[Senate Hearing 110-568]
[From the U.S. Government Publishing Office]
S. Hrg. 110-568
THE GOOGLE-YAHOO! AGREEMENT AND THE FUTURE OF INTERNET ADVERTISING
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HEARING
before the
SUBCOMMITTEE ON ANTITRUST,
COMPETITION POLICY AND CONSUMER RIGHTS
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JULY 15, 2008
__________
Serial No. J-110-106
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
45-092 PDF WASHINGTON DC: 2008
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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
William Castle, Republican Chief Counsel and Staff Director
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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
William Castle, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 4
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 1
prepared statement........................................... 79
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 3
prepared statement........................................... 80
Schumer, Hon. Charles E., a U.S. Senator from the State of New
York........................................................... 4
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 2
WITNESSES
Callahan, Michael J., Executive Vice President and General
Counsel, Yahoo! Inc., Sunnyvale, California.................... 6
Carter, Tim, President and Chief Executive Officer,
AsktheBuilder.com, Cincinnati, Ohio............................ 12
Crowley, Matthew, Chief Marketing Officer, Yellowpages.com.,
Glendale, California........................................... 13
Drummond, David, Senior Vice President of Corporate Development,
and Chief Legal Officer, Google, Mountain View, California..... 8
Smith, Brad, Senior Vice President and General Counsel,
Microsoft, Redmond, Washington................................. 10
QUESTIONS AND ANSWERS
Responses of Michael J. Callahan to questions submitted by
Senator Kohl................................................... 32
Responses of Matthew Crowley to questions submitted by Senator
Kohl........................................................... 36
Responses of David Drummond to questions submitted by Senator
Kohl........................................................... 39
Responses of Brad Smith to questions submitted by Senator Kohl... 46
SUBMISSIONS FOR THE RECORD
Callahan, Michael J., Executive Vice President and General
Counsel, Yahoo! Inc., Sunnyvale, California, statement......... 50
Carter, Tim, President and Chief Executive Officer,
AsktheBuilder.com, Cincinnati, Ohio, statement................. 60
Crowley, Matthew, Chief Marketing Officer, Yellowpages.com.,
Glendale, California, statement................................ 64
Drummond, David, Senior Vice President of Corporate Development,
and Chief Legal Officer, Google, Mountain View, California,
statement...................................................... 71
Small Business & Entrepreneurship Council, Karen Kerrigan,
President and Chief Executive Officer, Oakton, Virginia, letter 81
Smith, Brad, Senior Vice President and General Counsel,
Microsoft, Redmond, Washington, statement...................... 82
THE GOOGLE-YAHOO! AGREEMENT AND THE FUTURE OF INTERNET ADVERTISING
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TUESDAY, JULY 15, 2008
U.S. Senate,
Subcommittee on Antitrust, Competition Policy and Consumer
Rights,
Committee on the Judiciary,
Washington, D.C.
The Subcommittee met, pursuant to notice, at 10:31 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Herb Kohl,
Chairman of the Subcommittee, presiding.
Present: Senators Kohl, Leahy, Schumer, Cardin, Hatch, and
Specter.
OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Chairman Kohl. We will call this hearing to order at this
time.
Today we are going to examine the Internet advertising
market. We have read daily news accounts of Microsoft's efforts
to buy all or part of Yahoo! and proxy wars being fought for
control of Yahoo!'s future.
No one knows the outcome of those events, but today we will
examine what we do know. Google and Yahoo!, the two largest
competitors in search-based advertising, have reached an
agreement where Yahoo! will outsource a portion of its
advertising business to Google and the two companies will split
the proceeds. Yahoo! contends that this will add $800 million
annually and enable them to become a stronger independent
competitor to Google. Critics, on the other hand, ask how the
agreement could possibly be good for competition. They argue
that Google is paying its largest competitor a premium not to
compete as vigorously as Yahoo! had previously. And the higher
ad rates it will earn will encourage Yahoo! to compete even
less. So we are forced to ask today whether this agreement will
reduce Yahoo! to nothing more than the newest satellite in the
Google orbit.
While we will need to study this deal carefully, what is
indisputable is the vital importance of Internet advertising to
the national economy. As we increasingly rely on the Internet
for commerce, entertainment, communication, and news,
advertising on the Internet has become ever more essential to
business. In 2007, more than $21 billion was spent on Internet
advertising in the United States, more than the amount spent on
advertising on cable television, broadcast TV networks, radio,
or billboards. And it has tripled in just the last 5 years.
Google, Yahoo!, and Microsoft perform essential functions.
Not only do they serve as gateways to the Internet, but in
doing so, they help businesses and consumers find each other
with the most relevant advertising ever seen. So the stakes are
very high in maintaining a vibrant and competitive Internet
advertising sector. One type of Internet advertising, the
advertising that is displayed with Internet searches, is
particularly impacted by the Google/Yahoo! deal. The two
companies together have a 90-percent market share in Internet
search advertising, with Google alone controlling more than 70
percent of that market. In examining the competitive impact of
this deal, we will need to find answers to a number of
important questions: What will be the effect of Yahoo!
outsourcing a portion of its search advertising to its biggest
competitor? Will it lead to higher advertising rates or will it
work to advertisers' benefit by giving them a bigger audience?
Do other types of Internet advertising factor into this
equation?
The history of the development of the computer industry
gives us reason to be cautious as we evaluate this deal. A
decade ago, today's witness Microsoft came dangerously close to
quashing competition throughout the high-tech economy. We are
pleased that Microsoft has reformed its business practices, but
this experience teaches us the importance of acting and acting
early to ensure that competition is preserved in this vital
sector of the economy.
[The prepared statement of Senator Kohl appears as a
submission for the record.]
I turn now to Senator Arlen Specter for any comments.
STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
OF PENNSYLVANIA
Senator Specter. Well, thank you, Mr. Chairman. This is a
very important hearing. The Internet has come to be such a
major factor in our communications, very, very important, and
we are dealing here with some of the giants in the field. The
agreement would give Yahoo! the option to display Google ads on
its side of the search results, non-exclusive. And there are a
lot of ramifications. As noted over the weekend, Microsoft,
with the support of Yahoo!'s shareholder Carl Icahn, made yet
another offer to acquire Yahoo! but Yahoo! declined. Now it is
reported that Mr. Icahn will mount a proxy fight at the August
1st Yahoo! shareholders meeting in an effort to complete a deal
with Microsoft.
We are really in such a transitional age, it is hard to
keep up with all of the technical advances. And it is a point
of amazement to me to open up the Internet and put in the name
of Senator Pat Leahy or Senator Herbert Kohl or my own name and
see the splash of information that comes out. And high-tech and
advertising have become the order of the day. And then when you
have the entry into the field of people like Mr. Icahn, proxy
fights, it is a little hard to understand all of what is going
on.
Let me particularly commend Senator Kohl. Among the four of
us here, he is the only non-lawyer. That has come to be an
advantage in the U.S. Senate. It clears the head. He looks at
these issues from a little different perspective, not burdened
with all the antitrust courses which Senator Leahy took at
Georgetown and Senator Schumer took at Harvard. And it is
fortunate to have that kind of a perspective on this kind of an
issue. So good work.
Chairman Kohl. Thank you, Senator Specter.
Senator Leahy, would you like to make a few comments?
