power, influence or control.
    So while my objections begin with the notion of monopoly--it is my 
fear of what Google or any company could do with that position of un-
bridled power that makes me oppose the proposed partnership/merger.
    I much prefer to see Google remain the important and competitive 
player that is--spurring all of us to an even more competitive 
environment.

    Mr. Conyers. I ask you all only one question, remembering 
that this is not a merger but an agreement, which has more 
potential?
    I will start with you, Mr. Sable. Which agreement has more 
potential for anti-competitive effects, the Yahoo-Google 
agreement or the Yahoo-Microsoft agreement?
    Mr. Sable. Clearly, the Yahoo-Google agreement, as the size 
of the market share of that particular agreement would be 90 
percent plus.
    Mr. Conyers. Mr. Callahan.
    Mr. Callahan. I would disagree with, first and foremost, 
the comment from Mr. Sable that this is like a merger or is a 
merger. First and foremost, it is not a merger. We will 
continue to compete.
    I think while Yahoo's corporate future has been an open 
story for several months now, starting with an unsolicited bid 
from the Microsoft Corporation to a combined Microsoft-Icon 
proposal over the weekend for our search business and 
restructuring proposal, Yahoo remains focused on this deal for 
this hearing today, and we are very much convinced that this is 
a good thing.
    It is good for advertisers, as you heard Mr. Carter say. We 
believe it is very good for users, who we will be able to 
provide a more relevant experience, and it's obviously good for 
Yahoo as we continue to invest in our competitive 
differentiation going forward.
    Mr. Conyers. Mr. Carter.
    Mr. Carter. Congressman Conyers, the one that scares me the 
most--actually, I would say it terrifies me--would be a 
combination of Yahoo and Microsoft. Because Microsoft would 
effectively either swallow or completely kill off Yahoo's 
search engine, in my opinion. Then we would only be left with 
two.
    Right now, in my opinion, we need 10 search engines. I 
can't wait for the next company that comes along and challenges 
all three of the companies that are here today. I mean, I love 
all three of them. I personally spend my advertising dollars 
with all three companies. I would like to spend my ad dollars 
with 5 or 10 companies.
    Mr. Conyers. Mr. Smith.
    Mr. Smith. Yes, Mr. Chairman.
    Certainly, for us, an agreement between Yahoo and Google is 
going to bring together 90 percent of the market for search 
advertising. It is going to reduce choices for advertisers. It 
is going to increase prices. I think that is quite clear.
    If you want to talk about what Yahoo and Microsoft might do 
together, probably the most important word is ``might'', 
because we haven't figured out a way to do anything together. 
But if I look at the proposal that we made most recently, that 
is a proposal that would bring us together on search and search 
advertising. It would make Yahoo more efficient, more 
profitable. It would give us greater scale to do that work 
together. We would continue to compete with each other in a 
variety of other ways.
    Mr. Drummond usually points out that if Yahoo and Microsoft 
did a complete combination, he would have concerns about lack 
of competition in instant messaging, e-mail and display 
advertising. While, under the proposal that we made, Yahoo and 
Microsoft would continue to compete in all of those areas. But 
we would finally have a real counterbalance to Google in the 
market for search and search advertising.
    Mr. Conyers. Mr. Drummond.
    Mr. Drummond. Thank you.
    Let me preface--and I will answer the question directly, 
but let me say we keep hearing this 90 percent number being 
thrown out as the so-called market share that Google will 
control if this deal happens. It is just wrong.
    The relevant market here is not search advertising. The 
relevant market--as all three of our companies have told 
government in various proceedings, the relevant market is on-
line advertising, at a minimum. That includes display 
advertising, which is seen by all three of our companies as a 
huge area for us to get into, ultimately likely bigger than 
search and an area converging very much with search.
    So if you really look at that market, which is really the 
relevant one, our share is probably in the 20's. We don't have 
much in the way of a display advertising business. To my right 
are the two leaders in that area.
    So I think it is very clear. This deal doesn't increase our 
share in that overall market. Yahoo is staying in the market. 
They are going to be a competitor going forward.
    So if you ask me which deal would restrain competition, I 
will tell you that our deal is pro-competitive. There will 
still be three large, aggressive competitors competing across 
the board in Internet services. If Microsoft is successful at 
swallowing up Yahoo, you won't have--one will be gone. That is 
clear.
    Mr. Conyers. Professor Pasquale.
    Mr. Pasquale. Thank you, Chairman.
    My view is that perhaps this could be seen as pro-
competitive. The Google-Yahoo deal could be see as pro-
competitive if Yahoo is seen as a failing firm, although I 
don't really see the real data for that.
    I am wondering, in terms of how we get more search engines, 
I think the real incentive for alternative search engines to 
develop is most likely the promise of getting bought out, 
getting bought by one of the three major players. Anything that 
consolidates those down from three to two or more joint 
ventures between them I think the Committee should look on with 
some sort of suspicion.
    I finally would like to note, although technically there is 
a non-exclusive provision of this particular deal between 
Google and Yahoo that is proposed, it is really unlikely any 
other buyer could afford to pay as much as Google. I don't 
really see how that exactly is envisioned that there is going 
to be this type of cooperation with others than Google because 
I think Google has this enormous stable of existing advertisers 
that would maximize the amount they could pay to Yahoo for that 
space.
    Mr. Conyers. Thank you very much.
    Ranking Member Chabot.
    Mr. Chabot. Thank you, Mr. Chairman.
    Let me start with you, Mr. Carter, since you're from the 
First District of Ohio. Did you go to LaSalle High School?
    Mr. Carter. Roger Bacon. We kicked your butts in football 
many times.
    Mr. Chabot. Thanks for mentioning that. I have no further 
questions, Mr. Chairman.
    No, let me start with you. Do you work in your business 
with Google and Yahoo and Microsoft, principally Google, or 
what?
    Mr. Carter. I work with all three of those companies. I buy 
ads on all of their services through what I call a super 
affiliate who works for me that sells a lot of our products. I 
display Google ads on AsktheBuilder.com through their ad 
program. I had been approached several years ago by Yahoo when 
they started a similar program called Yahoo Publisher Network. 
I also have ads on AsktheBuilder right now from Conterra, 
Tabula. So there are many other companies out there that also 
sell Internet advertising. I don't have an exclusive 
arrangement on AsktheBuilder. I am constantly testing because 
everybody has a different angle and has a different advertising 
base.
    Mr. Chabot. Thank you.
    You mentioned that you thought that you would like to see 
another company or entity come into existence at some point 
that would compete with all the companies that are here this 
afternoon. Do you think that that is more likely or less likely 
to happen if this deal went through?
    Mr. Carter. That is a great question, Congressman Chabot. I 
think if I was either Microsoft, Yahoo or Google, I think I 
could sleep at night.
    But let's go back in time. I have heard the story of how 
Sergey and Larry started that company. It is unbelievable. 
There are young men and women in this country right now, this 
great Nation of ours, that they are going to take down those 
three companies. I am telling you it is going to happen. So if 
I was them, even with all the billions of dollars they have, 
they will not ever be able to stop that.
