[Senate Hearing 110-194]
[From the U.S. Government Printing Office]


                                                        S. Hrg. 110-194 
 
    AN EXAMINATION OF THE GOOGLE-DOUBLECLICK MERGER AND THE ONLINE 
 ADVERTISING INDUSTRY: WHAT ARE THE RISKS FOR COMPETITION AND PRIVACY? 

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

                                HEARING 

                               before the 

                       SUBCOMMITTEE ON ANTITRUST, 
                 COMPETITION POLICY AND CONSUMER RIGHTS 

                                 of the 

                       COMMITTEE ON THE JUDICIARY 
                          UNITED STATES SENATE 

                       ONE HUNDRED TENTH CONGRESS 

                             FIRST SESSION 

                               __________ 

                           SEPTEMBER 27, 2007 

                               __________ 

                          Serial No. J-110-25 

                               __________

         Printed for the use of the Committee on the Judiciary

                     U.S. GOVERNMENT PRINTING OFFICE

39-015 PDF                 WASHINGTON DC:  2007
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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts     ARLEN SPECTER, Pennsylvania
JOSEPH R. BIDEN, Jr., Delaware       ORRIN G. HATCH, Utah
HERB KOHL, Wisconsin                 CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California         JON KYL, Arizona
RUSSELL D. FEINGOLD, Wisconsin       JEFF SESSIONS, Alabama
CHARLES E. SCHUMER, New York         LINDSEY O. GRAHAM, South Carolina
RICHARD J. DURBIN, Illinois          JOHN CORNYN, Texas
BENJAMIN L. CARDIN, Maryland         SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island     TOM COBURN, Oklahoma
            Bruce A. Cohen, Chief Counsel and Staff Director
      Michael O'Neill, Republican Chief Counsel and Staff Director
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                     HERB KOHL, Wisconsin, Chairman
PATRICK J. LEAHY, Vermont            ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware       ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin       CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York         SAM BROWNBACK, Kansas
BENJAMIN L. CARDIN, Maryland         TOM COBURN, Oklahoma
                     Jeffrey Miller, Chief Counsel
                Peter Levitas, Republican Chief Counsel





















                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     3
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin......     1
    prepared statement...........................................   164
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, 
  prepared statement.............................................   166
Schumer, Charles E., A U.S. Senator from the State of New York...    18

                               WITNESSES

Cleland, Scott, President, Precursor LLC, McLean, Virginia.......    11
Drummond, David, Senior Vice President of Corporate Development 
  and Chief Legal Officer, Google, Mountain View, California.....     5
Lenard, Thomas M., Senior Fellow, Progress and Freedom 
  Foundation, Washington, D.C....................................     9
Rotenberg, Marc, Executive Director, Electronic Privacy 
  Information Center, Washington, D.C............................    13
Smith, Bradford L., Senior Vice President, General Counsel, and 
  Corporate Secretary, Microsoft Corporation, Redmond, Washington     7

                         QUESTIONS AND ANSWERS

Responses of David Drummond to questions submitted by Senator 
  Kohl...........................................................    33
Responses of Thomas Lenard to questions submitted by Senator Kohl    39
Responses of Marc Rotenberg to questions submitted by Senator 
  Kohl...........................................................    42
Responses of Brad Smith to questions submitted by Senator Kohl...    47

                       SUBMISSIONS FOR THE RECORD

AEI-Brookings Joint Center for Regulatory Studies, Robert W. Hahn 
  and Hal J. Singer, Washington, D.C., report....................    51
Center for Democracy & Technology, Washington, D.C., statement...   102
Cleland, Scott, President, Precursor LLC, McLean, Virginia, 
  statement and attachment.......................................   104
Drummond, David, Senior Vice President of Corporate Development 
  and Chief Legal Officer, Google, Mountain View, California, 
  statement......................................................   158
Lenard, Thomas M., Senior Fellow, Progress and Freedom 
  Foundation, Washington, D.C., statement........................   167
Rotenberg, Marc, Executive Director, Electronic Privacy 
  Information Center, Washington, D.C., statement and attachment.   173
Schmidt, Eric, Chairman of the Executive Board and Chief 
  Executive Officer, Google Inc., Washington, D.C., letter.......   196
Smith, Bradford L., Senior Vice President, General Counsel, and 
  Corporate Secretary, Microsoft Corporation, Redmond, 
  Washington, statement..........................................   198


    AN EXAMINATION OF THE GOOGLE-DOUBLECLICK MERGER AND THE ONLINE 
 ADVERTISING INDUSTRY: WHAT ARE THE RISKS FOR COMPETITION AND PRIVACY?

                              ----------                              


                      THURSDAY, SEPTEMBER 27, 2007

                                       U.S. Senate,
        Subcommittee on Antitrust, Competition Policy and 
            Consumer Rights, Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl, 
Chairman of the Subcommittee, presiding.
    Present: Senators Kohl, Schumer, and Hatch.

 OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 
                       STATE OF WISCONSIN

    Chairman Kohl. Good afternoon to you all. Our hearing today 
will examine the consolidation currently underway in the 
Internet advertising industry, including the planned 
acquisition of DoubleClick by the Internet giant Google. 
Advertising on the Internet is $17 billion business annually 
and is growing by about 30 percent a year, an amount which will 
only continue to increase dramatically as more news and 
entertainment content is delivered over the Internet. With 
similar acquisitions announced by Microsoft, Yahoo, and AOL, 
the total value of merger activity in this industry does exceed 
$30 billion already this year.
    But much more than Internet advertising is at stake. This 
consolidation has profound consequences for all those who use 
the Internet and for all of those who sell products and 
services on the Internet. The Internet offers consumers an 
amazing array of information and entertainment choices. Best of 
all, beyond the fee consumers pay to access the Internet, this 
incredible wealth of information is available for free. But the 
companies that bring this content to consumers, recognizable 
names such as Google, Microsoft, and AOL, are not charitable 
organizations.
    Advertising is the fuel that drives the Internet. Search 
companies like Google sell advertisers the right to place 
advertising on their search result pages--advertising which is 
highly targeted based on the words used in the consumer's 
search. And content companies like CNN.com or 
washingtonpost.com make money by selling graphics which display 
ads on their websites. These display ads are closely related to 
the content of the Web page and the demographics of the 
audience that views the Web page.
    The leading company placing Internet display ads on behalf 
of advertisers and on behalf of website owners is DoubleClick. 
Currently under review at the FTC is Google's planned 
acquisition of DoubleClick. For literally hundreds of millions 
of Americans and consumers around the world, the name Google is 
synonymous with a quick, easy, and reliable way to access a 
wealth of information and entertainment choices. Not even in 
existence a decade ago, Google has become universally known as 
the best and the fastest way to search the Internet. In 
harnessing the power of Internet advertising, Google has 
developed into one of the wealthiest and most profitable 
corporations in the world, with a current market capitalization 
of $170 billion in its very short corporate life.
    Google now seeks to acquire DoubleClick. The acquisition of 
the leading server of display ads--DoubleClick-by the dominant 
seller of search-based text ads--Google--obviously warrants 
close examination by the antitrust regulators at the FTC. Well, 
advertisers and Internet publishers have no choice but to deal 
with Google, giving Google a stranglehold over Internet 
advertising and the power to raise ad rates. Once these two 
companies have joined forces and combined their gigantic 
information resources, will the barriers to entry for a new 
entrant into the marketplace simply be too high? On the other 
hand, will the likely benefits to the advertising market and 
consumers by improving the targeting and precision of Internet 
advertising outweigh the potential damage to competition 
arising from this merger?
    But this merger and the ongoing consolidation in the 
Internet advertising industry as a whole raises equally 
important issues of consumer privacy. Google collects an 
enormous amount of information on computer users' search 
history and Internet preferences. DoubleClick also collects a 
vast amount of information regarding consumers' Internet 
preferences. While DoubleClick assures us today that this 
information is shared with no one other than the advertiser or 
the website carrying the advertising, what will happen to this 
treasure trove of consumer data once Google gains control of 
DoubleClick? Do consumers need to worry about the security and 
use of their privacy personal information as Google continues 
to grow more powerful?
    Some commentators believe that antitrust policymakers 
should not be concerned with these fundamental issues of 
privacy and merely be content to limit their review to 
traditional questions of effects on advertising rates. 
Respectfully, we disagree. The antitrust laws were written more 
than a century ago out of a concern with the effects of undue 
concentrations of economic power for our society as a whole and 
not just merely their effects on consumers' pocketbooks. No one 
concerned with antitrust policy should stand idly by if 
industry consolidation jeopardizes the vital privacy interests 
of our citizens so essential to our democracy.
    So we express that we have not reached a conclusion with 
respect to any of the vital questions that we will be exploring 
today. We have an open mind, and we have a need to examine 
these issues closely as the stakes for our society and the 
increasingly Internet-based economy are very high. We look 
forward to the testimony of our distinguished witnesses here 
today, and before we call on you for your statements, we turn 
to the Ranking Member on this Committee, the very distinguished 
Senator Orrin Hatch.

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE 
                            OF UTAH