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE
STATE OF VERMONT
Senator Leahy. Well, I must admit when I see Senator
Specter saying about clearing one's head not being a lawyer, I
recall once when scuba diving with my wife, and this 9-foot
nurse shark, the largest one we had ever seen, usually
harmless--that is the operative word, ``usually.'' It came
shooting right at us. We kind of ducked. It went right over us
and thought, That is great, it left. It turned around and it
comes right back at us. I was sucking in so much air, I thought
maybe the tanks would collapse. And we got back on the boat,
and I said to my wife, who is a registered nurse, I said,
``Well, don't worry, dear. That shark gave you professional
courtesy because a nurse shark, you are a nurse.'' She said,
``No, darling. You are a lawyer. The shark gave you
professional courtesy.''
[Laughter.]
Senator Leahy. But I do enjoy seeing the information, and
once in a while it is accurate that you read about each other.
And once in a while it is not. But I think the point that has
been made by both Senator Kohl--and I compliment him for
holding this hearing--and Senator Specter is that the Internet
opens new means of communication, new ways to buy and sell
products, all the things you all know better than anybody else.
And that free and easily accessed content on the Internet,
especially the free content, is being driven by a successful
and competitive online advertising industry. We would not have
it without that.
The online advertising industry in the U.S. I understood
surpassed $21 billion last year. That is something everybody
thought was an experiment just a few years ago, one of the
fastest growing areas. And more and more people are using the
Internet--business, schools, my 10-year-old grandson who goes
on to check his school schedule and things like that. And more
and more people are going to try to move their messages online.
Now, the question for us here is whether these
advertisers--and it could be Orvis or the Vermont Teddy Bear
Company, thinking about companies in my own State, or it could
be a major corporation like an auto company or something like
that--will find options at competitive prices because the
business there is dynamic. The antitrust laws, rooted as they
are in the fundamentals of competition in innovation and
pricing, are nimble enough to keep up with changing business
models and technology.
But we have this drama being played out in the courting of
Yahoo! by both Microsoft and Google, and that is going to have
lasting effects. The Google agreement with Yahoo! may relate
only to text advertisements, but if it stifles competition in
this market, that will quickly spill into emerging online ad
markets such as delivery to mobile systems, telephones and
others.
The ability of a single company to dominate the online
advertising marketplace also raises the specter that one
company will accumulate vast amounts of personal viewing data.
That worries me as much as any one item. It worries me whether
it is private industry doing it or whether it is our Government
doing it because of the privacy concerns. This is an issue I am
going to remain focused on as the online advertising market
continues to develop.
Senator Specter and I held a hearing about the gathering of
information within the data bases in the Federal Government on
this and how the Antitrust Subcommittee has taken a leading
role in looking at the competition issues. And I really want to
thank Senator Kohl for staying vigilant on this. When he told
me he was holding this timely and important hearing, I thought
it was a great idea.
I will hold off and listen to the witnesses, and thank you,
Herb.
[The prepared statement of Senator Leahy appears as a
submission for the record.]
Chairman Kohl. Thank you very much, Senator Leahy.
Senator Hatch?
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE
OF UTAH
Senator Hatch. Well, thank you, Mr. Chairman. I welcome all
of you witnesses here today. This is a very important set of
issues, as you know, and I could outline them, but I am sure
everybody knows what we are talking about or at least has some
idea. We want to take every consideration here that we can.
These involve tremendous entities that do tremendous things in
our society, and there are tremendous antitrust issues
involved.
So I just want you to know I take a great deal of interest
in this, and as my colleagues will, and I hope that we can
arrive at the right conclusions. But we are grateful to have
all of you here to help enlighten us here today, and we look
forward to hearing your testimony.
Thank you, Mr. Chairman.
Chairman Kohl. Thank you very much, Senator Hatch.
Senator Schumer?
STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE
STATE OF NEW YORK
Senator Schumer. Well, thank you, Mr. Chairman, and first
let me join my colleagues in just thanking you for being such a
diligent and conscientious Chair of this Subcommittee, on which
I am proud to serve, and making sure that there is an antitrust
law here and it is vibrant and active and important. And I also
want to thank all the witnesses for coming today to talk with
the Subcommittee. I care a lot about this issue. You know, the
Internet is developing every day, changes. It is exciting to be
sort of at the beginning of laying a whole new way that people
communicate and that changes all the time. And our job here,
because changes now may affect things 20, 30, 50 years into the
future, is to make sure it stays as competitive and as consumer
friendly as possible.
And second, of course, I have a parochial interest.
Internet advertising is a large industry in New York and a
growing industry in New York, and we in New York base some of
our future on that industry. We cannot just rely on one
industry.
And so for all those reasons, I am interested, and that is
why I have followed developments in this industry closely over
the last few years. I want to commend the companies testifying
for maintaining a robust public debate on some of the most
important issues in this critical sector.
Yahoo! and Google have consistently moved the debate
forward and have been fierce competitors. And for the most
part, consumers have benefited as a result. And let me say
this: Regardless of whatever happens with this deal, I am
confident that Yahoo! and Google will wake up the next morning
and prepare for the next battle. I am not concerned that this
deal will spell the end of either company. But what I am
concerned about is whether this deal is good for everyday
Internet users. That is really what the Internet is all about:
connecting each citizen on his or her own to information and
commerce more efficiently than was ever possible before. And I
feel confident, Mr. Chairman, that this arrangement could well
result in Internet advertising that is more tailored to
Internet users' wants and needs. And I also appreciate the
reassurances from Google and Yahoo! about what they will to
protect consumer privacy, and, of course, we will be watching,
I know, under Chairman Leahy's watchful eye to make sure that
those pledges are followed through.
I am also sensitive to two of the antitrust concerns that
have been raised. I hope this arrangement will not lead to a
price floor or any unlawful price fixing for search
advertising, as some have alleged. And I hope that this deal
will not stifle Yahoo!'s development in the field.
So I look forward to the testimony. I thank you for having
the hearing, Mr. Chairman, and I know we will continue to
follow this very important and really seminal issue.
Chairman Kohl. Thank you very much, Senator Schumer.
We would like now to introduce our panel of witnesses. Our
first witness today will be Michael Callahan. Mr. Callahan is
the General Counsel for Yahoo!, where he has worked since 1999.
Prior to joining Yahoo!, Mr. Callahan held positions with
Electronics for Imaging, Inc., and the law firm of Skadden
Arps.
Following him 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
management teams at Google to evaluate new business
opportunities, including alliances and mergers.
Next we will be hearing from 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 also served as Microsoft's Chief Compliance
Officer.
Following him we will be hearing from Tim Carter. Mr.
Carter is a master carpenter and plumber as well as syndicated
columnist on building. He is the founder of AsktheBuilder.com,
an online resource for building and home repair.
And then we will be hearing from Matthew Crowley. Mr.
Crowley is the Chief Marketing Officer for AT&T's
Yellowpages.com. Prior to his position with Yellowpages.com,
Mr. Crowley worked at SBC's SmartPages.com and Pacific Bell
Smart Yellowpages.
We thank you all for appearing before this Subcommittee. I
remind you all please to limit your opening testimony to 5
minutes.
Now I ask all of you to stand and take the oath with your
right hand raised. Do you affirm that the testimony you are
about to give will be the truth, the whole truth, and nothing
but the truth, so help you God?
Mr. Callahan. I do.
Mr. Drummond. I do.
Mr. Smith. I do.
Mr. Carter. I do.
Mr. Crowley. I do.
Chairman Kohl. Thank you so much.
Mr. Callahan, we would be delighted to hear from you.
STATEMENT OF MICHAEL J. CALLAHAN, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, YAHOO! INC., SUNNYVALE, CALIFORNIA
Mr. Callahan. Thank you, Chairman Kohl, Ranking Member
Hatch, and members of the Subcommittee. My name is Michael
Callahan, and I am Executive Vice President and General Counsel
of Yahoo! Inc. I appreciate the opportunity to be here today to
discuss the dynamic and growing Internet advertising space and
the commercial agreement between Google and Yahoo!.