    So I encourage it, because I think that is going to make 
America a better place to live. So that is why I am excited 
about it. I just think, from a business perspective, that will 
help keep those three companies on their toes, which is exactly 
where we need them. We don't ever want them to rest on their 
laurels.
    So I think this proposed deal is fantastic because it is 
going to give Yahoo this incredible amount of revenue that 
currently they are not getting; and if they play their cards 
right, they will be able to reinvest that and might even become 
the Google killer. We may go back in history and go, what did 
we do that for? It's the craziest thing we could have ever 
done.
    Mr. Chabot. Mr. Smith, let me go to you on behalf of 
Microsoft. How would you respond to the 90 percent question and 
more or less likely that this entity will come into existence 
in the future that is going to, in Mr. Carter's words, kill all 
three of you?
    Mr. Smith. Let's start with the basics. Google has 70, 
Yahoo has 20. That equals 90. No doubt about that. I don't 
think that is possible to dispute.
    Now it just turns on how does this agreement between the 
two of them--how does this agreement work? How does this open, 
secret agreement work that none of us are really able to see? I 
think that is a problem in and of itself.
    The way it appears to work is that Yahoo can take ads that 
it is selling at a lower price and send them to Google and have 
Google sell those ads when Google can sell them at a higher 
price.
    For all the talk about quality and the like, if you look at 
what Yahoo has filed with the Securities and Exchange 
Commission, what they have displayed is we are going to see, at 
least in that case, the exact same ads from the exact same 
advertisers on the exact same place on the exact same Yahoo 
search page. It is just that Google is doing the reselling at a 
higher price; and, therefore, Yahoo is making more money.
    Now, on the one hand, you can say, maybe Yahoo will use 
some of that money and invest in something that will compete 
with Google. But the reality is every time Google's prices go 
up, Yahoo benefits.
    That is not the way competition is supposed to work. If we 
want to merge, if we want to have a joint venture that gets 
reviewed, there are efficiencies that come out of that. But 
when you are competing, you are supposed to keep on competing, 
not collaborate in this kind of way, especially around 
something like pricing.
    Mr. Chabot. My time has almost expired. Let me ask one 
quick question.
    Mr. Callahan or Mr. Drummond, why was the deal limited to 
U.S. and Canada?
    Mr. Callahan. I can comment. The parties had agreed at this 
time for U.S. and Canada. I think, without speaking for Mr. 
Drummond, if there was a future opportunity to work together, 
that is something that might be considered. But that is where 
the negotiations ended.
    As to Mr. Smith's characterization, this 90 percent 
number--and I think Mr. Drummond spoke to this as well--would 
be the case if Yahoo was somehow merging with Google, exiting 
the search business, shutting down our business, none of which 
is the case. Quite to the contrary. We continue to innovate, 
not just in sponsored search. I can have a prop here from the 
Wall Street Journal this past Thursday: Yahoo wields new tool 
to battle Google. This is about our open search platform that 
we opened.
    We continue to very aggressively compete and not just in 
search. Mr. Drummond mentioned one small slice of what all our 
companies do right now. Google has done quite a good job, 
obviously, in Web search. Yahoo leads in displaying. Yahoo 
leads in mobile. These are areas that we continue to believe 
there is a compelling market opportunity for us to continue to 
invest, and the proceeds from this agreement would be part of 
that effort, sir.
    Mr. Chabot. I think Mr. Drummond would like to make a quick 
point.
    Mr. Drummond. Mr. Smith repeatedly keeps saying the point 
of this agreement is for Yahoo to have Google ads at higher 
prices. It's just not right. It's not just true. I think he 
knows that if someone says they are improving search 
monitorization, they are not talking about higher prices. The 
prices are being set in a dynamic auction where the advertisers 
are driving it, the advertisers are setting the prices.
    If you design an auction that works very well and you work 
hard on it, what happens is you get more revenue per query. In 
other words, it is more productive. You are getting more 
revenue because you are creating more clicks, more between 
users and advertisers than you would have if you didn't have as 
good a system.
    There may be cases in that kind of setting where the prices 
might be higher, but, ultimately, what you are looking for is 
the ultimate advertiser return. That is what drives all of 
this. What we are talking about with Yahoo is incremental 
revenues, because Google is going to be able to deliver them 
more targeted ads. This is not about a price increase.
    Mr. Chabot. Thank you, Mr. Chairman. I yield back.
    Mr. Conyers. Chairwoman Zoe Lofgren.
    Ms. Lofgren. Thank you, Mr. Chairman.
    I am thinking about the ad market generally, and in the 
analysis we got from the staff in our memo they note that if 
you take a look at on-line advertising as a whole, there are 
three big players. Yahoo has 18 percent. Microsoft has 6 
percent. Google has 25 percent. But if you add that up, that is 
51 percent for somebody else, not the three big guys.
    We have talked a little bit about competition, actually, 
the point of this, but the insurgents that are coming at you 
three, the 51 percent, I don't know who they are. I assume Digg 
is going to monotize some of the social networking like 
Facebook and MySpace. Who are the insurgents coming at you and 
how does that lead to assurance of competition? Any of the 
three of you.
    Mr. Drummond. If I might add, Congresswoman Lofgren, there 
are lots of them. In fact, we are actually probably most afraid 
of the ones we don't know about.
    A quick history, quick history. I think I met Larry and 
Sergey 10 years ago, and we ended up setting up the company in 
September 10 years ago. We were very small. There were many 
bigger search companies than we were.
    Our ad system that everybody is talking about as being 
alleged to be dominant and will be around forever is 4 years 
old. It is 4 years old. We have only had it for 4 years.
    At the time that we created it, Overture, which was 
subsequently acquired by Yahoo, was an incumbent player. We did 
it better, and we were very small. Our first major deal was 
with AOL back in 2002.
    Ms. Lofgren. You were the big guy.
    Mr. Drummond. But, I kid you not, we were afraid that our 
company would go bankrupt because of that deal--that is just 4 
years ago--because of the guarantees we had to make, which 
turns out we were able to perform, because we did a good job, 
and we have continued to try to do a good job.
    So as we look out at the landscape, the capital formation 
in Silicon Valley continues. There are new companies getting 
started all the time. Seems like hardly a day goes by when you 
don't read about--whether it's Facebook or some other social 
networking site being the new place, the new gateway to the 
Internet.
    I have every confidence that there are going to be more and 
more of these startups coming in that have great ideas and can 
execute them. And the great thing about the Internet is you 
don't need millions and millions of ideas all the time. You 
need a good idea. If we don't respond to that, I think we will 
wind up in the situation that Mr. Carter describes. We have got 
to innovate, too.
    Ms. Lofgren. Mr. Smith, you were looking eager to say 
something.
    Mr. Smith. Just two reactions to these comments.
    First, the Federal Trade Commission looked at the specific 
question last year of how the market should be defined. It 
looked at it in the context of the DoubleClick merger. What 
they said specifically, and I will quote, was that the evidence 
in this case shows that the advertising space sold by search 
engines is not a substitute for space sold directly or 
indirectly by publishers or vice versa.
    So they said quite clearly the relevant market in this 
context is the market for search ads, not all on-line ads.
    Ms. Lofgren. If I may--because I have got some other 
questions--I am not going to mention the name of this company 
because they haven't done their IPO yet, but there are some 
insurgents in the Valley that are going to take us to new 
places in contextual ads. It is very interesting.