    Senator Hatch. Well, thank you, Mr. Chairman. We welcome 
all of you to the Committee. I want to thank you for scheduling 
this important hearing. Let me see. Do I have this on? As 
always, it is a pleasure to be with you.
    I would also like to thank our distinguished panel of--for 
some reason, this is not working very well, is it?
    I want to thank our distinguished panel of witnesses today 
and thank them for agreeing to testify. And I especially want 
to welcome to the Committee and thank David Drummond and Brad 
Smith for appearing before us today. I appreciate all of you 
doing it. I realize being the general counsel and chief legal 
officer of a large corporation is a demanding job, and I am 
grateful to you both for taking the time to come and testify.
    The purpose of this hearing, as with all previous mergers 
under Senator Kohl's chairmanship, is to properly define the 
market in question and then discuss how the law applies. In the 
case of this specific hearing, we will also explore the 
legitimate questions of privacy. My goal for that portion of 
the hearing will be to have a frank discussion of the facts so 
that consumers are informed about the products offered by the 
corporations involved in this merger, because I believe many 
consumers do not fully understand the amount of data being 
collected about them and how it is used by these businesses.
    Accordingly, I anticipate that we will touch on a number of 
topics during this hearing, but the fundamental question 
remains: Does the Google-DoubleClick merger violate our 
Nation's antitrust laws?
    The first question to be asked then is: What type of merger 
is proposed? Now, I ask this question because Google argues in 
information provided to the Committee that they are not a 
competitor of DoubleClick. Now, is this then a conglomerate 
merger where we will explore the legal concepts of reciprocity 
and entrenchment? Is it a vertical merger? Or is this a merger 
between two competitors competing for a portion of the Internet 
advertising market? If this is the case, then the question of 
market power has to be addressed. Market power has been defined 
as ``the ability to profitably maintain prices above 
competitive levels for a set price without a resulting decrease 
in consumer demand.'' Google competitors have argued that if 
the transaction is finalized, then in addition to the 70 
percent of the text-based advertising that Google currently 
controls, the combined firm will account for nearly 80 percent 
of display ads. This poses the question: Can any firm, even one 
with the resources of Microsoft, overcome such a market 
position?
    Then there is the question of privacy. I believe that 
Google's intent is to act in a responsible manner with the 
information that it collects. However, I also believe the 
American consumer must be made fully aware of the fact that 
when they use search engines or click on an advertisement, 
whether it is a text or display ad, there is a strong 
possibility that personal information is being collected and 
stores. It is then up to the consumer to decide if that 
consumer wishes to use the services offered by these companies.
    Now, Mr. Chairman, these are important questions. I look 
forward to learning the thoughts and conclusions of this august 
panel of witnesses that you have invited to be with us today. 
And, again, I welcome all of you here, and I am going to be 
extremely interested in this particular hearing.
    Thank you, Mr. Chairman.
    Chairman Kohl. Thank you very much, Senator Hatch.
    We would now like to introduce our distinguished panel of 
witnesses. The first witness today will be David Drummond. Mr. 
Drummond is the Senior Vice President for Corporate Development 
and Chief Legal Officer at Google. In this role, Mr. Drummond 
works with the management teams at Google to evaluate new 
business opportunities, including alliances and mergers.
    Our next witness will be Brad Smith. Mr. Smith is the 
Senior Vice President and General Counsel for Microsoft. While 
at Microsoft, Mr. Smith has played a leading role in the 
company's intellectual property, competition, and other public 
policy issues. He is also serving as Microsoft's Chief 
Compliance Officer.
    Following him we will have Dr. Thomas Lenard. Dr. Lenard is 
currently a Senior Fellow at the Progress and Freedom 
Foundation. He will be leaving that organization at the end of 
the week to join a new think tank specializing in high-tech 
issues. Dr. Lenard has also served as the Office of Management 
and Budget, the Federal Trade Commission, and the Council on 
Wage and Price Stability.
    Following him we will have Scott Cleland. Mr. Cleland is 
the founder and President of Precursor, a consulting firm 
specializing the technology and telecommunications industries. 
Before founding Precursor, Mr. Cleland was Senior Policy 
Adviser for the Secretary of State in the first Bush 
administration, as well as Director of Legislative Affairs for 
the Department of Treasury.
    Finally, we will have Marc Rotenberg. Mr. Rotenberg is 
Executive Director of Electronic Privacy Information Center, a 
public interest research center focusing on protecting privacy 
and civil liberties. Mr. Rotenberg chairs the ABA Committee on 
Privacy and Information Protection, and he teaches privacy law 
at Georgetown University Law Center.
    We thank you all for appearing at this Subcommittee hearing 
today, and now I would ask you all to stand and take the oath 
and raise your right hand. Do you affirm that the them you are 
about to give before the Committee will be the truth, the whole 
truth, and nothing but the truth, so help you God?
    Mr. Drummond. I do.
    Mr. Smith. I do.
    Mr. Lenard. I do.
    Mr. Cleland. I do.
    Mr. Rotenberg. I do.
    Chairman Kohl. Thank you.
    Mr. Drummond, we will take your statement.

STATEMENT OF DAVID DRUMMOND, SENIOR VICE PRESIDENT OF CORPORATE 
  DEVELOPMENT AND CHIEF LEGAL OFFICER, GOOGLE, MOUNTAIN VIEW, 
                           CALIFORNIA

    Mr. Drummond. Chairman Kohl, Ranking Member Hatch, members 
of the Subcommittee, it is my pleasure to appear before you 
this afternoon to discuss recent developments in the online 
advertising world. Thanks for inviting me to testify here.
    Chairman Kohl. Is your button on?
    Mr. Drummond. Sorry. The online advertising business is 
complex, but my message to you today is simple: Online 
advertising benefits consumers, promotes free speech, and helps 
small businesses succeed. Google's acquisition of DoubleClick 
will help advance these goals while protecting consumer privacy 
and enabling greater innovation and greater competition.
    Now, in our experience, users value our ads because, like 
our search results, they connect them to the information, the 
products, and the services that they seek. Our online 
advertising promotes freer, more vigorous, and more diverse 
speech. We know that many bloggers and many website owners 
actually can afford to dedicate themselves full-time to that 
endeavor because of online advertising. In fact, last year, we 
paid $3.3 billion in advertising revenue to our website 
partners, and it is a great satisfaction to us that we are able 
to help this proliferation of online speech and activity.
    Now, our advertising network also helps small businesses 
connect with consumers that they otherwise would not be able to 
reach and to do so affordably, efficiently, and effectively. 
Let me give you an example. Allen-Edmonds, the shoemaker in 
Wisconsin, is a great example of how this works. Allen-Edmonds 
has frequently appeared as a sponsored link or ad to people 
searching for terms like ``men's dress shoes.'' Now, according 
to Allen-Edmonds' marketing director, the company's online 
sales rose 40 percent in 2005 because of the type of 
advertising that Google does. Mr. Chairman, there are thousands 
of other companies throughout America--most of them very small 
businesses--that also advertise with us.
    Now, we believe our acquisition of DoubleClick will help us 
provide even more benefits to consumers, support even more free 
speech, and help drive the success of even more small 
businesses throughout the country.
    By combining our advertising network with DoubleClick's 
display ad serving products and technology and by investing the 
resources in the display ad business, we think we will be able 
to provide better and more relevant advertising to consumers 
and to help publishers and advertisers generate more revenue. 
All of this new economic activity will fuel the creation of 
more rich, more diverse content on the Internet, which, of 
course, benefits consumers and society at large.
    Now, let me address the issue of competition. We are 
confident that our purchase of DoubleClick does not raise 
antitrust issues because of one simple fact: Google and 
DoubleClick do not compete with each other, despite what some 
might be saying. DoubleClick does not buy ads, does not sell 
ads, does not buy or sell advertising space. What it does do is 
provide technology tools that enable advertisers and publishers 
to deliver and manage ads once they have come to terms, and 
there are many, many others who do these sorts of things.
    The simplest way to look at this is by using an analogy. 
Google is to DoubleClick what, say, Amazon is to FedEx. Amazon 
sells books; FedEx delivers them. And, by analogy, we sell ads; 
DoubleClick delivers ads. Two different businesses.
    Our acquisition of DoubleClick does not foreclose other 
companies from competing in the online advertising space. 
Recent acquisitions in the space by Microsoft, $6 billion 
acquisition of aQuantive, which was a competitor of 
DoubleClick, acquisitions by Yahoo, AOL, and others are strong 
signals that the market believes this space has a lot of room 
for growth and a lot of room for competition. Beyond the recent 
acquisitions, there are thousands of companies that are 
competing in selling online ad space.
    Now, despite what they are saying here today, Microsoft 
actually appears to agree with this. Brian McAndrews, who is 
Microsoft's Senior Vice President of the Advertiser and 
Publisher Solutions Group, and before that the CEO of 
aQuantive, recently commented that the online advertising space 
is, and I quote, ``in the first or second inning of a long game 
here.'' He goes on to say that, ``There's no monopoly on 
innovation. I don't think you're going to see two or three big 
players and then game over. There will continue to be a broad 
range of companies.''
    We certainly agree with that, and if it were one stray 
comment in an unguarded sort of moment by a Microsoft 
executive, it would be one thing. But we have compiled a 
lengthy list of similar statements from Microsoft senior 
executives all made after the announcement of the DoubleClick 
transaction and after the aQuantive transaction, and they 
completely contradict what Microsoft is saying here today.
    Really, it seems like the only place that Microsoft is 
making these arguments about fear of declining competition in 
the online spaces here in Washington. I would be happy to 
discuss this list of quotes during Q&A or to submit it 
following the hearing, with your permission.
    Now, my final point today is that Google will continue to 
protect its users' privacy. For us, privacy does not begin or 
end with our purchase of DoubleClick. Privacy is a user 
interest that we have been protecting since our inception, and 
we will continue to innovate in this area. We spend a lot of 
time designing our products on the principles of transparency 
and choice--transparency about what information we collect and 
how we use it, and user choice about whether to provide us with 
any personal information at all. We were the first leading 
Internet company to decide to anonymize IP addresses and 
cookies in our server logs after 18 months. Most of our 
products allow people to use them anonymously and do not use 
any personally identifiable data unless we fully disclose that 
use in our privacy policy. We support Federal privacy 
legislation and the development of global privacy standards 
that can help build consumer trust and confidence in the 
Internet. We will also participate in the FTC's upcoming Town 
Hall on privacy in online advertising, which we think is a 
great vehicle for further examination of this subject.
    In looking to innovate in this area, looking ahead, we are 
approaching our entry into the ad serving business with a fresh 
eye. Here are some examples of the privacy protections and 
innovations we are working on in third-party or this ad serving 
business.
    We will be included an opt-out mechanism so that people can 
choose not to have an advertising cookie place on their 
computer, and our industry-leading decision to anonymize logs 
data after 18 months will also cover any log data generated in 
our ad serving programs that we are testing now.
    We are exploring the use of what we are calling ``crumbled 
cookies'' so that user data is not stored just in one cookie, 
which I know concerns some people.
    And we are working on better forms of notice within as so 
that users can better understand who is behind the ads that 
they see.
    Now, some of these ideas are experiments, and like all 
experiments, they may or they may not work out. But we are 
excited to start innovating in this area for our advertising 
customers and for our users to deliver better ads for them.
    Now, as I conclude my testimony, I will note that a lot of 
this activity--it seems like a lot of activity, and you may 
wonder why we focus on it. For one reason, protecting privacy 
is really part of the Google culture, and it is also a priority 
because our business simply depends on it. If our users do not 
trust us with the way we manage their information, they simply 
will not use us, and they are one click away from switching to 
any other competing product.
    I appreciate the opportunity to discuss these issues with 
you in the question session, and thank you for allowing me to 
testify.
    [The prepared statement of Mr. Drummond appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Drummond.
    Mr. Smith?