Yahoo! welcomes this hearing, and we are confident that the
more one learns about this agreement, the more clear it becomes
that it is good for competition--good for consumers, good for
advertisers, and yes, good for Yahoo!.
The purpose of this commercial arrangement and the intent
of Yahoo! moving forward is to help make our company an even
stronger competitor to Google, to Microsoft, and to others in
the dynamic and rapidly growing online advertising world. As I
am sure you know, this has been an interesting time for our
company, to say the least.
While I don't want to dwell on the very public proxy fight
in which we are currently engaged, I do want to spend a brief
moment on it because it will give you a flavor for how
intensely competitive the search business has become. All of
the companies at this table are laser focused on being
significant players in search. With this business arrangement,
Yahoo! will continue to execute on its long-term corporate
strategy. Microsoft, on the other hand, has turned to activist
shareholder Carl Icahn, in the apparent hope that this will
force a fire sale of Yahoo!'s core strategic search business.
Our priority at Yahoo! is to build value for our
stockholders. That continues to be our core mission. What we
will not do, however, is allow our business to be dismantled or
sold off piecemeal on terms that would be disadvantageous to
Yahoo! stockholders and to the market as a whole. I trust that
this will give you context to understand the extraordinary
value we all place in the paid search portion of the online
advertising business and how very competitive it is and will
remain, and why there are so many misconceptions--advanced by
our competitors--about the agreement we have entered into with
Google.
Let's start by reviewing what this agreement is not as well
as what it is.
First, this is not a merger. Far from it. We will
increasingly compete with Google and they with us. This is a
commercial arrangement between two companies who will remain
autonomous and compete aggressively-in search and display
advertising, mobile, news, e-mail, finance--you name it. Yahoo!
is here to stay, and we intend to compete across countless
platforms, including search, for years to come.
Second, Yahoo! is not exiting search, nor are we ceding any
portion of that space to Google. This will not, as some claim,
result in Google controlling 90 percent of the search business.
To the contrary, we will continue to do everything we can to
grow our share and also strengthen our competitiveness in
search and search advertising. This deal is just one more
important step along that path, and with all due respect to
Google, we have every intention of fighting them and winning--
in this and in other areas--for years to come.
Furthermore, this agreement does not affect algorithmic
search at all. When a user comes to Yahoo! and performs a
search, the algorithmic results returned will still be entirely
Yahoo!'s. Yahoo! serves close to a quarter of the searches that
consumers make today, and we expect to be serving that or more
after this deal is implemented.
Third, this agreement is non-exclusive and gives Yahoo!
complete discretion over how, where, and when we will choose to
use Google advertising on our sites. There are no minimum
requirements either, and Yahoo! is free to make similar deals
with other companies. In other words, this gives Yahoo! the
option to show Google ads, but does not tie our hands in any
important respect.
Fourth, the claim some have made that Yahoo! and Google are
price-fixing is entirely false. Prices for search terms are set
by open and fair market-based auctions, and advertisers only
pay when consumers click on their ads.
This agreement is truly win-win. It benefits consumers,
advertisers, publishers, and Yahoo!. Consumers will now get
more relevant advertising on Yahoo!'s site. Advertisers will
reach more consumers, and Yahoo! will become an even stronger
competitor in the broad advertising marketplace.
To put this agreement in perspective, it is helpful to
recall that until 2004 Yahoo! completely outsourced both its
algorithmic and sponsored search to a variety of companies,
including algorithmic search to Google. More recently, other
companies had outsourced their search functions to Yahoo!. In
fact, Microsoft outsourced its sponsored search to Yahoo! just
a few years ago and still does in some places around the world.
In 2004, Yahoo! made the strategic decision to bring
algorithmic and sponsored search in-house, and that decision
has not changed. Since then we have invested hundreds of
millions of dollars to improve our search products and compete
better in the marketplace.
For example, just last week, we announced BOSS, an open
platform build-your-own search service, which we believe will
unleash a wave of innovation, and our efforts to create an
open, robust exchange to bring publishers and advertisers
together are also well on their way. These efforts are
consistent with our complete commitment to continued growth in
search and display advertising.
With the additional operating cash-flow from this
agreement--anticipated to be between $250 million and $450
million in the first year--Yahoo! will accelerate our
innovation and better compete against Google, Microsoft, and
others in the online advertising marketplace.
Over the coming weeks, Yahoo! will continue to work with
our advertisers, our users, outside groups, and government
authorities to explain this agreement and address any questions
about the facts of the arrangement. We have kept the Department
of Justice informed along the way and will continue to
cooperate with them and this Subcommittee. We are confident
that the more one knows about this agreement, the more it
becomes clear that it will increase competition, stimulate
creativity, and benefit consumers, advertisers, and the online
advertising industry overall.
Thank you again for inviting me to appear here today, and I
look forward to answering any questions you may have.
[The prepared statement of Mr. Callahan appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Callahan.
Now we will hear from the Google representative with us
today, Mr. Drummond.
STATEMENT OF DAVID DRUMMOND, SENIOR VICE PRESIDENT OF CORPORATE
DEVELOPMENT, AND CHIEF LEGAL OFFICER, GOOGLE, MOUNTAIN VIEW,
CALIFORNIA
Mr. Drummond. Thank you, Chairman Kohl, Senator Hatch,
members of the Subcommittee. Thanks very much for inviting me
here today.
The Internet is a dynamic, competitive environment due to
the openness that has always been its hallmark. Our non-
exclusive commercial agreement with Yahoo! will maintain and
expand that competition. It creates new efficiencies that will
benefit consumers, advertisers, and publishers, while
protecting privacy and spurring innovation.
When Yahoo! chooses to use our technology, consumers will
see more relevant ads that better connect them to the products
and services they are interested in. Advertisers will benefit
from better ad-matching capability, improving the way that they
reach their customers. And web publishers who place Yahoo!'s
ads on their sites will also see more revenue from better ad
matching. That is why large and small advertisers, ad agencies,
and publishers have expressed their support for this agreement,
including such names as Publicis, Digitas, Overstock, and even
Microsoft's own in-house ad firm, Avenue A/Razorfish, who
called it ``good news for advertisers.''
Now, the fundamental point I would like to make today is
that this agreement promotes ongoing competition among
advertising. Let there be no doubt about this point. Google and
Yahoo! will remain fierce competitors--in search, in online
advertising, and many other products and services. Yahoo! has
said that it will reinvest revenue from this agreement into
improving its search engine and its other services. This
continued competition will help fuel innovation that is good
for the Internet, good for Internet users, and good for the
economy.
Now, the fact that this arrangement is made between
competitors is not unusual. Commercial arrangements between
competitors are commonplace online and in many other
industries. Antitrust authorities have recognized that
consumers can benefit from these arrangements, especially when
one company has technical expertise that enables another one to
improve their product quality. And we are also excited that as
part of this agreement, Yahoo! will make its instant messaging
network interoperable with Google's. That is a big step
forward, making instant messaging more like e-mail, with users
able to communicate across platforms more easily.
Now, I would also like to clear up a few things about this
agreement.
First, unlike the other alternatives, such as Microsoft
acquiring Yahoo!'s search assets or taking over all of Yahoo!,
this agreement will not remove a player from the field, from
the competitive field. Yahoo! will remain in the search
advertising business and will continue to be a vigorous and
aggressive competitor.