    Which leads me to a question about the possibility of the 
Microsoft-Yahoo deal, for lack of a better word. I am going to 
ask this because I have three companies that all--that have a 
presence in Silicon Valley: Microsoft in Mountainview, Google, 
Yahoo. My constituents work in your companies. So I am asking 
this in a very parochial way for my constituents.
    I will be honest. To see Icahn's involvement is a little 
nerve-wracking. He was called the vulture capitalist when he 
took over some other companies. His reputation--and I don't 
personally know him--is that he goes in, he does mass layoffs, 
cuts costs. It is chilling. He said himself that he doesn't 
know anything about technology.
    So I think there is some heartburn among the engineers and 
employees. I am not talking the management, just my 
constituents, about what is their fate going to be. Is 
Microsoft working with Mr. Ichan? Can you put a lid on that on 
behalf of my constituents here?
    Mr. Smith. Let me say two things. First, Mr. Ichan got 
involved in these issues with Yahoo in early May. Not any 
connection with Microsoft. He did it entirely on his own. He is 
now one of the largest shareholders of Yahoo.
    I can certainly allay what I believe is your principal 
concern. We get the fact that technology companies are 
fundamentally all about the people who work there. It is all 
about the engineers. That is why, when we made our initial 
offer to Yahoo on January 31, we offered a 62 percent premium.
    Ms. Lofgren. I don't want to get into that. You have 
answered the question. You are not working with Mr. Ichan. That 
is, I am sure, going to be good news to my constituents, and we 
are anxious about this.
    Let me just ask one more question, because I am running out 
of time.
    There are many ways to grab the attention of people. For 
example, I have a Yahoo e-mail address, a private e-mail, 
because I don't like the gmail address function. I have 
complained about it often, Mr. Drummond, but there has been no 
improvement.
    If you take a look at the free e-mail market--and it is a 
market because it drives traffic--Microsoft, at least the last 
time I looked, which was last October, had 38 percent, Yahoo 
had 38 percent. Combined, that is 76 percent.
    So if you take a look at that, with what we know is coming 
on contextual ads, what concern does that give us in terms of 
the same thing you say you are concerned about with the 
contract between Yahoo and Google?
    Mr. Smith. I think, first and foremost, if one considers 
the proposal we made to Yahoo last week, it would have had no 
impact on e-mail whatsoever. They would have continued to 
compete with Microsoft in e-mail. We would have simply come 
together in one area, one area only, and that is search or 
search and search advertising.
    Ms. Lofgren. My time is up, Mr. Chairman. I appreciate the 
recognition.
    Mr. Conyers. Mr. Ric Keller of Florida.
    Mr. Keller. Thank you, Mr. Chairman.
    Let me start with our professor. Is it Pasquale?
    Mr. Pasquale. Yes.
    Mr. Keller. Thank you.
    Professor Pasquale, part of your testimony is concerned 
with the so-called black box of the search algorithms. Why do 
you think Google, Yahoo or Microsoft or any company, for that 
matter, should be forced to disclose their trade secrets?
    Mr. Pasquale. Thank you, Representative.
    I don't believe that they should be forced to disclose 
them, generally. I mean, that would fly in the face of the 
fifth amendment on trade secret protection. But I do think 
there are some occasions for qualified transparency there so 
someone else can look under the hood, say, in the course of 
litigation or something like that.
    I think you can think of a situation--and there has been a 
little bit of litigation out there--where someone feels they 
have been treated unfairly by a search engine. As they become 
more and more dominant modes of the gatekeepers for on-line 
life, I think it is important that there be some entity that 
has a chance to look under the hood, be it in camera or like 
the FISA court or things like that.
    Mr. Keller. Who would be in the best position to look under 
the hood of the Google search algorithm, as you suggest?
    Mr. Pasquale. I believe it has been proposed on I believe 
Michael Zimmer's blog or some other search theorist's that 
within the Federal Trade Commission there be a committee of 
engineers, attorneys, and policy experts who would be able to 
look at this. I think these might help the companies in some 
ways. Because, right now, you have hundreds of lawsuits over 
things like trademark, other sorts of things that come up.
    You can think about either have this distributed among 
courts around the country or have it done in a centralized 
administrative body where the chance of them being 
inadvertently disclosed is much less likely.
    Mr. Keller. Not talking about a Federal magistrate? You are 
talking about a private entity?
    Mr. Pasquale. I think there are some opportunities for 
cooperation there.
    One thing I would like to commend Google for doing is they 
have a fantastic program for identifying sites that have 
malware or viruses or spyware that they collaborate with the 
Harvard Berkman Center on. I think that type of collaboration 
would serve them well in situations like this.
    Mr. Keller. Much of your testimony today is how this deal 
will impact on-line advertising. Obviously, as the Antitrust 
Task Force, our key issue is how things are going to affect or 
impact consumers. Do you have an opinion as you sit here today 
about how this deal will impact consumers?
    Mr. Pasquale. I think that my ultimate conclusions here 
are--and my fundamental point would be we should be wary about 
simple, subtle stories about Internet innovation in this space. 
I think that, yes, there was a situation where Google usurped 
the position of other dominant players. If you look at the way 
in which it has, say, licensing deals for content with other 
people, if you look at the cost of indexing the entire 
Internet, it is not as if someone could just invent this in the 
garage and challenge Google.
    I think they are rapidly approaching the type of tipping 
point toward dominance that we saw in the Western Union in 
1857, that we saw in the Bells in the early 20th century. I 
think, as we see, that we are going to have to think outside 
the box of antitrust to much more extensive interventions.
    Mr. Keller. Mr. Drummond, if I could go back to you. What 
impact, if any, do you think this deal will have on consumers, 
both pro and con, if any?
    Mr. Drummond. If you don't mind a quick response to the 
point about transparency. I was a little puzzled by the notion 
if someone wants to sue Google because of they are wronged 
about our algorithm or anything else, they wouldn't be able to 
get all the information they need. In fact, we have been sued 
many, many times by various people on various claims. We have 
won these suits, by and large. But in all those cases we have 
had the discovery process. If it is a trade secret, you have a 
protective order and limit the number of people.
    Mr. Keller. For all their flaws, they haven't had a hard 
time finding deep pockets.
    Mr. Drummond. We have been there. I want to make that quick 
point that, as I said in my testimony, this deal will be good 
for consumers.
    Mr. Keller. Explain it to me as if I am in elementary 
school, as opposed to a general counsel like you. What are the 
basics of why this deal is good for consumers?
    Mr. Drummond. It is good for consumers because ads are a 
form of information. We didn't see ads as something 
fundamentally different from results. We figure that if you do 
a good job, you can make them meaningful, you can make them 
about the information that the user is seeking. They should be 
as valuable as the search results.
    A lot of folks who search--and you search for a digital 
camera. You might not want to know how a digital camera works. 
Maybe you want to buy one. So that is really important 
information.
    So with this deal what this is going to allow is Yahoo to 
choose to use Google ads in those cases, is the Google ads 
generate more value, that is to say, they are more targeted, 
they create more information. So that is more information 
available to consumers after the fact than there was before. 