STATEMENT OF BRADFORD L. SMITH, SENIOR VICE PRESIDENT, GENERAL 
   COUNSEL, AND CORPORATE SECRETARY, MICROSOFT CORPORATION, 
                      REDMOND, WASHINGTON

    Mr. Smith. Well, thank you, Mr. Chairman, for the 
opportunity to provide Microsoft's perspective on these 
important issues this afternoon.
    We believe that the future of the Internet will be decided 
by developments in online advertising. As you noted, Mr. 
Chairman, online advertising is rapidly emerging as the fuel 
that powers the Internet and drives the digital economy. We 
estimate that online advertising spending is already a $27 
billion business, and it is projected to double to $54 billion 
in the next 4 years alone. To put that in perspective, that 
will be roughly the same size as the television and radio 
industries in this country today combined.
    These changes, as you noted, Mr. Chairman, are not only of 
tremendous economic importance, they have serious societal 
implications as well. Online ads increasingly provide the 
economic foundation for a free press and for political life 
more broadly.
    Now, I will be the first to admit that Microsoft is not 
disinterested when it comes to this issue. Competitors never 
are. But I do think we are in a good position to help identify 
the right questions. We know this market well, and it is 
absolutely clear to us that this merger raise serious questions 
that deserve serious answers. I would like to address two 
questions myself very briefly.
    The first one is this: What are the economic implications 
of allowing the largest Internet company in online advertising 
to acquire its most significant competitor? While there are 
millions of websites on the Internet and many, many 
advertisers, as David notes, there are actually a very small 
and declining number of intermediaries--intermediaries that 
provide the tools and services that connect advertise and 
website publishers together. These intermediaries play a 
gateway or a middleman role, if you will, much like the natural 
gas pipelines that connect refineries to distributors and 
ultimately to consumers in their homes.
    If you are a website operator and you want to sell ad space 
on your site, or if you are an advertiser and you want to 
display your ads, you have to work with and through one of 
these intermediaries.
    Now, already Google is the dominant company for one of the 
two main types of online advertising: search online ads. 
Roughly 70 percent of global spending on search-based 
advertising today flows through Google's ad words service. If 
Google is allowed to proceed with this merger, it will obtain a 
dominant gateway position over the other main type of online 
advertising: non-search ads--the non-search ads that are 
displayed on websites that we visit.
    Today, Google and DoubleClick are the two largest 
competitors in this area, and as I hope we will discuss more, 
they are competitors in this area. And yet, combined, Google 
will account for nearly 80 percent of all spending on non-
search ads served to third-party websites. In short, if Google 
and DoubleClick are allowed to merge, Google will become the 
overwhelmingly dominant pipeline for all forms of online 
advertising.
    Now, this merger will undoubtedly result in higher profits 
for the operator of the dominant advertising pipeline, but we 
believe it will be bad for everyone else. It will be bad for 
publishers, it will be bad for advertisers, and, most 
importantly, it will be bad for consumers.
    This leads to the second question I would like to address. 
What are the antitrust and privacy implications of giving a 
single company sole control over the largest data base of user 
information the world has ever known? Online ads are typically 
served based on user information, user data. As consumers, we 
give up this data, often without knowing it, in exchange for 
access to free content and services.
    Today, it is generally believed that Google and DoubleClick 
have amassed the two largest data bases of online user data in 
the world. This country does not permit the phone company to 
listen to what we say and use that information to target ads. 
The computer industry does not permit a software company to 
record everything we type and use that information to target 
ads. Yet with this merger, Google seeks to record nearly 
everything you see and do on the Internet and use that 
information to target ads. Indeed, one question is whether this 
merger will create a whole new meaning to the term ``being 
Googled.''
    These privacy issues, in fact, have antitrust consequences. 
Given the nature and economics of online advertising, this 
concentration of user information means that no other company 
will be able to serve ads as profitably. In short, it will 
substantially reduce the ability of other companies to compete.
    I appreciate that the technology and business models are 
new and dynamic, and I fully agree that the Internet is 
continuing to change very rapidly. Yet, amidst constant change, 
it is worth bearing in mind that one rule of the road has 
remained constant in the 117 years since the Sherman Act was 
adopted: We are all encouraged to work hard; we are all 
encouraged to earn our way to success. But no one is permitted 
to buy a dominant position by acquiring its single largest 
competitor.
    That principle has served this country well through 
generations of new industries and technologies. The question 
for this Congress and, indeed, for the Federal Trade Commission 
and this country is whether we want to abandon that principle 
now.
    Thank you very much, Mr. Chairman. I look forward to 
answering your questions.
    [The prepared statement of Mr. Smith appears as a 
submission for the record.]
    Chairman Kohl. Thank you very much, Mr. Smith.
    Mr. Lenard?

  STATEMENT OF THOMAS M. LENARD, SENIOR FELLOW, PROGRESS AND 
              FREEDOM FOUNDATION, WASHINGTON, D.C.

    Mr. Lenard. Thank you, Mr. Chairman. Thank you very much 
for the opportunity to present my views on the important 
competition and privacy issues raised by the Google-DoubleClick 
merger. Although I haven't done the detailed economic analysis 
that is often part of a merger review, from what I do know I do 
not believe that this acquisition threatens to be 
anticompetitive or harmful to consumers' privacy. I do think, 
however, that Government interference with this evolving 
market, which is still very much in its infancy, could be quite 
harmful to consumers.
    Google's purchase of DoubleClick is part of a spate of 
recent acquisitions in online advertising where companies are 
adding new capabilities in order to better serve their 
customers and better compete with each other.
    The FTC is doing a careful review of the Google deal, as it 
should, but these reviews are much more difficult when the 
markets are changing rapidly, as they clearly are here.
    In many ways, Google epitomizes the digital revolution. As 
you indicated in your opening remarks, Google's business model 
was difficult to envision just a few years ago--an illustration 
of the fact that the digital revolution is not just a 
technological revolution, but it is also very much a revolution 
in the design of business models and in the evolution of 
markets. When technologies and markets are changing rapidly, it 
is much more difficult to avoid policy mistakes.
    Policymaker should do everything possible to create an 
environment in which both the Googles and the DoubleClicks of 
the future can emerge and thrive. For many entrepreneurial 
ventures, acquisition by another company is a major way to 
generate capital and pay off early investors. The most likely 
acquirers are larger firms in the same or related sectors. And 
it would not go unnoticed by early investors if antitrust 
enforcement were to make it more difficult for the ventures in 
which they invest to be acquired. Such a policy would raise the 
hurdle for investment in these firms, with potentially adverse 
effects on innovation in this critically important sector of 
our economy.
    Opposition to the Google acquisition has focused on two 
arguments, both of which I think are flawed. The first argument 
is the standard antitrust claim--that both Google and 
DoubleClick have a large share of the activities that they 
undertake, so a merger would create market power problems. But 
I believe these firms are engaged in different activities, and 
so that even if we believed that Internet advertising was a 
market in antitrust terms, which is debatable since it still 
comprises only about 5 percent of all advertising, the firms 
will not gain market power from this merger because they don't 
have business in common.
    Google sells text ads mainly on their own websites and 
search result screens. DoubleClick sells the technology that 
delivers display ads from advertisers to websites and evaluates 
the effectiveness of the ads. DoubleClick does not sell 
advertising space or control any websites. Thus, even if we 
believe that Internet advertising is a market (which itself is 
highly debatable, since even with its growth it still comprises 
only about 5 percent of all advertising) the firms will not 
gain any market power from this merger since they do not have 
any business in common.
    The second argument concerns privacy where privacy 
advocates allege that Google's and DoubleClick's conduct ``has 
injured consumers by invading their privacy.'' But there is no 
evidence to support any assertions that consumers have been 
harmed or would be harmed.
    The great appeal of the Internet as an advertising medium 
is the ability to target ads to consumers much more precisely 
than can be done through other media. Using information from a 
variety of sources, including sometimes the past history of 
Internet browsing, Internet advertisers can develop an 
understanding of consumers' interests, deliver ads that are 
most useful to them, and avoid delivering those that are of 
less interest. More information can facilitate more precise 
targeting, and all of this serves consumers well.
    In addition, the revenues from online advertising support a 
variety of valuable services provided to consumers at no charge 
by the companies represented here as well as many others, such 
as search services, free e-mail, and content that is customized 
to the individual. Internet advertising firms also provide 
customized advertising to smaller websites that use the 
revenues to support themselves.
    In my view, antitrust and privacy are really separate 
issues, but some people have tried to connect the issues by 
arguing that the aggregation of data serves as a barrier to 
entry. The argument seems to be that the aggregation of data 
would enable Google to provide a better service and do so more 
efficiently and, therefore, it would be more difficult to 
compete against the company. Whether or not that is true, we 
need to approach such arguments with great caution because they 
go the heart of what we want our competitive economy to do, 
which is provide consumers with better goods and services at 
lower cost.
    The worst thing antitrust enforcers or any other 
policymakers could do is to implement policies that prevent 
companies from getting too good at what they do because it 
makes it harder to compete against them. That might be helpful 
to some competitors, but the goal of the antitrust laws is to 
help consumers and not competitors.
    Thank you.
    [The prepared statement of Mr. Lenard appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Lenard.
    Mr. Cleland?