Now, some would also have you believe that the agreement
will result in Google controlling nearly all of search
advertising. The agreement does no such thing. Yahoo! will
continue to operate its own search platforms, so adds to its
longstanding and deep base of advertisers, and continue to
operate its own ad auction. The agreement merely gives them the
option to show Google ads in cases where Google ads are likely
to generate more value. It is important to note also that this
agreement is limited to the U.S. and Canada and excludes
emerging fields such as mobile.
Second, the agreement does not increase Google's share of
search traffic because Yahoo! will continue to run its own
search engine. So, simply put, Yahoo! will have every
incentive, as you heard from Mr. Callahan they have every
intention, to continue to expand their search advertising
business.
Third, the agreement will not set an illegal price floor.
Microsoft would have you believe that the additional revenue
that Yahoo! and Google might make from the agreement will come
solely as a result of increased advertising prices. Nothing
could be further from the truth, and this reflects a
fundamental misunderstanding of how search monetization
actually works. The fact is we expect that the primary driver
of additional revenue will be more relevant ads being delivered
to more users, who will then click on those ads in greater
numbers. In other words, we are not looking to sell ads at
higher prices. We are looking to sell more ads. This is good
for everyone. Users are going to see more relevant ads.
Advertisers will connect with more interested users, and Yahoo!
and its partners will sell more advertising space.
Fourth, the agreement also upholds Google's deeply held
commitment to protecting user privacy. As Google supplies ads
to Yahoo! and its partners, personally identifiable information
of Internet users will not be shared between the companies.
So let me conclude today with some frank talk about what is
going on here. The most energetic critic of this agreement is
Microsoft, who, of course, is a significant competitor of ours
and not exactly a mom-and-pop shop. This is the same Microsoft
whose CEO said he was going to ``kill Google'' along with a lot
of other salty language I cannot repeat in this setting. And it
is also the same Microsoft that has a 90-percent share of
operating systems, a 90-percent share of productivity software,
and an 80-percent share of the browser market--a desktop
monopoly that Microsoft could use to harm the next phase of the
Internet, namely, cloud computing. Most importantly, this is
the same Microsoft that is actively trying to buy or at least
destabilize Yahoo!, thereby eliminating one of its biggest
competitors.
Now, if you think all of that gives Microsoft an incentive
to oppose this agreement, you would be right. And let's also
remember that Microsoft came before this Committee 10 months
ago with a host of extremely dramatic arguments about our
acquisition of DoubleClick, even though they themselves had
recently acquired DoubleClick's largest competitor. The
regulatory agencies were right to reject Microsoft's arguments
then, and they will be right to reject them again.
So, in conclusion, openness, interoperability, and
competition are central to Google's culture, the vibrancy of
the Internet, and the growth of free markets. Unlike with the
desktop, competition on the Internet is always just a click
away.
Thanks, and I look forward to taking your questions.
[The prepared statement of Mr. Drummond appears as a
submission for the record.]
Chairman Kohl. Thank you very much, Mr. Drummond.
We will now hear from your good friend at Microsoft, Mr.
Smith.
[Laughter.]
Senator Leahy. He may differ.
STATEMENT OF BRAD SMITH, SENIOR VICE PRESIDENT AND GENERAL
COUNSEL, MICROSOFT, REDMOND, WASHINGTON
Mr. Smith. Thank you for the introduction by my colleagues
at the table. Thank you Senator Kohl, Senator Hatch, other
members of the Subcommittee.
Let me be the first to acknowledge that Microsoft is not
disinterested when it comes to the issues before this
Committee. No competitor ever is. None of us are disinterested.
But we do know a lot about this market, and using that
information, we can help identify the questions that are
important for reviewing this agreement.
I think the principal question is this: Can a single
company establish effective control of the pricing of 90
percent of the market for search advertising by entering into
an agreement with its single largest competitor?
Now, the technology is complicated, but the antitrust
issues are straightforward. That is what I would like to
address this morning.
First, search has become the gateway to the web. Many
Americans sit down at a computer, and the first thing they look
at is a search page. When they get the results, they use those
results to determine what else they are going to look at or
perhaps use or buy from a company across the country.
Search advertising has become the fuel that is supporting a
lot of the content on the Internet today, as Senator Leahy
referred to earlier. It may be a sports score, it may be a news
story, it may be entertainment; but all of this free content is
frequently paid for, including by search advertising. It has
become a very large market. By 2011, it is estimated that the
market for search advertising will exceed $16 billion. That
will come close to rivaling the $20 billion that is paid today
on all advertising for all cable television across the country.
We believe the Internet today is at a moment of historical
importance in its evolution. If you look at the market for
search advertising, there are three principal competitors:
Google has 70 percent of this market, Yahoo! has 20 percent,
and Microsoft has less than 10 percent. So the fundamental
question is: What effect will this new agreement between Yahoo!
and Google have on the future of competition on the Internet?
We believe the effects will be four-fold.
First, it will lead to an unprecedented level of
concentration when it comes to search advertising. In the
history of advertising, no single company has managed to take
control of pricing of 90 percent of all of the advertising in
any medium--not in television, not in radio, not in publishing.
It should not happen on the Internet.
Second, this is going to mean fewer choices for
advertisers. Today there are many advertisers that choose to
advertise on Yahoo! either instead of or in addition to
advertising on Google. And yet under this agreement, many of
these advertisers are going to lose that choice. They are going
to have to go buy ads from Google simply to get the very same
ad placed in the very same place on a Yahoo! search page.
Third, this agreement will mean higher prices. The whole
basis for this agreement is the opportunity for Yahoo! to raise
its prices. When Yahoo! has filed its statements with the
Securities and Exchange Commission, it has referred to the
opportunity for ``better monetization.'' Mostly that is a fancy
way of describing a price increase. When Yahoo! says it sees an
$800 million opportunity to increase revenue, that is money
that is going to come out of the pockets of American companies,
large and small, companies that are buying cheaper ads on
Yahoo! today.
Finally, this agreement does raise important questions for
privacy. It is not just what is shared between the companies,
but what information flows from users to Google. If search is
the gateway to the web, as most believe it is, then this
agreement creates the prospect of a single company--Google--
taking control of that gateway. It raises the prospect of
information from up to 90 percent of search advertising flowing
to Google.
If this agreement goes forward, this Congress may not need
to enact a Federal privacy policy. We will have a national
privacy policy. It will be Google's privacy policy.
So, in sum, let me say we acknowledge that this technology
continues to change rapidly, but for 118 years, since the
Sherman Act was enacted, one rule of the road has remained
constant. We are all encouraged to work harder in order to
succeed. We are all encouraged to offer consumers a better
product. But no one is permitted to buy control of up to 90
percent of the market by entering into an agreement with its
single largest competitor. The question before this Congress,
and indeed the Department of Justice and the country as a
whole, is whether that principle should be abandoned now.
Thank you.
[The prepared statement of Mr. Smith appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Smith.
Mr. Carter?
STATEMENT OF TIM CARTER, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
ASKTHEBUILDER.COM, CINCINNATI, OHIO
Mr. Carter. Chairman Kohl, Ranking Member Hatch, and other
members of the Subcommittee, I sincerely appreciate this to
address you about this very important topic.
The future of Internet advertising is brilliant. In fact,
some might say it is possibly one of the fastest growing
segments of our national economy. The proposed agreement
between Google and Yahoo!, as seen from my eyes as a consumer
and an Internet publisher, is a very good idea. There are many
more winners who benefit from this business transaction than
those who make claims about being harmed.
People like you and me have problems each day. We seek out
solutions to those problems, and with the advent of the
Internet, it has never been easier or faster to discover
precise and accurate solutions to those problems.