That is a good thing.
    We also think, as I said before, this is going to create 
more value for advertisers and a bigger pie and lead to more 
sales and more conversions for them. Ultimately, that is good 
for the markets and for consumers as well.
    Mr. Keller. Mr. Chairman, my time has expired. I yield 
back.
    Mr. Conyers. Thank you very much.
    Lamar Smith, Ranking Member of the Committee.
    Mr. Smith of Texas. Thank you, Mr. Chairman.
    I would actually like to follow up on both some recent 
questions and some recent answers as well.
    Mr. Smith, you rightly pointed out that when Google merged 
with DoubleClick, the FTC said that the search advertising did 
in fact consist of a separate market. And so I tend to agree 
with you that if this arrangement is consummated that we are 
talking about 90 percent of the market. At least I will take 
the FTC's word for it, and that seems logical to me right now.
    That being the question, my follow-up question to some of 
your answers is I still don't necessarily appreciate where the 
competition is that is going to keep the price of ads down for 
the advertisers, for the consumers. You have been asked about 
that a couple of times.
    Mr. Drummond, you pointed to, theoretically, the new 
companies coming, being founded, started, and providing future 
competition. But I think I am more concerned about the present. 
Where is the competition now that is going to keep prices low?
    While I want to give you a chance to respond, Mr. Callahan 
has not yet responded to that question. I would like to ask him 
to respond first, and that is, where is the competition in a 
situation where Google, at the option of Yahoo, controls 90 
percent of the market? Where is the competition that is going 
to be good for the advertisers?
    Mr. Callahan. Where we see the benefit for advertisers is, 
currently, if a user was to enter a certain search term into 
the Yahoo engine, there may be a case where we don't return a 
result because there is no result. There has been no advertiser 
that has bid against that search query. In that example, we 
would then turn to the Google system and an advertiser who had 
bid. There would be a click. The advertiser may pay but also 
generate a customer lead.
    Similar to that, what we would be looking to do at Yahoo 
is, in order to augment the overall relevance of our page--and 
this goes back to the question just asked about consumers' 
impact--is to the extent, as Mr. Carter mentioned, people that 
are either looking for a commercial question or looking for 
information in general, Yahoo would be able to use the Google 
system to serve a higher quality ad and perhaps generate a 
click-through. Whether or not--how the pricing gets affected 
depends on the auction on the Google side. But that is how we 
would see it on the Yahoo side.
    Mr. Smith of Texas. I can understand why Google benefits 
from this deal. I am not sure where I see that Yahoo benefits 
so much.
    As I understand it, there is a part of the agreement that 
allows Google to terminate the agreement if they are not making 
I think it was $83 million in 4 months. That comes out to about 
a quarter of a billion dollars a year. How much does Yahoo 
expect to make? If they are increasing their revenues, why 
isn't that going to decrease yours or allow them to dominate 
the market?
    Mr. Callahan. It is correct. The way you described the 
termination is right. That is set at a level that we believe 
would mean--and Mr. Drummond will be able to comment better--
that would mean we would be using their system at a very, very 
low level. That is a small amount of ads.
    What we expect is about $250 million to $400 million in 
operating cash flow over the first year, assuming 
implementation which, as you know, is still under regulatory 
review. What we see as the benefit for consumers going forward 
is that, to the extent we are able to take money--and we plan 
to do this--from this arrangement with Google, invest it in 
some of the innovations like what I mentioned from last 
Thursday, invest it in our mobile platform. We are very much 
speaking today about PC-based search, but we see mobile 
distribution in other areas as a big developer for the future.
    Mr. Smith of Texas. Let me ask Mr. Smith to respond to 
that, if I may.
    Mr. Smith. I think the fundamental problem is pretty well 
captured by your questions. If there is an advertiser today who 
wants to advertise on Yahoo, it can do so. In the future, it 
may lose that ability because Yahoo will have decided to serve 
those ads from Google instead.
    It is certainly I think patently clear that, in general, 
the prices on Google are higher. I am not complaining. That 
reflects a number of things. But prices for advertisers are 
higher. In many cases, it is going to be companies that are 
buying an advertisement on Yahoo today, they are going to have 
to pay more to get back to where they started just to get back 
to the same advertisement on the same page. That is what I 
think Yahoo's filing with the SEC makes clear.
    I also think there are a heck of a lot of things about this 
agreement we don't know and no one is telling us about. If you 
look at the form 8K that Yahoo filed with the SEC, one of the 
things it noted was that, while Google is going to pay Yahoo a 
percentage of the revenue for selling these ads, that 
percentage adjusts based on specified monthly gross revenue 
thresholds. That is not explained.
    A lot of times what that means is that the more money that 
is sent, the higher percentage Yahoo may get. There are a lot 
of incentives here, or there may be a lot of incentives here 
for Yahoo to send even more business to Google. There doesn't 
appear to be any ceiling. There doesn't appear to be any limit. 
Yet it appears to be the case every time Google raises its 
prices Yahoo makes more money as well.
    Mr. Smith of Texas. Mr. Drummond, do you want to respond 
quickly? Then I will ask Mr. Carter his opinion about the 
competition.
    Mr. Drummond. Sure. Once again, the reason Google has been 
successful and generates more revenues per search generally 
than our competitors is because we have a better ad-targeting 
technology. The ads are more relevant. More people click on 
them. More ads get served. As a result, there is more revenue 
generated.
    This is not about price increases. I think it is an awfully 
broad statement to say that prices generally are higher on 
Google. They may or may not be. I think you would have to look 
at the millions of auctions to do such a study.
    I mean, you asked the question where is the competition. 
The competition inherently is in the auction. That is the 
beauty of this system, that the advertisers are the ones 
setting the prices every day on every query. You have our 
system after this deal. You will still have the Yahoo system, 
the Microsoft system.
    Mr. Smith of Texas. I am not sure I know where an 
advertiser goes, other than, say, Google if Google has 90 
percent of the market. Why would anybody go anywhere else? And 
that allows you to increase the prices.
    Mr. Carter or Professor Pasquale, very briefly.
    Mr. Carter. I understand about the timing. I can tell you 
that the competition out there--you may or may not believe what 
I am going to tell you. As crazy as this sounds----
    Mr. Smith. You need to tell me in 15 seconds.
    Mr. Carter. To a large degree, everyone out here in the 
auction and those of us that create Web sites, we are the ones 
controlling where people are going. It is not the people 
sitting at this table.
    Now if somebody wants to ask a question, I will tell you 
how----
    Mr. Smith of Texas. Let me get Professor Pasquale's 
response.
    Mr. Pasquale. Thank you.
    I would just say very quickly about why is there greater 
revenue. There are two possibilities.
    One, as David Drummond said, there may be better ad-
targeting technology. However, it may be may be they have more 
people to match. Because we can't know all about the deals of 
the ad-targeting technology because of the secrecy, the 
opacity. We don't know what percentage that is. I think it is 
the latter case. If it is simply they have more people to 
match, then that is a self-reinforcing dynamic that is only 
going to lead to increase their monopolistic position.
    Mr. Smith of Texas. Thank you, Mr. Chairman.
    Mr. Conyers. Mr. Goodlatte of Virginia.