 STATEMENT OF SCOTT CLELAND, PRESIDENT, PRECURSOR LLC, MCLEAN, 
                            VIRGINIA

    Mr. Cleland. Mr. Chairman, thank you for the opportunity 
and the honor to testify. I am Scott Cleland, President of 
Precursor LLC. The views expressed by me in this testimony are 
mine alone and not the views of any of my clients.
    The online advertising market is rapidly consolidating and 
becoming highly concentrated. Yahoo has bought Right Media, 
Microsoft bought aQuantive, Google has bought YouTube, Ad Scape 
Media, DoubleClick, Feed Burner, and others.
    Now, I have done the in-depth work on this and on the facts 
of the case, and of all the recent mergers, I believe Google-
DoubleClick is uniquely anticompetitive and really represents a 
watershed moment for Internet competition. I think it is 
clearly one of the most far-reaching, least understood, and 
most important mergers this Subcommittee will ever review.
    The biggest challenge here, Mr. Chairman, is to see the 
forest for the trees. Online advertising is the only proven 
business model for monetizing Internet content. Also, the 
Internet is the ultimate network of networks, so in antitrust 
terms, it also creates the ultimate network effect of network 
effects. Essentially, network effect is the positive feedback 
loop where the looter extends one's lead.
    Now, in a nutshell, this merger creates an exponential 
network effect in that the merger expand Google's network of 
viewers, advertisers, website publishers, and data.
    Now, the biggest risk for Congress and the FTC is missing 
the critical importance of the essence of online advertising, 
and that essence is the exceptional interconnectedness and 
interrelated segments--networks, people, products, services, 
and technology. They are all webbed together.
    Now, the traditional concept in antitrust wants to have 
separate markets, and I would argue be careful here because, 
arguably, separate markets are the least applicable and most 
artificial and contrived when they are applied to an Internet 
business. Now, listen. I know others have said we are separate 
markets, we do not compete. Be very wary when they say they are 
separate when they are heavily interrelated by the same 
viewers, the same advertisers, the same websites, and the same 
core data.
    Now, the analogy I would like to use is to argue that 
search and display are separate markets and do not compete is 
like saying your eyes and your ears do not compete for the 
brain's attention. It makes no sense. Of course they compete.
    This merger should also concern you, Mr. Chairman, because 
every politician understands that information is power, and 
Google openly aspires to be the world's most powerful 
information broker. Listen to Google's on uniquely monopolistic 
public vision in its well-known mission statement: to organize 
the world's information and make it universally accessible and 
useful. No other entity in the world currently has such a naked 
ambition to control and effectively corner any world commodity, 
let alone the world's information, both public and private, and 
have the wherewithal--infrastructure, technology, capacity, 
expertise, and acquisitions--to actually pull it off.
    What I ask you is: What checks and balances would exist to 
Google-DoubleClick's web of market power over the world's 
information? The combined Google-DoubleClick merger would have 
little accountability to consumers, to competition, to 
regulators, or even third-party oversight.
    So what is my recommendation? Oppose the merger. This is 
not a hard antitrust call, in my view. In my 15 years of 
relevant experience, I have never seen a merger that 
facilitates such extreme global concentration, both 
horizontally and vertically simultaneously, generates more 
powerful and cumulative network effects or increasing barriers 
to entry, tips so many sub-segments to substantially less 
competition. Let's talk search, text ad serving, contextual ad 
serving, graphic display ad serving, rich media video ad 
serving, consumer behavior data, ad publishing analytical 
tools, cross-market performance analytics, ad brokering, and ad 
exchanges. I have never seen anything like this. I have never 
seen anything that accelerates a dominating platform effect so 
quickly and so completely where dominance in one segment can be 
cross-leveraged to dominate related segments. And, finally, I 
have never seen anything that forecloses more actual and 
potential competition.
    Another thing. Conditions will not work here. They would 
prove futile and they would prove counterproductive, and I 
actually think it would result in the worst of all scenarios, 
which would be a slippery slope toward Internet regulation.
    So why should you oppose this merger? Very simply, bottom 
line, if a business wants its content to succeed on the 
Internet, it would have no choice but to use the Google-
DoubleClick-YouTube online advertising platform. No real 
competitive choice.
    Now, I have said a lot of things in my short remarks here. 
I do have six charts that, if it pleases the Chairman, in Q&A I 
can go into in depth and explain the Internet choice paradox, 
the extreme concentration, the extreme media concentration, the 
tipping point that this creates, the bottleneck this creates, 
and then, last, the extreme market power it creates.
    Thank you.
    [The prepared statement of Mr. Cleland appears as a 
submission for the record.]
    Chairman Kohl. Thank you, Mr. Cleland.
    Mr. Rotenberg?

  STATEMENT OF MARC ROTENBERG, EXECUTIVE DIRECTOR, ELECTRONIC 
          PRIVACY INFORMATION CENTER, WASHINGTON, D.C.

    Mr. Rotenberg. Mr. Chairman, thank you very much for the 
opportunity to testify today, in particular for considering the 
privacy implications of the Google-DoubleClick Merger. There is 
no question that the merger has enormous economic consequences 
for the two companies and its partners, but I think the 
greatest consequences will be felt by Internet users around the 
world whose privacy interests will be clearly implicated by 
whatever outcome we see.
    EPIC, my organization, has played a significant role at the 
Federal Trade Commission over many years trying to establish 
strong privacy safeguards for consumers and for Internet users, 
and what I would like to do this afternoon is briefly summarize 
some of the key cases that we have been involved with as the 
basis for the reason that we challenged the Google-DoubleClick 
merger. I think it will help explain the significance of the 
merger, the privacy interests at stake, and also the FTC's 
authority to act.
    I would like to begin by describing for you the fact that 
we challenged a similar merger in the late 1990's when 
DoubleClick sought to acquire a company called Abacus. At that 
time DoubleClick was the Internet's leading advertiser, and we 
were very impressed by the company. They made a point of saying 
that they did not collect user-identified information, that it 
was not necessary to make online advertising work, and they 
represented in their privacy policy, as well as in the privacy 
policies of all their partners, that there was no collection of 
personal information taking place. It was on this basis that 
many people accepted the DoubleClick business model.
    It, therefore, came as a surprise to us when we learned 
that DoubleClick proposed to acquire a data base marketing firm 
called Abacus, which had large profiles on American consumers, 
and DoubleClick proposed to merge the anonymous Internet 
profiles with the detailed customer profiles contained in the 
Abacus data base.
    We filed a complaint to the Federal Trade Commission. We 
alleged that the company had engaged in an unfair deceptive 
trade practice. It was the first time, in fact, that the 
Section 5 authority of the Commission had been invoked in the 
context of consumer privacy.
    The Commission undertook an investigation. There was a 
modest settlement reached. DoubleClick agreed to abide by 
certain privacy principles. Frankly, we were not very happy at 
the time, but it was significant that it demonstrated that the 
Commission could act on privacy matters.
    Now, the second case which I will tell you about, which I 
think is in some respects even more interesting, involves a 
complaint we brought to the Commission in 2001 regarding 
Microsoft. Microsoft's identity management system, Passport, 
proposed a single sign-on for the Internet that would 
essentially become the gateway for access to Internet content. 
And we said that the privacy and security issues implicit in 
the Passport proposal were substantial and implicated the 
privacy rights of Internet users.
    The Commission undertook an investigation and ultimately 
issued a consent order, which Microsoft agreed to, and 
Microsoft, since the time of that case has been bound by 
significant privacy obligations because of the concerns about 
the Passport system, even though it was not necessary for the 
Commission to find in that case actual harm.
    I will mention briefly we also brought the ChoicePoint case 
to the Commission. That involved a large data broker. It engage 
in lax business practices. The Commission found in our favor 
and ultimately issued a $15 million judgment, the largest 
judgment in the Commission's history.
    So when we decided earlier this year to file our complaint 
at the Federal Trade Commission, along with the Center for 
Digital Democracy and the U.S Public Interest Research Group, 
it was based on our familiarity with the FTC's authority to act 
under Section 5. It was based on our concern about the privacy 
interests that would be implicated in this merger. And it was 
based on the information that we were able to obtain about 
Google and DoubleClick's business practices.
    Since the filing of our complaint, nothing has happened 
that has led us to a different conclusion. In fact, all of the 
information that has been revealed since April indicates that 
there are greater data collection practices planned than were 
originally proposed, and that our instinct about the privacy 
interests implicated in the deal is something that others who 
look at these matters also share.
    For example, after the filing of our complaint, the 
Consumer Protection Board in New York State wrote to the 
Federal Trade Commission and expressed support for what EPIC 
said, said the deal should be blocked. We learned that the FTC 
itself had issued a second request in this merger review, which 
we know from the Chairman's own analysis indicates a strong 
presumption that the deal will either be blocked or modified. 
And now we are seeing regulatory authorities around the world--
the European Commission, Australia, and Canada--moving to 