In my opinion, one of the reasons for Google's success
stems from the fact they are an excellent matchmaker. They
created a streamlined search engine that displays search
results as well as contextual advertising that matches the
exact search term typed by tens of millions of consumers each
day, many of whom are your constituents. Google is not the sole
search engine that does this.
The advertising that is part of the search results is
purchased by small and large companies alike. To the best of my
knowledge, this method of displaying a highly targeted ad is
quite possibly the key component to the paradigm shift that is
happening right now in the advertising industry. Never before
could companies be in front of so many consumers who needed
their product or service at that exact instant in time. The old
methods of advertising usually had some type of delay built in.
Billions of dollars are being spent on Internet
advertising, and the market is growing. It is growing because
it is a win-win situation. Consumers who quickly solve their
problems win. The company selling the solution to the consumer
wins. The Internet company that sold the ad wins. And, finally,
a website that displays a syndicated ad wins.
Yahoo! has valuable real estate on their website pages that
is seen by tens of millions of people each day. They can sell
or lease that virtual real estate to whomever they please or
even fill the space with things they create. I do the exact
same thing at AsktheBuilder.com, filling my pages with my
columns and videos, ads sold by others, and ads I sell myself.
Yahoo! is a public corporation, and it is paramount that
they do what is best for their stockholders. If they can lease
space on their website to some other company and derive revenue
for doing virtually nothing, why would you or anyone stop them?
Who is getting harmed? Surely not the people who are clicking
the ads! They willingly click them hoping to discover a
solution to the problem they have.
Let's take this one more step down the antitrust pathway.
When and where will you stop sliding down this slippery slope?
I had a discussion with a fellow Internet entrepreneur named
Dan Gray. He said, ``Tim, are you next? When you become the
most visited home improvement website on the Internet, will the
Government come in and tell you that you can't display Google
ads? If that were to happen, it would be the most un-American
thing I could imagine.'' Dan is right.
If memory serves me right, antitrust actions were initiated
when some company or a small group of companies enriched
themselves at the expense of others who were harmed financially
by the actions of the company or the company. That cannot be
said about the proposed deal between Google and Yahoo!. The
tens of millions of consumers each day who visit the Yahoo!
website are going to see ads that solve their problems. Many
will click those ads. Hundreds of thousands of businesses who
sell the products and services to these consumers will increase
their revenues when those ads are clicked. Those companies end
up paying more taxes, and our economy grows.
Who is harmed in this transaction? Perhaps some other
company or companies that decided to follow a different pathway
in the business jungle. My father-in-law taught me long ago
that there is no substitute for brains. Furthermore, I have
discovered that healthy competition is a great thing.
This proposed deal has the potential to increase the
revenues of Yahoo! by hundreds of millions of dollars each
year. The ad revenue that Yahoo! receives from Google will flow
into Yahoo! with virtually no expenses. If the management of
Yahoo! is wise, they will reinvest this money back into their
company to provide the healthy competition that we as consumers
want and need. The deal may also force other companies in the
Internet business world to work a little harder. My experience
as a builder is that a little hard work never really hurt
anyone.
Thank you again for taking the time to consider my opinions
in this very important issue.
[The prepared statement of Mr. Carter appears as a
submission for the record.]
Chairman Kohl. Thanks for your statement, Mr. Carter.
Mr. Crowley?
STATEMENT OF MATTHEW CROWLEY, CHIEF MARKETING OFFICER,
YELLOWPAGES.COM., GLENDALE, CALIFORNIA
Mr. Crowley. Thank you, Chairman Kohl, Ranking Member
Hatch, members of the Subcommittee. I appreciate the
opportunity to speak to you today about the important issues
raised by the proposed agreement between Google and Yahoo!. I
am Chief Marketing Officer for Yellowpages.com--Yellowpages.com
is a subsidiary of AT&T. We have an interest in this deal on
several fronts.
First off, AT&T is a large purchaser of search engine
advertising. We spend millions of dollars a year advertising
our products and services through search--, in particular,
Google and Yahoo!.
Second, we operate Yellowpages.com which essentially is the
Internet extension of the print Yellow Pages. The print Yellow
Pages is the means by which consumers and local businesses can
connect to each other--Yellowpages.com is essentially that
extension.
In addition to the Internet advertising solutions that we
provide to small businesses, we also are a one-stop shop for
small businesses for digital advertising. We offer several
websites--search engine market, we place advertising--agency on
Google and Yahoo!, helping them choose their key words and
advertise online. So as you can see, we have an interest--our
products and services, as well as for tens of thousands of
businesses,--places search advertising for them, and
particularly today relevant to Google and Yahoo!.
The other meaningful aspect of this deal is that AT&T has
had a longstanding business relationship with Yahoo!--Yahoo!
continues to remain viable, a viable competitor in this space.
So that being said, we think that we have two issues,
concerns with the proposed agreement. One is we do--and the
second is--innovation decrease--not just with Yahoo! but across
the Net. So I will start with pricing.
Today Yahoo! and Google operate two independent
marketplaces for--search advertising. Google is the dominant
player in the market with 70 percent. Together, Yahoo! and
Google make up 90 percent of the market. Even though Google is
the dominant player at 70 percent, Yahoo! is still a formidable
alternative for advertisers to place their search engine
marketing budget. We can compete and we can compare Google and
Yahoo! to each other and select the best price.
Under this proposed agreement, Yahoo! will offer over large
portions of its inventory to Google. We expect that the
agreement, it has been said, is worth $800 million. It is not
insignificant. With Google, we have an opportunity to place
advertising. With Yahoo!, we have an opportunity to place
advertising. But in this case, inventory on Yahoo! will be
diminished. We expect then with a decreased supply of inventory
on Yahoo!, prices will go up.
Google is not necessarily an alternative for that because
their prices are higher. If you try to buy these ad words,
these search terms through Google, Yahoo! is already replacing
what they call ``lower-value advertising'' with higher-value or
more expensive advertising through Google, so the price is
higher over there.
So as we see it, there is decreased inventory available on
Yahoo! and a more expensive channel to purchase our advertising
through Google. And Google has been generally more expensive,
and even today there was an article that came out in the New
York Times blog suggesting that this could increase prices for
Google paid ads on Yahoo! by 22 percent.
Our other concern is around Yahoo!'s viability as a
business and innovation within the Internet industry in
general. So today Yahoo! has all the incentive in the world to
compete aggressively with Google to earn its share of the
market. Under this proposed agreement, Yahoo! will hand over or
cede a significant portion of its advertising to Google and
accept what we could call fast money from Google for this ad
space. That decreases Yahoo!'s incentive to innovate and
compete. It also decreases Yahoo!'s information by no longer
processing these advertising transactions by which they can
continue to increase their service and increase their offering.
So we see that this ultimately increases prices, decreases
Yahoo! as a viable competitor, and is not good for the search
advertising business and not good for the small businesses that
we represent as their agency.
Thank you.
[The prepared statement of Mr. Crowley appears as a
submission for the record.]
Chairman Kohl. Thank you, Mr. Crowley.
For you, Mr. Callahan, from Yahoo!, I have this question:
Critics of this agreement have argued that Yahoo! is getting
paid by its largest rival not to compete as vigorously. In
fact, they argue that Yahoo!'s success will now be tied to how
well Google performs. Don't your critics have a point, Mr.
Callahan?
Mr. Callahan. Mr. Chairman, as we reviewed this agreement
and decided to enter into it, the approach for Yahoo! is that
we believe we will reinvest the proceeds from this transaction,
from the agreement as it goes forward, to invest in our current
search business, our search and display advertising business,
and indeed continue to vigorously compete with Google. We are
not ceding any part of our algorithmic search business, which
we built from scratch about 4 years ago, and I think the
history of competition on the Internet from our perspective
supports that.
