[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
COMPETITION ON THE INTERNET
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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
U.S. GOVERNMENT PRINTING OFFICE
43-524 PDF WASHINGTON : 2008
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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
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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
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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
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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.]