undertake investigations of the privacy implications of this 
deal.
    Simply stated, it is our view that unless the Federal Trade 
Commission imposes substantial privacy safeguards by means of a 
consent order, this merger should not go forward. The privacy 
interests are simply too great. The safeguards are not there. 
This is going to be a real problem for the Internet if it is 
allowed to stand.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Rotenberg appears as a 
submission for the record.]
    Chairman Kohl. Thank you very much.
    Mr. Cleland, Google argues that DoubleClick does not really 
compete with Google with respect to Internet advertising. 
Google further argues that while Google actually sells the ads 
appearing on its search results pages, DoubleClick does not 
sell any advertising. It just provides the technology to place 
ads for advertisers on websites.
    Doesn't Google have a point, Mr. Cleland? And if so, how 
could this merger harm competition or lead to higher rates?
    Mr. Cleland. They certainly do compete, and basically what 
we are talking about is how ads get served to a screen. And 
Google serves those screens as text ads in a search bar and as 
contextual ads. DoubleClick serves them in display, which is a 
banner ad, or in video.
    Now, those are the exact same function and technology that 
is going that serves 1's and 0's from different companies 
through a network and has them appear in different formats on 
the screen that you see. They are doing exactly the same thing, 
and they compete for the same ad dollars.
    As I said before, they have the same audience, they have 
the same set of advertisers they work with, they have the same 
websites they work with, and they have basically similar data.
    The analogy is a very powerful one. What I am trying to say 
here is these are interrelated markets. It is like trying to 
say that since my eye and my ear are separate body parts, they 
do not have any interaction with my brain and they do not 
compete with my brain for information. Of course, I may hear 
something, I may see something, and we both know that you can 
see and hear completely different things, and the brain must 
sort out which is superior.
    It is classic. What we are talking about is Google is going 
to create a brain where it controls all the major networks. 
Let's look at each one of these segments that I keep repeating. 
It would take the Internet viewer audience from 65 percent to 
about 90 percent. It would take the 90 percent of Google's 
share, according to William Blair, of the advertiser community 
and add 1,500 of the top global customers that DoubleClick has, 
hundreds that Google does not have.
    Then if we talk about websites, Google has about a million 
websites, and it would add 17 of the top 50 from DoubleClick. 
And as other witnesses have described, the two biggest online 
data bases of consumer behavior would be added to, by far, what 
would be the world's largest.
    And so what I see here is to argue that they are separate 
markets is preposterous. It is artificial, superficial, and 
basically arbitrary distinctions, because also, let's look at 
it here, this whole time Google explains and represents 
themselves as working for consumers. Consumers do not pay 
Google a dime. Now, generally we would think that the people 
who pay you are the ones you work for. Google says they are 
just one click away of losing a customer. That is not a 
customer. It is a user, and the user pays their privacy in 
order to use search.
    So I do not buy Google's argument. They are competitors.
    Chairman Kohl. Mr. Drummond, in a minute I am going to give 
you, and perhaps you, Mr. Lenard, a chance to respond. But just 
to add on a little bit, Brad Smith, you said that DoubleClick 
is the most significant and the largest competitor to Google.
    Mr. Smith. Yes, absolutely, and we believe that.
    Chairman Kohl. Do you want to amplify that a little bit?
    Mr. Smith. Sure.
    Chairman Kohl. Because Mr. Drummond does not think that is 
true at all and Mr. Lenard does not think that is true at all.
    Mr. Smith. I disagree with the premise in the first 
instance that Google is only in the business of selling ads and 
not in the business of delivering them or serving them. I just 
went to Google's website myself at lunchtime today, and this is 
all about their AdSense network. And if you go to google.com/
adsense, the first thing you are going to see is this. It says, 
``AdSense for content automatically crawls the content of your 
pages and delivers ads. You can choose both text or image 
ads.''
    And you can see this not only on Google's site. You can see 
it on a number of other sites. I will show you a chart of a 
website that we took a snapshot of the day before yesterday. It 
is a popular social networking site called friendster.com, and 
you can see on this page on the right two ads. The top ad is 
delivered by DoubleClick, and the ad directly below it is 
delivered by Google's AdSense Network.
    To the best of our knowledge, if you buy an ad through 
AdSense, it may sometimes be delivered by DoubleClick, but it 
is also sometimes delivered by Google AdSense directly itself. 
And what is more, if you look at what DoubleClick was doing 
before this merger and what Google was doing before this 
merger, they were each building out all of the pieces in the 
pipeline, the piece that connects with publishers, the piece 
that connects with advertisers, and this electronic exchange in 
the middle.
    So I am not persuaded myself by Google's analogy. I think a 
better analogy is this: Google is already Amazon and is already 
FedEx. Now they are proposing to buy the post office. I think 
if that happened, not only Barnes & Noble but every book buyer 
in the country would have a real problem.
    Chairman Kohl. Mr. Drummond, would you like to take those 
two arguments and rip them into shreds, please?
    [Laughter.]
    Mr. Drummond. Sure. I will give it my best shot, but first 
I guess I have to express a little bewilderment. I keep hearing 
that DoubleClick is our single largest competitor over and over 
again, and when I heard single--I showed up at a hearing about 
a DoubleClick transaction, and it appears to be a hearing about 
our acquisition of Microsoft.
    There is a lot of rhetoric being thrown around here, but we 
have got to be clear, and I can even use Brad's prop here to 
make the point.
    We are very different than DoubleClick. We have never sat 
around the boardroom and talked about our competition with 
DoubleClick. It is a very different business.
    We sell ads--we sell largely search ads. We do not actually 
participate in this display ad segment very much. We very much 
would like to, and that is part of the reason we purchased 
DoubleClick because of their tools.
    DoubleClick does not sell any ads. When you see an ad from 
DoubleClick, all they do is deliver it. The buyer of the ad, 
the seller of the ad have already gotten together and done the 
deal together. DoubleClick has nothing to do with that, and all 
they do is deliver the ad.
    Conversely, we do not sell any ad serving products. Yes, we 
have our own fleet of trucks, but we don't operate any truck 
delivery services to anyone else. So these comparisons are 
quite specious. They are very different markets, and they 
simply do not overlap.
    This notion that DoubleClick is our biggest competitor 
seems strange in light of the total revenues that DoubleClick 
generated in their ad serving tools business--about $143 
million in revenue last year in North America. That hardly 
seems like the kind of business compared to Google and compared 
to Microsoft and others that would serve as our biggest 
competitor.
    I think you need to think about it a little differently. 
What seems to be being said here is that because the 
DoubleClick tools are used by some sellers of ads and some 
buyers of ads, that, therefore, DoubleClick controls and 
dominates this market, that is not true. It is no more true 
than a delivery--a company that delivers trucks from, say, the 
dock to the dealer, or cars, you know, controls the car or the 
truck market. It does not. It is an enabler, and that is all. 
So I think we need to be a little bit more precise with what we 
are talking about here.
    I also want to address this data base notion that is being 
tossed about. The information that DoubleClick has is standard 
Web information. It is not personally identifiable information, 
that all Web companies, including Microsoft, and others, have 
and collect. It is a very standard thing. DoubleClick cannot 
use that data for anything else, and this data is not--this is 
not a unique situation that gives Google some leg up. 
Obviously, lots of companies are in this space. They are 
competing in this space. Microsoft just acquired aQuantive, 
which does all of the same things. They are now saying that 
aQuantive is the leading ad serving company, bigger than 
DoubleClick, so it is somewhat surprising to hear them say now 
that DoubleClick has this vast trove that is greater than any 
other data that anyone else has. And DoubleClick cannot do, by 
contract with its customers, it cannot do all these things with 
this data. And so it is just not something that we need to 
worry about.
    And I do need to say that, you know--I am not saying this 
to say that this is not something that we should be looking at 
in terms of, you know, the data that ad companies have, and we 
are going to participate in the FTC Town Hall on this issue, 
and we believe that that is the right way to go rather than 
attempting to make this a single-company issue, which it 
clearly is not.
    I mean, when you look at the information--let's just unpack 
this notion of Google having, you know, the biggest data base 
or having this treasure trove of information. Microsoft already 
has what it claims is the biggest ad serving company. It is, 
with the acquisition of a Quantive, in addition the largest 
purchaser of online ads. It has a destination site with 
hundreds of millions of users, e-mail with 280 million or so 
users, $1 billion or so in revenue from display advertising 
compared to Google's very small amount. And this is not even 
talking about any of the other products that Microsoft has.
    I think they are pretty well poised--they have a lot more 
information than Google has and, quite frankly, have announced 
many, many new initiatives with behavioral targeting and the 
like.
    So I think what we need to do here is put things a little 
bit more in perspective and look at the facts. Thanks.
    Chairman Kohl. Senator Schumer from New York has joined us, 
and I would like to call on him for remarks and questions.