    Mr. Goodlatte. Thank you for holding this hearing. It is 
very interesting.
    Mr. Drummond, much has been made in the media of 
Microsoft's bid to acquire Yahoo and Google's efforts to keep 
Yahoo an independent company through that deal. What does 
Google gain from keeping another competitor in the market? What 
are you getting out of the deal?
    Mr. Drummond. First of all, revenue. We have a program of 
syndicating our ads to others on the Web that we have had from 
the beginning of our ad program that is profitable for us. So 
we like to do it. It is open to anyone. You can sign up for it 
on line if you are a Web site. We felt that, in addition to 
providing us revenue, it also helps to create more good content 
on the Web that we can search.
    So we have always felt that that was a good model to have, 
and we think we sent something like $4.5 billion to Web sites 
last year in our program. We think that is a very good thing; 
and it is good for search, which is our core business. It is a 
competitor. There are other competitors of ours that use 
various of our services.
    Mr. Goodlatte. Let me ask you about that. So if you have 
Google doing business on your site, participating in your 
auctions, if you will, and that means that the two companies 
that have 90 percent of the market, if Microsoft said they 
wanted to participate with you as well, would Microsoft be 
welcome to have the same kind of deal?
    Mr. Drummond. I agree. We are open to a conversation.
    Mr. Goodlatte. That does not raise any antitrust concerns?
    Mr. Drummond. Again, I think the issue would be we are 
creating incremental value in the market. The deal we have with 
Yahoo is not ceding their business to us.
    Mr. Goodlatte. You are becoming the premier auction house. 
Yahoo may be running a satellite auction, which will run if 
somebody goes there and they can't place an advertiser. But 
they are going to turn it over to you if they can't, and you 
are going to do that. You also have Microsoft. Don't you become 
the reason why anybody wouldn't advertise with anything else if 
all of the three major search companies on the Internet turn to 
you as the auction house of last resort?
    Mr. Drummond. I don't really think that is true. Again, the 
online advertising market is very big. There are huge 
opportunities of new ad formats that are not search, that may 
touch on search but are very different, use different targeting 
techniques, and we are all interested in going after that. It 
is a big market. These companies want it, and they are not 
going to cede it to us.
    Mr. Goodlatte. Mr. Callahan, you were asked why the deal 
was limited to the U.S. and Canada, and you confirmed it was 
indeed limited to U.S. And Canada, but you didn't tell us why. 
Was there any concern that in Europe or someplace else that the 
anti-trust laws might have a different impact on this 
arrangement than here in the U.S.?
    Mr. Callahan. It was a product of the negotiations between 
the parties. If there were obviously conversations about 
pushing this transaction to have coverage outside the United 
States or Canada, obviously, we would be ready to engage with 
the proper authorities. But it was a product of negotiations of 
the parties.
    Mr. Goodlatte. I understand that. But it doesn't tell you 
why it was the product of the negotiations of the party. Why 
did you limit it to Canada and the United States?
    Mr. Callahan. As we worked through the deal, that is where 
we saw an opportunity for us to get the most value from this 
and still be able to reinvest into our business going forward. 
I think on the Yahoo side we would be open to a conversation 
about expanding this in the future.
    Mr. Goodlatte. Have any State Attorneys General contacted 
you about reviewing the deal?
    Mr. Callahan. There has been interest expressed from 
certain States and similar to our work with the Department of 
Justice.
    Mr. Goodlatte. Have you provided them with the unredacted 
agreement?
    Mr. Callahan. I am not aware of that, sir.
    Mr. Goodlatte. The answer, is no, you have not.
    Mr. Callahan. As to the States?
    Mr. Goodlatte. Yes.
    Mr. Callahan. I am not aware if we have.
    Mr. Goodlatte. How will they review the deal if they don't 
have a copy of the deal?
    Mr. Callahan. As I understand it, they will discuss with 
the Department of Justice, I believe is how the arrangements 
are set up.
    Mr. Goodlatte. Mr. Smith, let me ask you, how would a deal 
between Microsoft and Yahoo be different for on-line 
advertisers than a deal between Google and Yahoo? If there are 
only three search advertising participants in the marketplace, 
doesn't any deal restrict competition?
    Mr. Smith. I think there are two important distinctions. 
First, an agreement between Microsoft and Yahoo would bring 
together about 20 to 30 percent of the market, not 90. Second, 
it would, in fact, create a stronger counterbalance to Google 
in the marketplace for search and search advertising.
    I do think, with all due respect to Mr. Drummond, that the 
market will benefit if there is a significant competitor to 
keep Google honest, and that is what we were striving to 
create.
    Mr. Goodlatte. Thank you.
    Thank you, Mr. Chairman.
    Mr. Conyers. Thank you.
    I turn now to Chris Cannon of Utah.
    Mr. Cannon. Thank you, Mr. Chairman. I apologize to our 
panel members. I am the Ranking Member on a Committee doing a 
markup earlier in this session so I missed some of it.
    I take it from Mr. Goodlatte's question the issue of an 
unredacted contract has come up. Is it possible for this 
Committee to have access that agreement?
    Mr. Callahan. I think we had worked with Committee staff, 
as I understand it from my team, in advance to provide a copy 
of the agreement or information about the agreement. We would 
be, of course, eager to work with the staff on providing 
information to the Task Force, including access to the 
agreement.
    Mr. Cannon. Thank you. That is I think remarkably 
important, because the devil--or the angel--is in the details. 
I can't help thinking, as I sit here looking at Microsoft today 
and Google today and Yahoo, without thinking back to a time 
when one of my constituents, WordPerfect, had a conflict with 
Microsoft and a large lawsuit--I think a $250 million 
settlement--with Microsoft over its dominance of the market.
    I sat down with some of my high-tech guys and said, What do 
you think about Microsoft? They said, We really like Microsoft 
because they have the platform that we can develop to. So I 
have never found myself actually really antagonistic to 
Microsoft.
    Frankly, it is sort of interesting to see the evolution 
here. In fact, I can't help thinking about a corollary in 
chemistry where you take a small aperture with high pressure 
and let chemicals fall into a low pressure environment, where 
things change dramatically. That is sort of like where we are 
today.
    I am going to address some questions to you, Mr. Drummond, 
in that regard, because we met 6 or 8 months ago, talked at 
some length about what I wanted Google documents to do. So that 
is a tool that I just love.
    The world, seems to me, is changing so remarkably and we 
are at that point now looking forward at what the possibilities 
are. Mr. Carter has talked a little bit about that. What I 
thought I would ask you, Mr. Drummond, if you were your 
competitors, and not necessarily Microsoft or anybody else but 
in this world, I want to frame the future, how would you do it 
and get around the dominating position that you are currently 
creating with Yahoo?
    Mr. Drummond. Well, thanks for the question. It is a big 
one.
    First of all, I don't think we are creating a dominant 
position with Yahoo in this deal for the reasons that I have 
stated. I think that if you talk to anybody at Google, the 
technical people at Google, about the problems we are trying to 
solve, whether it is search or creating quality ads or doing e-
mail or any of the things we are trying to do effectively, they 
will tell you that we actually aren't doing it very well, if 
you can believe that. In other words, there is a huge way--we 
have huge strides to make to still make these products a lot 
better.