From 2000 to 2004, Google supplied all of Yahoo!'s web
search, algorithmic search. In 2004, through a series of
acquisitions and internal product development, we went from
zero in web search to approximately 20 percent to 25 percent,
depending on whose data you use.
If you move that history forward the last 4 years, if you
will forgive me a prop, in Thursday's Wall Street Journal,
``Yahoo! wields new tool to battle Google,'' and it is our BOSS
product, which is an open platform web search initiative to
continue our ability and, we believe, fund our ability with
this agreement to continue to aggressively compete with Google.
Chairman Kohl. Thank you.
Mr. Smith, from Microsoft, your competitors seem to suggest
that this collaboration is just a normal part of doing
business. If the agreement is put into practice, what do you
think the search advertising business will look like in a year
or two?
Mr. Smith. I think we are going to see a market that is
less competitive than exists today. I think that is the
reality, and I think virtually all of us in this industry know
that is the reality. We have had lots of conversations,
certainly in our company and with other companies, even with
Yahoo!. On June 8th, we met with Yahoo! in San Jose, and Jerry
Yang, the CEO of Yahoo! looked across the table, looked us in
the eye, and said, ``Look, the market, the search market today
is basically a bipolar market.'' He said, ``On one pole there
is Google, and on the other pole there are Yahoo! and
Microsoft, both competing with Google.'' He said, ``If we do
this deal with Google, Yahoo! will become part of Google's
pole. And Microsoft,'' he said, ``would not be strong enough in
this market to remain a pole of its own.''
Mr. Chairman, you asked the question when the hearing
started, would this agreement turn Yahoo! into a satellite in
Google's orbit? I think everybody knows the answer is yes.
Chairman Kohl. Well, now, that is a pretty strong comment
that you just made, Mr. Smith, and, of course, you are under
oath and you do recollect quite accurately, I am sure you will
state exactly what Mr. Yang said?
Mr. Smith. I just stated exactly what Mr. Yang said, and it
made such a strong impression on us that a few minutes later,
when we broke, the four of us from Microsoft walked down the
hall to a separate conference room, and we sat down and we
said, ``I can't believe that Jerry just said those things.''
And Steve Ballmer turned to me and said, ``Think about that. He
said, `There is only going to be one pole in the market.' I
guess that would be a mono-pole, wouldn't it?'' It made a very
strong impression.
Mr. Callahan. Mr. Chairman--
Chairman Kohl. Well, Mr. Callahan, do you have some answers
to provide us this morning?
Mr. Callahan. I am sorry to interrupt. I did want to,
without addressing Mr. Smith's comments directly, I was a
participant in that meeting as well, so I can add to the drama
a little bit at the San Jose airport on June 8th. And while I
am not going to address Mr. Smith's characterization of Mr.
Yang's statement, I will say this: Our board of directors, as
part of the evaluation of our strategic alternatives, has made
a conscious decision to stay and search, to compete against
Google and against Microsoft, and this agreement will enable us
to continue to do that. How the market turns in the future will
depend upon how successful we are in continuing to compete. And
with the initiatives that we have had underway for years and
the initiatives that we see in the convergence of search and
display advertising going forward--which I think is an
important point that I would like to make to the Subcommittee--
the current discussion here is about search-based advertising.
Yahoo! believes that as the future of this market evolves,
advertisers are interested in purchasing a combined search and
display.
And if you would forgive me for a moment, I have a prop; I
could show sort of what is the difference between the search
and display advertisement. But we believe that advertisers look
for a combined purchase online. We have a compelling strategy,
different than Google, and perhaps different than Microsoft, to
build that in the future.
So as you look here, if you will forgive me one moment,
this is the current typical Yahoo! search page today, which
is--it says ``Yahoo!-sponsored search'' on the top. And if you
could imagine, there is a space here for a banner button, which
we call display advertising, which is not search based. Then
there is web results, which are from Yahoo!. And here is
``Yahoo!-sponsored search,'' which we show depending upon how
the page is put together.
Following implementation of the agreement, this is a
possible Yahoo! search page. This would be continued Yahoo!
search listings here; continued Yahoo! web search, a product
that we built from scratch 4 years ago through acquisition;
continued Yahoo!-sponsored search listings here; and perhaps,
if we decide to find a better-quality ad than Google, sponsored
search listings along here.
Chairman Kohl. Yes, I appreciate what you are saying.
Clearly what you are saying contradicts what your boss said.
And, you know, that is pretty explosive stuff, and we will have
to consider that.
Now we turn to Mr. Hatch.
Senator Hatch. Well, thank you, Mr. Chairman.
Mr. Callahan, in the information that Yahoo! provided the
Subcommittee, your company argues that Yahoo! and Google will
``compete aggressively against one another in search and
display advertising.'' Now, I have to ask: How can that be?
Does not this agreement give advertisers the incentive to
bypass Yahoo! entirely and only bid with Google since the
agreement creates the strong possibility that an ad will be
placed on both Yahoo! and Google's search result pages? Simply
put, why bother bidding on Yahoo!'s site when it can go to
Google and get two for one?
Mr. Callahan. Thank you for the question, Senator. I
believe that advertisers will benefit from this agreement on
both the Yahoo! system and on the Google system. As you know,
on the Google system they have the opportunity, although not
the guarantee, for increased distribution and the reason that
is is Yahoo! maintains complete flexibility if and when to
source certain ads from Google or backfill certain ads from the
Google system. But if an advertiser wants to reach the Yahoo!
system--and I think Mr. Carter's testimony about the desire to
advertise on both--then they need to go through the Yahoo!
system to be guaranteed to reach that. Google will not know
when Yahoo! is going to pull certain ads, and Yahoo! is going
to do that in a strategic way where we can find a quality ad
for us to replace an ad that perhaps for Yahoo! would not be--
or does not exist if no one has bid.
Senator Hatch. Let me put it this way: Will Google ads only
be in the lower right-hand corner?
Mr. Callahan. No. I am sorry. That was merely an
illustration.
Senator Hatch. OK.
Mr. Callahan. The agreement maintains--and it is an
important part--Yahoo! complete flexibility to implement this
transaction and the way the ads are shown on our site.
Senator Hatch. Mr. Smith, welcome back to the Committee as
well, all of you. You have been here before.
Mr. Smith. Recently, yes.
Senator Hatch. Well, we always enjoy having all of you
here.
Microsoft used Overture, which is owned by Yahoo!, to place
most of the ads displayed by MSN search engine until 2006. MSN
received a portion of the fees for displaying Yahoo!'s ads. Was
not that agreement similar to the one being proposed by Yahoo!
and Google? And if the Microsoft-Overture contract did not
amount to price-fixing, how can you argue now that the Google-
Yahoo! agreement amounts to per se price-fixing?
Mr. Smith. Well, there was--very good question, Senator.
But there was one critical difference--
Senator Hatch. It needs to be asked. That is why I am
asking it.
Mr. Smith. There was a critical difference. We were not in
the market for search advertising at that time, so we were
relying on Yahoo! or, in that case, Overture to provide that
service to us. We are now in this market. All three of us are
in this market. So any agreement between any of us is in a
different category because we are competitors. And if you look
at the pages that Mr. Callahan showed, they really drive home
this point.
The first page, as he said, is a Yahoo! page today.
Actually, if you look at it carefully, it is what displays when
somebody types in the word ``flowers,'' and you get a lot of
ads from people who sell flowers. And in the second page, the
page that will exist in the future, someone types in
``flowers,'' and, in fact, the three ads that he showed being
provided by Google, it is the exact same three ads as were
there before. It is from the exact same three companies. It is
in the exact same place on the Yahoo! search page. The only
difference is now those three companies cannot buy their ad
from Yahoo!. They have to buy the ad from Google, and they are
going to pay more money.