STATEMENT OF CHARLES E. SCHUMER, A U.S. SENATOR FROM THE STATE 
                          OF NEW YORK

    Senator Schumer. Thank you, Mr. Chairman.
    First, I want to thank you for holding these hearings. You 
are always right there when there are issues that are of 
importance in antitrust and other related areas. So I thank you 
for holding the hearing, because given the high stakes and 
important issues on all sides, it is appropriate to look at the 
antitrust and other implications of mergers in this sector.
    I am concerned about consumer privacy as these companies 
which hold vast amounts of information do consider merging. 
And, of course, Mr. Chairman, it has been amazing to watch 
computer technology develop. It was not long ago when nobody 
had personal computers. I remember in college I learned about 
computers, and we had all these punch cards, and it took about 
days to write a program and more days to punch in the cards, 
and then it did not work. These big, huge machines like you 
used to see in the movies in the 1960s, and now, of course, we 
can hold them almost in the palm of our hand.
    Of course, each of these new innovations brings new 
challenges. They are all to the good. But there are challenges. 
One of these is the complicated by interesting issue of online 
advertising that brings us here today.
    We cannot ignore the fact that an increasing portion of the 
advertising dollar around the world is going to online 
advertising, text or picture ads that show up every time we do 
a search or go onto an ISP like AOL or Google. The companies at 
issue here are some of the largest and most profitable in 
America. It is my sincere hope that as they continue to grow, 
they will use their expansions for the good of consumers.
    But I want to make sure three things are addressed in the 
online advertising deals, particularly this one, which has 
relevance to New York: first, antitrust laws, as you are 
carefully watching over, Mr. Chairman; second, privacy; and, 
third, jobs in New York.
    On the antitrust side, there are certainly questions about 
what impact a merger such as this will have on the advertising 
market. Those questions should be answered by this Committee, 
Justice Department, and the FTC as they review this merger.
    In addition, I have some concerns on the privacy side. As 
the Internet expands, the amount collected about our personal 
life grows. Some of it is collected to better target ads to 
each of us.
    So because of my concerns, I met with the Google CEO, Dr. 
Eric Schmidt. I asked for a specific commitment from Google 
that it will protect privacy following the merger given the 
increased abilities and power that they have. And at this time, 
Mr. Chairman, I would like to place into the record a copy of a 
letter from Dr. Schmidt to me that lists some of the steps 
Google tells me that it will take to protect privacy.
    Chairman Kohl. Without objection.
    Senator Schumer. Thank you, Mr. Chairman.
    Google is looking for ways to provide users with better 
forms of notice to help users understand what is behind the ads 
they see. Google is looking into ``an opt-out mechanism'' in 
the future so that individuals can choose not to have cookies 
placed on their computers. And it is also experimenting with 
new privacy protection features. For instance, they are looking 
into the idea of using crumbled cookies so that the user data 
is not stored in any one single cookie, one single place.
    Mr. Chairman, these steps I think are important measures 
toward addressing my privacy concerns, and I thank Google and 
Dr. Schmidt for doing them. I am hopeful that Google will take 
these steps as part of this merger and part of an ongoing 
effort to protect privacy, because that is going to make 
customers happy, so it is in your interest and everyone's 
interests.
    Google has also talked to me, Dr. Schmidt has, about 
commitments of jobs in New York. Obviously, DoubleClick is a 
New York company. Google has hundreds and hundreds of their top 
researchers in New York, a lot of them at, I think it is, 111 
Eighth Avenue, which is one of our high-tech buildings, and we 
are very interested in growing a high-tech industry in New York 
as best we can. And Dr. Schmidt has assured me that as a net 
effect of the merger, the number of jobs is going to grow in 
New York, which matters a great deal to me as well.
    These commitments I think are significant and meaningful. I 
thank Google for responding to my requests in this way. And, 
Mr. Chairman, I thank you for having the hearing and thank the 
witnesses for coming.
    Chairman Kohl. Thank you very much, Senator Schumer.
    Mr. Cleland, most analysts agree that as a result of all 
these Internet advertising deals and the Google-DoubleClick 
merger in particular, advertising will becoming more targeted 
to a customer's interests and, therefore, more efficient. 
Customers will get ads for products that they are more 
interested in; advertisers will get access to people more 
interested in their products; and websites will be able to sell 
their ad space at the best possible prices.
    Now, wouldn't you say that this is a good result for 
consumers and for the economy as a whole?
    Mr. Cleland. I think what this does is it brings to mind 
the Internet content paradox, and if you can put up the first 
slide here, what I really want to do here is I think there is a 
lot of misdirection that is going on of trying to get--you 
know, have people talk about--oops, not that one. I am sorry. 
The first one. It would be the one on the other--the other 
side. It's called the ``Internet Choice Paradox.''
    The point I am making here is that Google represents itself 
as working for consumers and gets everybody to focus on the 
consumer side. You know, and that is a smart thing for it to 
do. But it is not in the business, it is not being paid by 
consumers not one dime. It serves advertisers.
    And so what I would like to do is get people to understand 
that the consumer side has many choices--free access to reach 
any content. But on the business side, there is very little 
choice, and there is, you know, a bottleneck for that access.
    And so how I would answer your question is that when you 
talk about consumers, that is where they would like to take 
this. But this is an antitrust hearing. This is competition. 
This is talking about where is the competition. They say they 
are one click away from somebody using another search engine. 
They did not get paid dime one by that user that is leaving 
them.
    Now, on the other side, you know, they would be worried 
about losing a big competitor, and what is going on with 
Facebook right now, there is a fight between Google and 
Microsoft over who will get access to that traffic, that large 
website. That is where the action is. It is on the business 
side. And all this talk about the consumer side in an online 
advertising model where consumers do not pay for the service I 
consider a huge misdirection. And that is why I put together 
this slide to focus people: Competition issues are on the right 
side on the bottleneck access to online advertising.
    Did that answer your question?
    Chairman Kohl. Somewhat.
    [Laughter.]
    Chairman Kohl. Mr. Drummond, after Google's deal to acquire 
DoubleClick was announced, Google Deputy Counsel Nicole Wong 
stated that Google hopes to ``integrate the two companies' non-
personally identifiable data'' in order to provide ``better and 
more relevant ads for consumers.'' This makes perfect sense. As 
you gain more and more information about consumers, you will be 
able to do a better job of targeting ads. Both Google and 
DoubleClick collect a huge amount of information on consumer 
preferences, including what websites they search and what 
advertising they view online. How could any new entrant without 
such access to consumer information possibly be able to compete 
with the combined Google-DoubleClick? Doesn't the tremendous 
amount of information that will be held by the combined Google-
DoubleClick after the merger constitute a barrier to entry to 
any new rival entering this market, a huge barrier to entry? 
And isn't, in fact, that one of the goals that you wish to 
achieve?
    Mr. Drummond. Let me address. No, that is not true. We do 
not have a unique--or a stranglehold on all of the information 
out on the Internet for purposes of--for online advertising 
purposes. There are many--there are other competitors in this 
space; aQuantive is a big competitor to DoubleClick, has the 
same kind of data. There is simply no way for us to--there are 
ample ways for others to come into this market.
    Again, if you look at the data that Microsoft has--
    Chairman Kohl. But I just want to be sure we--isn't it true 
that one of the offshoots of this merger is that it will make 
you a much stronger player in the whole field?
    Mr. Drummond. Well, we hope that it will help make us 
stronger in a field that we have actually been fairly weak in, 
and that is in display advertising. You know, one of the things 
we hear from customers is that they would like all of us to 
offer more integrated solutions that have an ad serving 
component, that have the ad placement components, as well as 
selling and placing--selling the ads.
    Now, Microsoft and Yahoo and AOL are all going down the 
same path, and it is really in response to a customer demand, 
and that is why you are seeing a lot of these transactions in 
the marketplace.
    So, yes, we definitely want to be a stronger competitor in 
display advertising where there is enormous, enormous 
competition. There are some incumbent larger players, such as 
MSN, such as AOL, such as Yahoo. We are not one of them. But 
there is a lot of competition in that space, thousands of sites 
that are selling advertising space. So we think it is a great 
space. And all of the companies are moving forward with ideas 
about better targeting to create better ads. And, yes, that 
uses some of the data that is created in the process.
    But I have to tell you that when people come here and say 
that DoubleClick is the only place that has this data, it is 
just not true: aQuantive has this data; lots of other folks 
involved in ad serving have this data as well. So this is not a 
barrier-to-entry issue.
    Chairman Kohl. Mr. Cleland?
    Mr. Cleland. Could I reply to that? Could you pull up the 
chart that says ``A Tipping Point''? Let's look at the world 
from a competitor's standpoint, and look at what this does.
    What do people want when they buy advertising? They want an 
audience, and they will pay for a larger amount if they have a 
larger audience. So in this instance, Google's--you know, 65 
percent of Internet viewer share would be--they would get 25 
percent of the share that they do not have, up to about 90 
percent, according to my estimates. And if you are a website, 
what do you want? You want to have access to lots of 
advertisers, and you are willing to pay for that, and that is 
what you seek.
    Well, they have got 90-percent share of the advertisers, 
and this is going to give them hundreds of the ones they do not 
have. So once again, if you are a website, who are you going to 
turn to? You are going to turn to Google because they are the 
only game in town that can give you access to all of the 
world's advertisers. If you are an advertiser globally and you 
want to reach all of the consumers, you have got to go to 
Google because they have gone from 65 to 90 percent. And 
Microsoft, Yahoo, and the others? Baby stuff relative to those 
numbers.
    Then if you look at the consumer data that they combine, 
remember, these are network effects upon network effects. And 
it is acquisition. If you deconstructed this and asked Mr. 
Drummond how long would it take them to replicate organically 
what DoubleClick has, it would take them years. And ask them if 
DoubleClick could ever catch Google. They would say no, you 
know, it is ridiculous.
    So when you realize that what Google will get through 
buying it instantly, they will own this market. They will 
control it via acquisition.
    Now, that is what the law--at least the way I understand 
it, it says you cannot via acquisition substantially lessen 
competition. And there is a tipping point here, and then in the 
next slide--I will not talk about it, but what I would do is 
explain very clearly that it facilitates a bottleneck, and it 
talks about many of the same points I just made, but in a 
different dimension.
    Chairman Kohl. Yes, Mr. Smith?
    Mr. Smith. Yes, if I could address that. I would not be 
here if we did not believe that this merger does create two 
very important barriers to entry. And I go back and say think 
of this as a pipeline and think about it as something that, in 
fact, is not all that different from other kinds of delivery 
channels, even like the passive shipping issues that you have 
been addressing, Mr. Chairman, in other contexts.
    This pipeline has advertisers on the one end and website 
publishers on the other. And the pipeline itself principally 
has three broad components: there is a component that serves 
the publishers, there is an exchange that is electronic that is 
in the middle, and there is a component that serves the 
advertisers.
    Now, David keeps talking about aQuantive, but what is 
important to keep in mind is aQuantive's business was 
principally on the side of addressing the needs of the 
advertisers. When you go to serving the publishers, the third-
party publishers on the Internet, aQuantive had a business that 
was in single digits, DoubleClick has a business that was at 
about a 50-percent share, and Google had a business that was 
about a 30-percent share.
    And keep in mind, yesterday Google was saying that they 
were not in the delivery business at all. Today they have a 
fleet of trucks. Yesterday they were saying they did not do 
delivery of ads, and today when David answered your question, 
he said they do not delivery very much.
    The fact is they are in not only the business of selling 
advertisements to publishers but delivering those ads. They 
have in this business, this pipeline business, they have a 
million customers who advertise. Microsoft has 85,000 or 
thereabouts. The businesses are really not comparable today.
    And so there is, on the one hand, this barrier to entry 
that consists of what you might think about as the advertising 
inventory barrier to entry. There are all of these ads. There 
is also a barrier to entry that consists of this massive 
accumulation of user information. And it all comes together not 
only on these two ends, but in the middle.
    In a lot of ways, this merger is like the--it would be like 
combining the New York Stock Exchange and the Nasdaq. You know, 
if the New York Stock Exchange and the Nasdaq were to combine, 
somebody could build an alternative exchange, but would anybody 
go there to take their company public? It is hard to believe 
that would be the case. That is the kind of thing that will 
result here.
    Chairman Kohl. As I understand it, Mr. Drummond is 
suggesting that these businesses are dissimilar and that there 
really is not much synergy between one and the other. Are you 
suggesting that he is being somewhat disingenuous here today?
    Mr. Smith. I am not going to second-guess his motives. Off 
the basketball court, we can be friendly. But I do respectfully 
disagree with what he is saying.
    Chairman Kohl. Are you a basketball player?
    Mr. Drummond. I am not. I do not know where that came from.
    Mr. Smith. Only when they are playing in Wisconsin.
    [Laughter.]
    Chairman Kohl. Mr. Drummond, go ahead.
    Mr. Drummond. I am not sure where that came from, but I 