    I think that what we are seeing as we go around and talk to 
engineers, computer scientists, there are a lot of people 
working on some pretty interesting stuff that will take us to 
the next level.
    I think what I would probably--and I am not in the business 
of advising people to compete with Google, but were I in that 
business, I would probably say figure out on one of these 
really tough problems a new way to do it, a new way to use 
computing power and to use computer science to do a better job 
of it.
    Mr. Cannon. Professor, do you have a point you want to make 
here?
    Mr. Pasquale. Thank you very much, Representative Cannon.
    I would just say that if we look at the technical economic 
literature on a lot of this stuff, it can be compared to a 
dating service. You can think about what they are doing is a 
two-sided market. You are trying to bring together advertisers 
and users.
    The question I would put is, if you had two dating services 
that you could go to and one said I have amazing match-matching 
technology, but I only have 9 members of the opposite sex, and 
the other side, Well, we have about 70 to 90 members of the 
opposite sex, I think I know which dating service I would 
choose.
    I think that is another reason to be kind of careful, I 
think, about mapping out this potential future. I think that 
was an excellent question, because I think, ultimately, what 
makes the products better here, if you look at, say, the 
innovation theory of Eric von Hippel at MIT, it is users, it is 
tracking user habits. For that reason, the company that has the 
majority of users using its platforms tracks those users' 
habits and it can tell which ads work and which do not much 
better than the others. That is the key to the innovation here.
    Mr. Cannon. Mr. Carter.
    Mr. Carter. Yes. Congressman Cannon, I would like to add a 
little perspective. I think a lot of people don't realize how 
fragile all of even the search and this advertising situation 
really is. What I mean by that is it is driven by the people 
that are using it, meaning, I actually believe that there are 
ways within the algorithms that Microsoft or Google uses to 
where they can actually look at how much time a person spends 
on a page once they go there, once they deliver them. I know 
that because I can see that in my own log files at 
AsktheBuilder.
    So people out in the world viewing the search results, if 
Google or Yahoo starts throwing up garbage search results, I 
don't know about you, but I know if all of a sudden they are 
worthless. I am going to say I am not coming to Google anymore 
or to Microsoft anymore.
    Mr. Cannon. I am not sure where my time is, but can I ask 
you to refine that question? Because if you shift gears and 
look at social networks, that there is something that informs 
us here. I think social networks are really in a primitive 
stage, but at some point people are going to be advertising to 
other people instead of doing searches with Google.
    Mr. Carter, if you would both like to respond. Seems to me 
that the next evolution really goes not to the credibility of 
the ads but the credibility of the person who is promoting the 
ad or the item or the idea.
    Mr. Carter. Absolutely. Remember, there are only two 
reasons why people are getting on the Internet each day. There 
are only two: pleasure and problems. So if I go to a Web site 
and it is not solving my problem, I am out of there. So if the 
ad doesn't solve my problem, I am out of there. That is how 
fragile I am talking about.
    That is why this all works right now, and it works so well, 
because people like me, who write the ads, if I just change one 
word in the headline, I might increase my sales 400 percent. 
That is a magical thing. We have never had that kind of power 
before. That is the power that is in my hands as an advertiser 
as well as a consumer. Because on the other end I click ads all 
the time when I am looking for a product I want to buy.
    So please don't give these guys too much credit. I love 
them all. Don't misunderstand me. But I am trying to tell you 
that a lot of this is actually happening because of what all of 
us in this room do each day when we use the Internet.
    Mr. Cannon. I would love to hear what Mr. Sable has to say.
    Mr. Sable. I would add one point. Social
    networking is not new. If you go back, there are studies 
that go back to the '30's that talk about why would you buy a 
particular product, why would you go to a particular service, 
and it is because my friend here, Mr. Carter, told me. That is 
all that we have done, is created new efficiencies on the Web.
    I think what Mr. Carter was saying, what I was trying to 
say in my statement, was the notion of search is really the 
key. The advertising is great, but the dirty little secret that 
we all still have to wrestle with is that, unlike in the old 
days when we say we know 50 percent works and we wish we knew 
what to do with the other 50 percent, it is a lot less than 
that today because we are not being able to target as well as 
we should. So targeting and being able to serve the right 
target is still the game. The closer we are able to target, the 
better we are able to use the information that we get, is going 
to make it work.
    But, having said that, it is the critical search at the 
core that is still really the issue. Because, as I said in my 
testimony, only 40 percent of search is duplicated.
    So if you look today--and I would be interested in what my 
colleagues have to say--but if you look at the page, take a 
Google page where the natural search--in other words, the 
search that just comes up from the search engine is in the 
middle--the click-through rates on what is natural, on what I 
have just asked and people like me have asked and sort of works 
on the basic algorithm, those still have the highest click-
through rates, which suggests that the consumer kind of 
understands where they are going to get the best information.
    So the challenge is still to make that advertising not just 
relevant but incredibly relevant to the content as well as to 
the user. I think that that is really the issue at hand. We 
must keep that piece as competitive as possible. Otherwise, we 
have lost the game.
    Mr. Cannon. As I yield back, let me point out that, while I 
talk about this exciting future, I hope the record is clear how 
we take the next steps, especially here legally, are really 
important. That is why I think it is important for this 
Committee to have a pretty good look at that agreement so we 
understand what we are doing. Because the predicate we are 
setting today is going to be the foundation to where we end up.
    With that, I yield back.
    Mr. Conyers. Tom Feeney of Florida.
    Mr. Feeney. Thank you, Mr. Chairman.
    This is a fascinating thing. The Internet is still such an 
infant, although it has grown in a hurry. It is very difficult 
to adopt appropriate regulations. In this case, we are talking 
antitrust when you are letting us really understand exactly how 
this incredible growth has occurred. We certainly couldn't have 
predicted it 10 or 15 years ago.
    Mr. Carter, you said something earlier which was 
essentially that the Web businesses and the customers are what 
created the drive to specific sites. You are not worried about 
whether it is a 90 percent combination or theoretically a 100 
percent combination. Do you want to elaborate on that?
    Mr. Carter. I will tell you why I am not worried about it. 
Because I am telling you that in real world every day people 
are using these search engines, all three of the ones that are 
here as well as other ones we haven't even discussed today. The 
consumers that are using those search engines and coming up 
with the search results, just like any other--that is a 
business transaction. If I decide to invest my time at Google, 
they better give me back a good result. Just like last night 
when I went to eat I didn't get good service.
    So, anyway, the point is the consumers are driving this 
engine. They are driving the bus.
    Mr. Feeney. Mr. Carter, theoretically, if one company 
controlled 100 percent of the market--8 or 10 years ago we 
didn't have this sort of incredible customer service on the 
Internet. So if you didn't have anything to compare it to, we 
don't really know how theoretically things can get a lot 
better. We don't know how much better because we can't 
micromanage or micro-vision the future in many cases.
    Mr. Carter. I disagree. Because I sell tens of thousands of 
dollars of advertising myself, and there are hundreds of 
thousands of Web sites out there that also sell their own ads. 
So the companies that are buying ads--remember, you are kind of 
looking at this myopically, because you are just discussing 
search advertising.