I just think it is inescapable that those three companies
are going to pay more money. And because they are direct
competitors in the same market, in a way that we were not when
we were relying on Overture, it is a very different situation.
Senator Hatch. Thank you.
Let me ask Mr. Carter or Mr. Crowley, won't you be tempted
to just use Google? Wouldn't that be more convenient for both
of you?
Mr. Carter. Senator Hatch, that is a great question. I
think I can--I first have to say it is kind of interesting to
be in this room with these titans of industry, and here I am, I
am actually one of their customers, because I buy ads from all
three of these gentlemen next to me. And would it surprise you
sitting at the dais to know that on either one of their
websites right now, when they talk about these expensive ads,
what if I told you I can buy ads on their websites right now
for pennies a click--not nickels, not dimes, not dollars.
Pennies. And every business that is out in America right now
can do the same thing.
So I do not want to hear all this belly aching about this
is expensive. If you want to buy the big, highly targeted key
words, sure, there is a lot of competition for those. But way
out on a long tail where a lot of consumers are actually typing
these very long key word phrases, you can actually buy ads for
very little money.
But to make a long story short, I am not worried about it
at all. My business depends entirely upon free search. The way
that people come to my AsktheBuilder.com website is through
search. I absolutely want Yahoo! and Microsoft to both be
viable against Google. The reason that Google is so powerful in
search right now is only one reason. I happen to be a
previously elected government official. I just resigned about 4
months ago because I got a big project going on. But the reason
that you are here today, Senators, is because you were elected
to come here. Well, your constituents and all the other
consumers in America are voting right now which search engine
is solving their problems more quickly. And at this instant in
time, it just happens to be Google. Yahoo! or Microsoft or some
other two young kids who are in a garage right now might
supplant all three of these guys. That is possible. Look at
what has happened. Look how quickly we had these giant
industries develop. Never in the history of America has that
happened, ever. And it can still happen.
So if I were these three gentlemen and their companies and
their board of directors, I would be worried each day. But to
answer your question, Senator Hatch, I am not worried at all
because I am convinced that all three companies are working as
hard as they can, maybe some harder than others, and as a
result, they are getting more consumers who like the services
that they provide.
Mr. Crowley. So if I may, if there is time, Senator, I will
also respond. As an advertiser, I do have concerns. Today,
whether it is pennies or dollars, when you add this up, it is a
multi-billion-dollar industry. And if prices go up by 5
percent, 10 percent, 20 percent, those prices are borne by the
small and medium businesses that need to carry that freight, by
the large businesses that carry that freight. We are the ones
that are actually paying for the free Internet. And ultimately
that translates into prices that consumers have to pay for
goods and services. So it is quite meaningful.
The other thing that is concerning is, as Mr. Carter
stated, Google is the dominant play in search today. And by
doing this type of deal now, it weakens Yahoo! in terms of
their ability to compete. It provides a safety net for them not
to innovate. And advertisers like me and advertisers like Crete
Truck Sales in Wisconsin or Countertops of Utah in Sandy, Utah,
those who come to us to place their search engine advertising
will have less choice, higher prices. That is not good for
them, and that is not good for the future of this industry. And
when I look at the page over there, what I see is not
additional choice. Today I can go to Yahoo!. Today I can go to
Google. I have that option. I can buy them at competitive rates
from two independent marketplaces. In the future, for both AT&T
and for our businesses, we would have to pay higher rates to
compete for less inventory on Yahoo! and at higher rates in the
Google marketplace.
Thank you.
Chairman Kohl. Thank you.
Senator Specter, go ahead.
Senator Specter. Thank you, Mr. Chairman.
Mr. Callahan, the arguments made by Mr. Crowley seem to me
pretty impressive, especially when backed up with a 90-percent
share, which Google and Yahoo! would have. That is a very
dominant factor. This hearing has been very both interesting
and illuminating, and we are going to have to followup with
staffs because we cannot possibly get into all the details
here. But it seems hard on the surface to accept the argument
that if you have a combination which gives a market share of 90
percent that it is not anticompetitive. We are going to
followup because this is something I want to pursue. But give
me a 30-second answer to how 90 percent just does not dominate
so decisively as to hurt consumers?
Mr. Callahan. Thank you, Senator. The 90-percent figure
would be accurate if Yahoo! was exiting the business. Yahoo! is
not going to exit this business. We will continue to sell
sponsored search advertising, we will continue to be in web
search, and we will continue to aggressively compete with
Google in all aspects of advertising. There will be no change
in how we execute going forward, other than additional
resources for us to invest.
Senator Specter. You are talking about Yahoo!, what Yahoo!
is going to do?
Mr. Callahan. Yes, sir.
Senator Specter. But you are representing Google. How do
you know what Yahoo! is going to do--oh, vice versa? Well, Mr.
Drummond, the question is to you. How will you maintain that
kind of vigorous competition?
Mr. Drummond. Apologies. I thought it had been directed to
Mr. Callahan. I think he made--that was a very good answer and
similar to the one I would have given myself. Again, this
agreement gives Yahoo! complete flexibility about what to do.
It is not consolidation. There is no merger. We are not--
Senator Specter. It has flexibility, but still, if you
exercise it, you are 90-percent plus. That is what the consumer
has to be concerned with, what your power is.
Mr. Drummond. If they exercise it.
Senator Specter. Well, but you have the power to exercise
it. Let me move to Mr. Smith for just a minute. Now you have
Carl Icahn entering the picture, and Carl Icahn wants Microsoft
to acquire Yahoo!. Apparently Yahoo! is worth more money in
Microsoft's hands than it is in Yahoo!'s hands, or else they
would not want to have a proxy fight about it. That adds
another dimension to an already extremely complicated picture.
Microsoft is trying to buy Yahoo!, and now you have a
collaborator inside of Yahoo! to help you.
What are the machinations of that kind of an acquisition to
add complexity to what this Subcommittee already has to
consider?
Mr. Smith. Well, it obviously reflects a fluid situation,
Senator, and we appreciate that. There is a proxy contest going
forward, and that is governed by the regulations of the
Securities--
Senator Specter. Never mind fluid. It is Yahoo! is more
valuable in Microsoft's hands than Yahoo! is in Yahoo!'s hands.
Mr. Smith. I do not know that--
Senator Specter. Doesn't Carl Icahn think that?
Mr. Smith. Mr. Icahn has spoken for himself. Let me
describe what Microsoft did and the position that we took.
Senator Specter. Carl Icahn has spoken for himself, but
aren't you working hand in glove?
Mr. Smith. No. Microsoft made a proposal last week for a
search deal with Yahoo!, and we provided that to Yahoo!. It was
conveyed to them, and they turned down that proposal.
Senator Specter. They turned it down, but if Icahn wins,
doesn't Microsoft get Yahoo!?
Mr. Smith. Not necessarily. I mean, first of all, we have
all recognized that, regardless of who wins the proxy contest,
no one can guarantee the outcome. There will be a new board.
The board will have to do its fiduciary duty. You know, we--
Senator Specter. If Icahn wins the proxy fight, you can
pretty much tell he will have control of Yahoo!, won't he?
Mr. Smith. If his slate--
Senator Specter. Microsoft will buy Yahoo!.
Mr. Smith. If the nine directors that he has put forward
win, the nine directors will govern the board of Yahoo!.
Senator Specter. We may have to have another hearing, Mr.
Chairman. I have one question for Mr. Callahan, and I will wrap
up immediately. I saw the yellow light.