have to say, I did not say that these were completely 
dissimilar. They are certainly complementary businesses. We 
would like to have an integrated offering that includes the 
kinds of things and the kinds of ad serving tools for display 
advertising, which Google does not have, and we would like to 
add that to our product suite. The same reason why Microsoft 
wanted to add aQuantive, that product to their product suite.
    But it still is the case that we are not in the ad--we have 
not been in the ad serving business to date, and just to say 
that we deliver our own ads is not saying that we are in the ad 
serving business. Every website--many websites have ways to 
place ads independent of DoubleClick, of Atlas, aQuantive, or 
anything else. So the fact that we happen to deliver ads does 
not put us in the business.
    No advertiser, no publisher, in evaluating their choices 
for these ad serving tools, will sit down and think, Well, 
should I purchase from DoubleClick, from Atlas, or from Google? 
Google is not into the conversation because Google does not 
have a product. So when you talk about competitors, you need to 
talk about firms that are choices for a consumer. And there is 
no choice here. They operate in completely different markets. 
And the same goes on the advertising sales side. If you are an 
advertiser and you are looking to sell ads on websites, you do 
not come to DoubleClick to do that, because DoubleClick does 
not sell any space. You go to websites. Many websites have 
their own direct sales forces. You can go to advertising 
networks such as Microsoft's ad center, Yahoo, to Google, and 
lots of places like that. But the place that you would not go 
is to DoubleClick or to an ad serving company. You would use an 
ad-serving company perhaps, but you would not--and you have 
many choices there, but you would not use Google. And I think 
that is being lost over here, but it is clearly the case that 
these are very different, complementary but very distinct 
businesses.
    Chairman Kohl. Senator Hatch?
    Senator Hatch. Thank you, Senator.
    Mr. Drummond, with respect to the broadband service market, 
Google seems to contend that consolidation harms consumers and 
``downstream'' application service providers. At least that is 
the way I have interpreted it. Yet the Google-DoubleClick 
merger represents a much more significant concentration of 
Internet advertising market share.
    Now, why are there too few players in the broadband service 
market, but why won't the Google-DoubleClick transaction create 
too few players in the Internet advertising market?
    Mr. Drummond. Well, Senator, I would be happy to address 
that. These are very different businesses, very different 
markets. I think in the broadband sector, it is apparent to all 
of us that we have very few choices for our broadband service. 
In many markets, you have two choices, and in many, many 
markets you have just one.
    That is simply not the case in online advertising. In the 
markets that--in the sale of ads, which is what Google does, 
there are many, many choices. There are display ads; there are 
search-based ads; there are many, many outlets to get those 
ads. And so we simply do not have that same dynamic.
    This acquisition changes that not at all. As I said, by 
acquiring DoubleClick it does not reduce the choices of anyone 
who is looking for ad serving technology products. It does not 
reduce the choices of anyone who is looking to buy or sell ads 
because DoubleClick simply does not do that. So these are very 
different markets. You are talking about one market where there 
are few players that the customers, the consumers can touch, 
and one in which there are multiple players. And they are only 
growing, not shrinking in many ways.
    Senator Hatch. OK. Mr. Smith, for as long as I can 
remember, Microsoft has stated that an entrepreneur operating 
from a garage could put your company out of business, 
astounding as that sounds. But I understand what you are 
saying.
    Whether or not that is true, it strikes me that a similar 
statement could be made of Google. If someone writes a better 
search algorithm, Internet users will merely jump to the 
entrepreneur's site and perform their searches there. Simply 
put, if Google does not have Internet users using its search 
engine, then it does not have anyone to advertise to. In 
addition, DoubleClick's percentage of the overall Internet 
advertising market is much smaller by comparison.
    So I think we have to ask: What is the concern? If 
Microsoft or another company comes along and creates a better 
search engine, Google might not be as dominant a player in the 
market as it is today. Now, if that is true, again, where is 
the this problem? Why not just build a better product? Have you 
not just purchased a DoubleClick competitor? This is a lot of 
questions and I--
    Mr. Smith. That is a very good question, Senator, and if we 
believed that this was a market where better technology or 
better value by itself could carry the day, I would not have 
come here today. But that is not the market that we are dealing 
with.
    Indeed, if that were this market, Microsoft would not have 
paid an 83-percent multi-billion-dollar premium to acquire a 
Quantive, and I do not think that DoubleClick would have sold 
for the premium that it sold for. This market is consolidating. 
And we certainly believe that when this consolidation is 
finished--and it is going to be finished very quickly--we are 
either going to have one company that provides the pipeline for 
online advertising, or we will have two, or maybe we will have 
three. I cannot imagine more than three. I am skeptical that we 
will even have as many as three.
    And once we reach that point, I do not think that better 
technology or better value can make a difference. The barriers 
to entry created by the accumulation of all of the inventory in 
the ads and all of the user information is too great. It really 
is, as I was saying before, Senator, it is like the combination 
of the New York Stock Exchange and Nasdaq. Somebody could offer 
a better stock exchange, but if that one exchange were to come 
into existence and had all of the brokerage relationships and 
all of the purchasers in the country, why would anybody take 
their company public anywhere else? That very much, I believe, 
is analogous to this situation.
    Mr. Cleland. Senator, could I also answer that question?
    Senator Hatch. Sure.
    Mr. Cleland. One of the most preposterous notions I have 
heard is Google saying that, you know, any day a new search 
engine could come and knock them out. Let's break that down.
    What Google has is the world's largest infrastructure and a 
parallel processing grid. It is a supercomputer. There are a 
million customized servers that Google has bought and dispersed 
around the country, and those million servers copy every single 
page, at least reported by the New York Times, every single 
page of the Internet every day and keep it stored and 
recovered. That is how you can get, you know, a very quick 
response.
    They also have a million advertisers, or a million websites 
they deal with. They have 90 percent of the advertisers. They 
have 650 million users and 80 percent of the data on consumers' 
usage patterns in order to do targeted advertising.
    Now, I would say the accumulated aspect of two guys or one 
guy in a garage, it would require, you know, tens of billions 
of dollars and years and years for them to replicate something 
that could compete with Google. It is not just what search 
engine you have. If that was true, ask.com would be really--you 
know, they made some tweaks to their engine, and they would be 
improving. Or Yahoo, when it tweaked and improved its search 
engine, which it used to outsource to Google, it would be 
better. But the cost, the barriers to entry, are just enormous 
about what Google does.
    Hopefully that was helpful.
    Senator Hatch. It was.
    Mr. Smith, much has been made about how Google and 
DoubleClick maintain information to their users. With your 
acquisition of--is it a Quantive?
    Mr. Smith. Yes. That is right, a Quantive.
    Senator Hatch. What other types of information will you 
store, for how long, and what are Microsoft policies to 
maintaining the privacy of Microsoft's users?
    Mr. Smith. I think there are two things to think about, 
Senator, in the context that you raise. They are both quite 
important.
    First, I would say that we need to think about this in the 
context of this merger. This merger, in our opinion, is about 
creating a single pipeline that has virtually all of the user 
information on the Internet. And if things go in this 
direction, we will no longer as consumers live in a world where 
our user information is divided and held by a variety of 
different companies. It will all be in the hands of a single 
company. And so I think you are quite right to ask, OK, well, 
what are the policies and practices of us when it comes to 
protecting user information?
    We announced new privacy principles in July. We built on 
privacy principles that we have had in the past, and I believe 
that they are--I would have to say I believe they are the best 
principles that you can find in this industry. We said, for 
example, that we will anonymize all user information, for 
example, all of the IP addresses, after 18 months. Now, Google 
likes to say that they were the first to anonymize information. 
In fact, I do not believe that Google is anonymizing anything, 
and I say that with respect, because, you know, all of our 
computers basically have the equivalent of a phone number. It 
is the IP address. It is basically nine digits.
    What we announced at Microsoft is that after 18 months we 
would delete that IP address, that phone number, in its 
entirety. What Google announced was that they would take that 
IP address after 18 months, and they would delete the last few 
digits.
    This very much reminds me of when I moved to Paris in 1993. 
I quickly found that when you get a phone bill in France, you 
get the list of phone numbers that were called from your house, 
but the last four digits have been deleted. Apparently it was 
considered socially awkward for spouses to be able to know who 
was being called from their house. And yet any good divorce 
lawyer in France can tell you that they can still figure out 
quite a bit. It may make it harder, but it does not make this 
information anonymous.
    Mr. Rotenberg. Senator, may I speak to this issue?
    Senator Hatch. Yes, sir.
    Mr. Rotenberg. I did not raise earlier some of the privacy 
concerns that we identified in Google's practices, but I think 
it is appropriate now, and I think it is particularly important 
because Google has made a number of representations to this 
Committee, and I sense that as well in Senator Schumer's 
remarks, regarding what it will do to safeguard privacy. But it 
uses these terms such as ``anonymize'' very loosely.
    Mr. Smith is correct. When Google says that it is 
anonymizing the Internet protocol address, it is much like 
taking the last two digits off a telephone number. In context, 
it is very easy to re-create the identity of the computer tied 
to the Internet. It is very similar with a cookie as well, and 
we have actually put together an analysis, and our simple 
conclusion is that what Google describes as non-personally 
identifiable information, which is the information that it 
retains on every single search query--and that is the Internet 
protocol address, the cookie information, the date and time of 
the query, the query search term. They describe all of that as 
non-personally identifiable. That is actually a remarkable 
claim because in so many different respects, that information 
is uniquely tied to the Internet user who made the search 
query. In fact, it is the reason that the Department of 
Justice, for example, goes to search companies and requests 
those files precisely to identify Internet users.
    And I will say further I have recently had an exchange with 
Dr. Schmidt, the CEO of Google. In the pages of the Financial 
Times, he described his proposal to safeguard privacy for 
Internet users. I published a response and explained that many 
of the safeguards that Google is recommending will not 
adequately safeguard the privacy interests of Internet users. 
And this is precisely the reason that the pending complaint of 
the Federal Trade Commission is so important. We need a much 
clearer description of what the business practices will be of 
this merged entity to ensure that the privacy interests of 
Internet users will be protected.
    Senator Hatch. Thank you.
    Dr. Lenard, as you well know, one of the major concerns 
about antitrust law is the creation of or enhancement of market 
power. In the context of sellers of goods or services, market 
power may be defined as ``the ability to profitably maintain 
prices above the competitive levels for a significant period of 
time.''
    Now, market power may be exercised, however, not only by 
raising price but also by reducing quality or slowing 
innovation. Therefore, how can one argue that a standard 
antitrust claim cannot be made if Google already controls 70 
percent of the search advertising and if the merger is 
permitted, Google-DoubleClick will account for nearly--well, I 
guess nearly 80 percent of the non-search ads or display ads.
    So I would like your opinion, and then I would like to give 
other members of the panel an opportunity to respond as well.
    Mr. Lenard. Thank you, Senator. There are several responses 
to that. The first one, I think, is the one we have been 
talking about a lot, that these really are not--this is really 
not a merger between direct competitors, really for the reasons 
that Mr. Drummond said. I mean, you do not--if the price of the 
ad space that Google is selling goes up, you cannot substitute 
for that by going to DoubleClick and buying, you know, ad 
serving capabilities. They are just not direct substitutes for 
each other. Obviously, what DoubleClick provides is an input 
into the Internet advertising market, but it is not by any 
means a direct substitute for what Google is supplying.
    You know, the second thing gets to this--and this has not 
been talked about that much. I mentioned it a little bit in my 
statement. What we really are talking about here is providing 
better quality for consumers. All of these companies are 
integrating with other firms in an effort to provide a better 
product for consumers. And the notion that--there is this 
notion that maybe if Google acquires DoubleClick, the product 
will be too good and it is going to be hard to compete against. 
Well, as I said, I think that is really a risky proposition to 
go down that road because we do not want to--you know, we do 
not want to hold--you know, grab onto the belt of somebody who 
is in the race and say, well, everybody, let's make them run a 
little bit slower so everybody can catch up a little bit. That 
would just provide all sorts of bad incentives to the system.
    The other thing I think that has not been mentioned in this 
so far is the customers, the people who buy--the firms who buy 
advertising services. A lot of them are very big companies. 
They are very sophisticated. They are very price-sensitive. 
They buy from multiple suppliers. And if somebody starts 
raising the price on them, they are going to go someplace else 
very quickly, and that is going to discipline the market.
    Senator Hatch. Anybody else?
    Mr. Drummond. If I may, this notion of 80 percent of all 
advertising keeps getting tossed around here as if it is some 
kind of a fact. It is a made-up number. We have not seen any 