    Mr. Feeney. I am looking at this in a confused way. That is 
why I am asking you questions.
    Mr. Carter. No disrespect intended. Don't misunderstand me. 
There are all kind of other ads that people can buy on the 
Internet. This may come as a surprise, and some of the people 
in the room may not believe this. I have ads that I sell 
myself. I have been doing it since 1995, and I get click-
through rates of 35 percent. That is unheard of in the 
marketplace. My advertisers are doing backflips. They are so 
happy.
    So the point is there are other options out there for 
companies who want to advertise. They don't even have to go to 
these three giants that are at this table.
    Mr. Feeney. Mr. Pasquale, you don't have a dog in this 
fight. You are not trying to merge or unmerge or have a semi-
secret agreement. On page 3 of your testimony you worry about 
manipulation that would result in high barriers to entry of new 
competitors but also barriers presumably to Web sites. I 
understand why it would be in the interest of Yahoo and Google 
or Microsoft and Yahoo or whoever to erect barriers to 
competitors. Why would it be in their interest to erect 
barriers to a thousand or a hundred thousand new Mr. Carters 
participating on the Internet? I don't understand that.
    Mr. Pasquale. Sure. And I would like to sort of--I think I 
can analogize that, actually, to some of Google's own advocacy 
with respect to the carriers and net neutrality. Let me just 
start, though, with a concrete example.
    There was once a Web site called 2bigfeet.com. This Web 
site, through lots of hard work and effort, became--if you put 
in, ``I have large feet. I need size 15, size 16 shoes'', 
whatever, your search would be about big men's shoes. It would 
be the number one site. Suddenly, one day, a few years ago, it 
dropped off entirely, disappeared. I called Google repeatedly. 
Like his whole business was built around search results leading 
people to his site.
    Now why would that happen? Why might that be something that 
could happen and would be troubling? I think one particular 
theory here that is a possibility is that if you want to sell 
people paid ads, you may want to churn the organic ads, the 
stuff that just comes up in the middle of the screen so you can 
get more and more paid ads sold. So that's one concern.
    The other concern--this gets back to Mr. Carter's point. If 
they provide a bad service, I will just leave them. Well, if 
you have--there are some searches where, clearly, if you're 
looking for one particular site, if you're looking for Coca-
Cola.com and they give you Pepsi, that is clearly the wrong 
answer.
    But many searches are not like the simple navigational 
search. If I put in ``big men's shoes'', I may have no idea 
what I will come up with. There is nothing I can check it 
against. It is what economists call a credence good. And, 
therefore, I think given the searcher's position as a credence 
good, I think we have to worry about that.
    And, finally, it ties into net neutrality. All three of the 
companies to my right have talked about their worries, the 
carriers, telcos and other companies who deliberately impair 
quality of service in order to raise their costs in order to 
reach their customers. I think, by the same token, we have to 
have some worries about search engines potentially churning 
their organic results or otherwise manipulating results so that 
people have to buy paid ads rather than relying on organic 
search to connect them to their customers.
    Mr. Feeney. You know, it is all very interesting.
    Mr. Smith, I guess a lot of the tension today has been on 
the notion that 30 percent market share you don't consider to 
be an antitrust issue, but 90 percent of the market share you 
do. How would a 30 percent market share--if you and Yahoo 
teamed up, how would that benefit the consumers in a way that 
90 percent agreement for sharing some sort of infrastructure 
for auction bids--how would your proposal with Yahoo benefit 
consumers, compared to the disadvantage you suggested the 
arrangement in front of the Justice Department would have?
    And with that, when you're done, I yield back.
    Mr. Smith. I think the real question is whether there will 
emerge in this market for search advertising any real 
counterbalance to the market power of Google. Quarter after 
quarter, basically, Google's market share has been increasing. 
And while one can say, isn't it nice all of these people 
together make up what happens, I really don't think that is the 
way it works. It is a bit like suggesting that it is we 
consumers that are setting the price for gasoline because we 
are the ones who go to the gas station. Actually, there is an 
organization called OPEC that has a lot to do with it.
    And there are a lot of people who go and bid up for auction 
prices at Google, but the reality is Google sets minimum 
prices. It sets minimum prices oftentimes by individual 
advertiser. It has quality scores that determine who wins. 
There is not a lot of transparency about that.
    The market wants a sustainable counterbalance to Google. I 
think that if in some way, shape or form Microsoft and Yahoo 
had or could have gotten together in the search area we would 
create something that would be sustainable, and it would be 
more competitive. And that is why Google has taken this step 
with Yahoo.
    Let's keep in mind Google didn't create this exercise a 
year ago. They didn't initiate it 2 years ago. Microsoft 
offered to buy Yahoo on Thursday evening, January 31st; and the 
very next day Eric Schmidt, the CEO of Google, called up Jerry 
Yang, the CEO of Yahoo, and offered his help. I think that says 
a lot right there.
    Mr. Conyers. Darrell Issa, California.
    Mr. Issa. Being on this Committee is always interesting 
because people know that all they have to do is define the 
relevant market their way and they win. And this is no 
different.
    So I am going to limit my questions; and, in fairness to 
Microsoft, Yahoo/Google, I am going to start and just go back 
and forth between Yahoo and Microsoft so that we don't get the 
inevitable piling on for just a moment.
    Today--wait a second here. Nope, I take that back. I think 
I will go Google and Microsoft for a moment--and nothing 
personal, Yahoo, but you are not the relevant market leader for 
a moment.
    Let's talk about this. What should we today and for all 
time consider the relevant market that your two companies 
believe we are talking about here today and the markets in 
which each of you believes you do or do not have market 
dominance? And I ask that because it seems--and I have been fed 
material by both sides. It seems that you both have shifting 
sands of whether or not you have market power in a particular 
market.
    And I would say to the Chairman, you might remember that 
the NAB came to us and told us that satellite radio didn't 
compete against radio coming through the airwaves from a 
different starting point. So we have heard it all.
    But I would like to ask you on behalf of your companies--
Mr. Smith, starting with you, what is the relevant market that 
the possible acquisition of Yahoo by you or the combining of 
efforts with Google we are talking about, who's in it? What 
size do they have together?
    Mr. Smith. Microsoft put a proposal on the table in May and 
has kept the proposal on the table ever since and reinvigorated 
it and made it more attractive as recently as last Friday.
    Mr. Issa. And yours is public.
    Mr. Smith. We have made public statements about it, and it 
was clear that it concerned two things: algorithmic search, 
which some people sometimes called natural search, and paid 
search, this paid search advertising market.
    Certainly Microsoft is not dominating either of those 
markets. Our market share in both of those segments is in the 
range of 10 percent, maybe a little bit less, maybe a little 
bit more.
    I believe that Google clearly is dominant in the market for 
search and paid search advertising. I think I should 
acknowledge we know that we have a dominant position, for 
example, in the market for personal computer operating systems. 
The Federal Court of Appeals was clear about that earlier in 
this decade. The European Commission found us to be dominant in 
the market in certain server markets. And we have stepped up to 
that, and we have acknowledged it, and we haven't continued to 
debate and suggest that----
    Mr. Issa. Mr. Drummond, would you agree with that? Is that 
a pretty good assessment of the relevant markets? Or how would 
you differ in your definition of the relevant market?