support for it. I do not think there is any. And it relies on 
this premise, which is utterly false, that DoubleClick somehow 
controls some major sector of spending on display ads. It does 
not control it. It does not get any--no one pays DoubleClick to 
place an ad.
    So to say that somehow there is this control or domination 
of the display advertising business because as part of our 
products we now have ad serving technology is just--is crazy. 
Again, Brad talks about a $27 billion market potentially this 
year in online advertising. Of course, a big chunk of that is 
display advertising. And the entire market for ad serving 
companies is about $300-some million. Those are the revenues of 
the companies, you know, Atlas, DoubleClick, and everyone 
combined.
    How can it be that one participant in a $300 million market 
controls and dominates a multi-multi-billion-dollar market? It 
is impossible.
    So, you know, I urge you not to be misled by some of these 
numbers that are being tossed around today.
    Mr. Cleland. I have to reply to that. If Google is 
representing that this is the online advertising market, they 
are going to have a very hard time making that case, because as 
you know, the Congress for years has media ownership limits 
that it restricts how much you can control a certain media, and 
online is clearly a separate media. And Google--and there are 
just reams and mountains of evidence of how Google has 
explained how online advertising is better, because it is 
targeted, it is relevant, and it is measurable; and that, 
therefore, people should move ads off of TV, radio, and 
newspaper, and move it online.
    Now, if that is not different markets, I do not know what 
is, because where the other advertising is just kind of 
general, this is stuff that you can target to an individual 
user, you can measure it, and they can argue that the consumer 
might save more. That is relevant.
    Now, the other point you made about extreme market power, 
if you could put up that slide, what you have here is 
extraordinary. You cannot just say these guys do not compete. 
What we are talking about is an ecosystem, OK? They are going 
to corner this market. Now, let's look--remember, online 
advertising is an indirect market. Consumers do not pay a dime 
to Google. There is a three-way transaction here. So you have 
to understand it as a three-way-sided market. You have got 
users, content providers' websites, and advertisers. Once 
again, this merger adds the No. 1 and No. 2 Internet viewer 
audiences, the No. 1 and No. 2 best Internet content website 
networks, and the No. 1 and two best advertiser networks. And 
what it does, because this is the brains of the Internet and 
the brains of online advertising, what it will allow them to do 
over time is on this platform cross-leverage, and as ads to 
more to ad brokering and as ads go more to ad exchanges, 
whether it is a pipeline, whether it is a bottleneck, whatever 
we call it, they are almost all going to have to go through 
Google-DoubleClick-YouTube.
    And so this notion that there is lots of choice, a big 
advertiser, if it wants to reach the world audience, it has got 
to go to Google-DoubleClick. If a website wants to reach all 
the advertisers out there, it has one choice. It has got to go 
to Google-DoubleClick.
    Thank you.
    Senator Hatch. Brad?
    Mr. Smith. If I could just make two points, Senator. I do 
think it is helpful to be clear about what we are not talking 
about and what we are talking about. We are not talking about, 
in my opinion, whether Google should continue to have the 
opportunity to innovate and develop a better product and 
service. And I say hats off to Google. They have done a lot of 
good innovation, and we have all benefited from that this 
decade.
    What we are talking about is not that but, rather, whether 
Google can buy its way to what we regard as a dominant market 
position. And also, we should be clear we are not talking about 
buying up this entire $300 billion market for all of the 
advertising in the world or even all of the $27 billion online 
advertising business. We are talking about this pipeline. And 
there are a lot of markets that are characterized by these 
concerns about passive shipping or pipelines, for example.
    The very first antitrust case ever brought against Standard 
Oil was brought at a time when there were lots of different oil 
wells owned by different people in the country. There were lots 
of different people that were distributing oil to customers. 
But what Standard Oil was accused of doing was basically 
solidifying and monopolizing the railroad network and, thereby, 
the pipeline for effectively moving oil downstream in the 
economy. That is analogous to what we are talking about here.
    I do believe that when you look at this pipeline, it is 
absolutely fair and it is absolutely accurate to say that if 
this merger is approved, Google will account for 80 percent of 
the ads that are served to publishers.
    Mr. Drummond. We will not account for that. The 80 
percent--simply because some portion of online, of display 
advertising is delivered using a tool from DoubleClick when 
there are many other tools available does not mean that Google 
accounts for. Again, no control over the advertising, no 
ownership of the data that comes with that that is collected in 
the process of the advertising. That data is owned by the 
customers, publishers and advertisers, and DoubleClick or 
Google cannot do anything with it.
    It is simply not true that by doing an acquisition like 
this there is some control of this display advertising market.
    Senator Hatch. Well, this has been a very interesting 
hearing. I am sorry I have been in and out, but I have been on 
the floor all day and had to go back and forth. I have a lot of 
other questions, but I think I will submit them, Mr. Chairman, 
so that we do not keep these folks too long. But a very 
interesting set of questions. You have very interesting two 
companies here, and other companies involved, and I am 
absolutely fascinated by your industry. We will just have to 
see where we go from here.
    Chairman Kohl. Thank you very much. I quite agree, Senator 
Hatch.
    One more question, Mr. Rotenberg, to you. Should there be 
Federal laws to ensure that customer information from searches 
and that from advertising information be kept separate? Should 
we put conditions on this deal to ensure that information be 
kept separate? What other conditions would you propose in terms 
of this merger?
    Mr. Rotenberg. Thank you, Senator, for asking that 
question. One of the things that we have done in the various 
filings that we have made to the Commission regarding this 
merger is to propose a number of different remedies that the 
Commission, we believe, could enforce through a consent order. 
I think the most simple and most direct one is to say that 
there should be enforceable privacy standards that safeguard 
the information that is being collected, ensure that it is not 
being misused.
    Google has in various ways said that it shares that goal; 
it is prepared to do that. Our view is that if that is the 
company's position, this is the perfect opportunity, perhaps 
even a unique opportunity, to get that in writing through a 
consent order at the Commission and we would like to see it 
happen.
    There are, in fact, I think in our three different filings, 
between 20 and 25 different recommendations we have made. One 
of the recommendations concerns this very interesting issue of 
data retention, and as you may be aware, there is a lot of 
controversy today, particularly among users of the Internet, 
about the amount of information that is being collected and 
retained by these companies.
    Now, to be fair to Google, it is very much a reflection of 
the Internet architecture that some information needs to be 
accessed by any Internet advertiser, generally speaking, to 
respond to a query. That is basically--because of the stateless 
nature of the Internet, if the Internet user was, in effect, a 
new entity every time they went to a website, it would be 
almost impossible to interact. Now, there are ways to get 
around that, but, generally speaking, we understand why 
Internet advertisers collect a little bit of information. The 
question is: Why do they keep it for so long? Why is it 
necessary, after they have answered the search request, after 
they have provided the advertising links that their business 
partners provide so that there is a successful business model, 
why do they need to keep the information as long as they do?
    So with respect to that issue, we actually think there is a 
very good opportunity here as well for the Commission to 
enforce much more sensible limits on the duration of 
information that is kept by the search companies to protect the 
privacy interests of Internet users. And we actually believe 
that over the long term--the companies may not admit this 
publicly, but I will be willing to bet they would say so 
privately--they will protect themselves against some downstream 
risks if they were not sitting on so much data, because I can 
tell you several scenarios under which both Microsoft and 
Google are genuinely concerned about the amount of information 
they keep: one, a security breach. These are companies that 
have brilliant people; the top computer security experts in the 
world work for these companies. And, nonetheless, you know, 
before this hearing, we happened to do a little search because 
I thought you might ask me a question about Google's security 
flaws, so I did a Google search. There are over 2,200,000 Web 
pages on the topic of Google security flaws. The top ten all 
describe very serious breaches that that company has 
experienced. That is one reason, I suspect, they are genuinely 
concerned about the information they keep.
    The other, of course, is in the legal context. They can 
always be compelled to produce information to someone else 
under circumstances that they might otherwise choose not to 
disclose that information. Now, we applauded Google last year 
when they opposed a broad subpoena that the Department of 
Justice sent to that company. We thought it was unnecessary, we 
thought it was excessive. Google did the right thing by 
opposing it. But we also said at the time that there was an 
ongoing risk, as long as this company kept so much information 
on Internet users, that the Department of Justice or anyone 
else with legal process could come back in the future.
    And so, you know, in answer to your question, Senator, we 
think this is the ideal moment, the unique moment to enforce 
meaningful privacy standards to limit the collection of 
information on Internet users to make these business models 
work, but also to ensure trust and confidence in our new 
economy.
    Chairman Kohl. A last comment, Mr. Smith? Or second to last 
comment, then Mr. Drummond.
    Mr. Smith. I would second Mr. Rotenberg's call for Federal 
privacy legislation. We have been endorsing that for some time. 
I have come here a number of times myself to encourage Members 
of Congress to adopt Federal privacy legislation.
    But I also think it is a mistake to think that as consumers 
our personal information can be protected by law and regulation 
alone. And in that context, I think one of the fundamental 
issues in this merger is whether the marketplace and 
competition will continue to play a role as well.
    I think it is very disconcerting to think about a future 
where all of our user information flows through only one data 
pipeline, because if that pipeline is breached, the 
consequences are enormous. If you look at the information that 
is now flowing, it includes not only the simple things like 
where we live and our date of birth, but it includes 
increasingly medical health records, it includes our financial 
records, it includes everything we are interested in on the 
Internet, what we are looking for, what we are thinking. The 
amount of information truly is quite substantial. We should not 
have to rely on a single pipeline. Not only is there the danger 
of what happens if there is such a breach, but we would lose 
the role that competition plays.
    One of the reasons we are having this dialog is because 
Google and Microsoft and Yahoo and AOL and many others have an 
incentive today to compete to offer consumers better privacy. 
Competition is, in effect, the guardian of consumer privacy 
needs today. And yet if this merger is approved, the ability of 
that guardian to play this role in the future will be 
dissipated quite substantially.
    Chairman Kohl. Mr. Drummond?
    Mr. Drummond. Thank you. Let me just say that I agree with 
Brad's call for Federal privacy legislation. We are on the 
record on that. We also believe there should be some global 
standards so that there is not a patchwork of privacy laws 
around the world that are very difficult to work with and make 
it very confusing for consumers. So we are all for that.
    We do not think that there should be conditions placed 
here. This is an industry issue, and we think it should be 
addressed, and we should be thinking about ways in which we can 
make sure that there is continued confidence in protecting user 
data while at the same time allowing the companies to innovate 
and to deliver better services to users, which is what--you 
know, users want those and users benefit from them, as do 
advertisers and websites. That is why we think the upcoming FTC 
Town Hall is so important, because it provides a great forum 
for us to sit down and really work these issues out. That is 
how these issues should be worked through, not in the context 
of one deal in a big industry with many, many players, where 
there are many other deals going on. We ought to look at this 
in a more holistic manner.
    And let me just close by saying one thing. There is no 
pipe. You keep hearing about this pipeline, this single 
pipeline with all of the data. Please do not be misled. There 
is no such thing. When it comes to search, there are a number 
of options for users. We all know that. We have been successful 
because we have delivered a great service. There are other good 
search engines, and they have been pretty successful, too. And 
it is absolutely true that any user can, at a moment's notice, 
go use another one, and they do all the time.
    On the advertising side, whether it is ad serving or 
whether it is display ads, there are all kinds of choices. And 
any data that is collected through advertising, whether it is 
from a technology maker or from a website itself, that is going 
to be broadly distributed around the thousands of participants 
in this market, the many, many participants in this ad serving 
technology market, of which the No. 1, according to Microsoft, 
is owned by Microsoft.
    So I just want to be clear. This pipe that is being talked 
about is very much a fiction.
    Chairman Kohl. Well, gentlemen, we want to thank you so 
much for coming today. The Internet is enormously powerful in 
our world today and will become even more so in the years to 
come, and this deal obviously will have an impact on that, as 
well as other deals, and the rules and regulations that will 
govern the Internet. These are very important questions in our 
society, and I think we are privileged to have had such strong, 
well-informed both advocates and objectors here today. It has 
added a lot to the dialog, and I am sure there will be 
additional rounds before this heavyweight fight is settled.
    So we thank you all for coming, and this hearing is 
adjourned.
    [Whereupon, at 4:16 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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