    Mr. Drummond. Sure. Actually, I would differ.
    Mr. Issa. Not a surprise.
    Mr. Drummond. As I said earlier, we've been absolutely 
consistent about this. We have had this review we are talking 
about now. We have the DoubleClick review. Our view is that 
advertising--a lot of advertising is substitutes for other 
advertising. You see a lot of advertising that is currently 
off-line coming on to the Web. So advertisers are literally 
making that----
    Mr. Issa. So you are yellow pages.
    Mr. Drummond. I think there is competition there. But, at a 
minimum, we believe--and we have been very consistent about 
this--that online advertising in its principal forms, or search 
based and display based, is the relevant market for looking at 
this transaction. We believe it was the relevant marking for 
looking at our DoubleClick transaction.
    I am somewhat surprised to hear Mr. Smith's answer to that 
last question. Because, in the DoubleClick deal, they weren't 
filing papers with agencies saying that on-line advertising was 
indeed the relevant market. So maybe there are some shifting 
sands there. But we have been very consistent----
    Mr. Issa. So the 70 percent of the search market is okay 
with you. You are 70 percent of----
    Mr. Drummond. Actually, I think that overestimates it a 
bit. Because when I look at that information--we pay to our Web 
sites, which is substantial. So I think it overstates it by a 
bit, but it is a substantial amount.
    Mr. Issa. Okay. I am going to stay in the same genre, but I 
am going to make a small change, and that is barriers to entry. 
Do you both agree that, at this point in the maturity of the 
Internet, not inconceivable that somebody will start in their 
basement--or, in California, we have garages, not basements--
and come out of nowhere? But today there appears to be a high 
barrier to becoming a player in the search business. And I say 
that because many have tried, and even those who had a foothold 
have disappeared, for the most part, other than the big three 
as far as having more than a round in here.
    Can you agree that today it appears as though this has sort 
of a success barrier to entry? Can we both agree on that?
    Okay, Yahoo, how about you? If you weren't in it, could you 
get in it today and gain a 30, 20 percent market share that you 
have today?
    Mr. Callahan. I am not sure how quickly a new company could 
gain a share, but I think the innovation point is an important 
one, and it goes back to several comments that were made.
    I believe I read Microsoft acquired a company that does 
natural language search called Powerset for some hundred 
million dollars some time in the last couple weeks. There are 
companies that do mobile voice activated search, which is a 
market that no company really explores in detail right now and 
I think there is a lot of innovation yet to come.
    Mr. Issa. Lastly--and this is only for Microsoft and 
Google, if you don't mind--tie in. Microsoft, you have been 
sort of--I am sorry, Mr. Smith, but you have been accused of, 
because you have so much market share dominance on the desktop 
90-ish percent or whatever, that somehow that gives you a tie 
in. And I am not going to agree or disagree, but every copy of 
Microsoft XP and Vista arrives with a search engine in it. And 
Mr. Drummond you have 65, 70 percent of the market.
    So can we comment, each of you, on why you think that there 
is a tie-in value to Microsoft, who has less than 10 percent of 
the market but puts it in 90 percent of the products when they 
arrive, versus Google, who arrives from Microsoft without a 
search in Internet Explorer but in fact gains 65 percent of the 
market. I want to understand that.
    Because I want to know if there is any credence to the 
allegation that we seem to keep hearing that somehow market 
power starts with the desktop when, in fact, you have gotten to 
be the dominant player without ever being in the desktop except 
when I add it while surfing--starting off surfing, to be 
honest, with Microsoft's product.
    Mr. Drummond. Sure. We have been concerned, and we have 
expressed this concern a number of times, that what happened on 
the desktop, that is to say, with software companies that were 
start-up and through dint of hard work and innovation led the 
market, then were obliterated by Microsoft, because Microsoft 
was able to----
    Mr. Issa. My question was they already had the head start 
when you started.
    Mr. Drummond. That's right. What we have been concerned 
about is the same thing will happen on the Internet through the 
mechanism you just talked--among other ways, the mechanisms you 
just talked about. I think we have been out there talking about 
that, trying to make sure that doesn't happen. We have talked 
to Microsoft a lot about the design of their products.
    Mr. Issa. Mr. Chairman, indulgence a little bit.
    I understand you've been talking about it. What I'm saying 
is here, today, tell us how, if there is that tie in, not could 
be a tie in, but tie in, how you went from having zero to 
having market dominance while, in fact, their product arrives 
with a search engine on day one. They own, if you will, 
Internet Explorer, and you've gotten there. That's what I am 
trying to understand because----
    Mr. Drummond. Just to be clear, in the early part of our 
existence, Microsoft really didn't have a search engine. In 
fact, they licensed it from someone else. So it wasn't a part 
of a market they were focusing on. As I think everyone knows, 
with much fanfare Microsoft turned its attention to the 
Internet in much the same way they turned their attention to 
Internet software such as browsers. And you know what happened 
with Netscape.
    So our concern was that that could happen, and we have been 
urging people to be vigilant of that happening again. But we 
like competition on the merits. That's what largely has been 
happening, and we are very happy with that.
    Mr. Issa. Mr. Smith, quickly, for an answer.
    Mr. Smith. Our business is supervised by the Federal 
Government, a number of States and a number of foreign 
governments. We have clear practices that we published 2 years 
ago.
    One of the principles that we apply is that, while there is 
a default setting on Internet Explorer for a search engine for 
the Internet, any PC manufacturer can change that. So, for 
example, Google has entered into an agreement with Dell so that 
if you buy a PC from Dell it has Google as the default. Yahoo 
had an agreement with HP until recently. So if you bought a PC 
from HP, it had Yahoo as the default.
    We have stepped up, I would say, to a number of 
responsibilities; and we are seeking to live up with them. We 
are not still living in the world where we say, oh, we are 
never dominant. I am not sure that can be said to the gentleman 
and the company to my left.
    Mr. Issa. Thank you for your indulgence, Mr. Chairman.
    Mr. Conyers. You are welcome.
    Closing comments, Zoe Lofgren.
    Ms. Lofgren. Mr. Chairman, I just want to thank you for 
convening this hearing, and I wish that we could do a second 
round, because there are still more questions. I do think that 
for Silicon Valley, certainly the whole country, but the eyes 
are watching today because all three companies, as I said 
earlier, are part of the Valley. And we want to make sure that 
we have competition. Clearly, Silicon Valley thrives on 
competition, and it is obvious we have competition here today 
as well.
    I really want to thank you, Mr. Chairman, for the quality 
of this hearing and really the quality of the testimony. And I 
yield back.
    Mr. Conyers. You and everyone else has 5 days to ask them 
all the questions they want, and they'll send you all the 
answers they want, and we will put it all in the record.
    So I thank the witnesses. This has been an important 
hearing. It has shed a lot of light on a lot of complex issues, 
and we ask that you follow this Committee, the Antitrust, Anti-
Competitive Task Force here at Judiciary. It is a valuable 
Committee, and I am very pleased that we had so many Members 
that could join us all today.
    Thank you very much for your attention.
    [Whereupon, at 3:46 p.m., the Task Force was adjourned.]

                                 
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