This is very interesting testimony from Mr. Smith on only
one pole if this deal goes through. You were at the meeting. I
did not hear you contradict that.
Mr. Callahan. I disagree with how Mr. Smith characterized
what Mr. Yang thinks about the market.
Senator Specter. Never mind the characterization. What was
said?
Mr. Callahan. I don't recall that Mr. Yang said what Mr.
Smith had indicated. But I will say this--
Senator Specter. You don't recall?
Mr. Callahan. I am sorry--
Senator Specter. Does that mean Mr. Smith could be right?
Mr. Callahan. I don't think it would be appropriate for me
to comment on Mr. Smith's accuracy or not about how he relayed
the conversation.
Senator Specter. Well, wait a minute. You were at the
meeting. You are a witness.
Mr. Callahan. Yes, sir. It was a long--
Senator Specter. What do you say, Mr. Witness?
Mr. Callahan. What I believe is that Yahoo! sees a
competitive future with this agreement in place, and--
Senator Specter. Was there a comment made about only one
pole?
Mr. Callahan. I don't recall that comment, sir.
Senator Specter. Are you standing by your testimony, Mr.
Smith?
Mr. Smith. Absolutely. Absolutely.
Senator Specter. I have not heard the Chairman talk about
the oath being administered, and I have known Senator Kohl
since he was elected in 1988. That is pretty tough talk coming
from a non-lawyer.
Chairman Kohl. Excellent. Thank you.
[Laughter.]
Chairman Kohl. We are getting into serious business here,
folks. We will have to recess for 10 minutes. There is an
ongoing vote.
[Recess from 11:35 a.m. to 11:52 a.m.]
Chairman Kohl. We will startup again, and we will ask
Senator Hatch to resume his questioning.
Senator Hatch. Well, first of all, this has been an
extremely interesting hearing to me, and we never get a real
chance to ask all the questions we want to ask. But, Mr.
Callahan, how will you decide if it is in Yahoo!'s best
interest to place a Google ad on Yahoo!'s search result pages?
Mr. Callahan. What Yahoo! plans to do, once the agreement
is through regulatory review, is to implement sending some
search terms to Google to backfill ads where Yahoo! does not
have the same quality ad that could be returned by Google and
one that would have increased relevance, generate a click. And
we believe that benefits consumers to the point that Mr. Carter
had made, that consumers come to the Internet to look for
solutions to problems. That would create a more relevant ad and
a better-quality ad. And we think it is good for advertisers as
well.
Senator Hatch. Let me ask you and Mr. Drummond this
question: Mr. Smith in his written testimony argues that under
this agreement, ``Yahoo! will never have an incentive to sell
an advertisement for less than Google is offering.''
Specifically, a price floor will be created and that this is
per se price-fixing--that has already come up--based under the
Supreme Court's decision United States v. Socony-Vacuum.
I would like you to respond to that argument, because it is
an interesting argument and it has been raised by a lot of
people.
Mr. Callahan. Yes, I can speak first and then turn to Mr.
Drummond.
Senator Hatch. I would be happy to have you--well, both of
you should respond, and then I would be happy to have Brad
Smith respond.
Mr. Callahan. OK. There is no pricing coordination between
the companies as part of this deal. Key word prices--so that
price, as Mr. Carter indicated, for cents or whatever it may
be--that get bid will be conducted on a separate Yahoo! auction
and a separate Google auction. And when Yahoo! has an ad that
is drawn from the Google system, that ad will be priced at
whatever the price was on the Google system.
Senator Hatch. That sounds good, but as a practical matter,
wouldn't it really basically come down to--
Mr. Callahan. I don't think we know that, sir. The bid
price for the ad would depend upon whatever the auction is. It
would depend on how many advertisers are in that system, what
the particular key word is, and then, in fact, whether or not
there is a click generated, because advertisers only pay when
there is a click. There is no payment from the advertiser is
the ad is shown, only if it is clicked, which comes back to our
argument why we believe this will, long term, benefit consumers
with a more relevant ad in the cases where Yahoo! may decide to
draw that ad from Google.
Senator Hatch. OK. Mr. Drummond?
Mr. Drummond. Sure. Let me just add to that. I think there
is a fundamental misconception that is being sort of put out
here about search monetization, and there is this notion that
Google just has high prices and--
Senator Hatch. That is what I have--
Mr. Drummond.--that is the reason--that is the reason why
Google is successful. So it is amazing that people could
possibly be successful if all we did was take the same old ads
that everybody else has and we price them higher. Does anybody
think that is a successful business strategy? It is not.
It turns out that what this--this is not, as in the Socony-
Vacuum case, a market about a commodity that different
purveyors might sell in a spot market. This is a very
complicated--it is about as far from a commodity as you can
imagine. It is a very complicated--in terms of the outcome,
whether an advertiser is going to generate leads and then
ultimately sales from an ad is a very complicated process. And
it turns out it is very hard to do, and it depends on search
traffic, it depends on the types of advertisers, and, most
importantly, it depends on the quality of the ad and how good
it is. And it turns out when you get it right, when you start
figuring out how to do that, what you do is you create more
clicks, you create more ads that are relevant, that advertisers
want to see. It is the absolute opposite of what was going on
in Socony, which was reducing output. It is the opposite. It is
increasing output because now you are going to have--because
you have done a better job with the targeting, you now have
more matches, that is, more consumers are put in touch with
advertisers, and that is good for everyone.
So the fundamental misconception here is that the
incremental revenue that Yahoo! and Google might make in this
deal has to do with just a price increase. What is going on
here, as I said in my oral testimony and in my written
testimony, what is going on here is that there are more ads
being seen, there are more ads being clicked on, there are more
relevant ads. And, ultimately, what is important to the
advertiser is that they get leads from this and that they get
ultimately sales from this.
Now, you could have--you know, the dynamics of each auction
are going to be very, very different. There are different
players in them. There are different search traffic behind it.
And there could be cases where the price ultimately is higher,
and Google could be higher on Yahoo!. But what is important to
understand ultimately is the value that is being created, so
what we have here is an increasing pie that Yahoo! and Google
will share in, and that is good. It is more output. It is more
supply into the market.
Senator Hatch. Mr. Smith, you can take some time to answer
that if you would like, but it just brings to mind if this
agreement is non-exclusive and Yahoo! is free to make deals
with other companies, does not this undercut your argument that
the agreement creates a per se price floor? For instance,
Microsoft just purchased Aquantive for $6 billion. Does that
not mean that others will be interested in this market and
eager to form agreements with Yahoo!? I think it is a relevant
question, but you can answer to their comments as well.
Mr. Smith. First, price-fixing agreements are never
exclusive. They all tend to be non-exclusive, and they are
usually done with a spirit of ``the more, the merrier.'' That
is why the Government takes such a hard line against them. And
while lots of things in this industry are complicated, I don't
think that the issue that is before this Committee is anything
but straightforward.
If this agreement goes into effect, then if Google makes
more money, then Yahoo! will make more money. If Google raises
prices, Yahoo! is going to earn more revenue. That is not the
way the marketplace is supposed to work. And I think Mr.
Callahan's own use of his props showed it very clearly. He was
showing the exact same ads, not better-quality ads, not new ads
that are not existing today, but the exact same ads from the
exact same advertisers showing up in exactly the same place. It
is just that they go through Google and they cost more money.
That is not complicated.
Senator Hatch. Mr. Chairman, could I ask another question?
Chairman Kohl. Go ahead.
Senator Hatch. I don't mean to--
Chairman Kohl. Go ahead.
Senator Hatch. OK. Well, Mr. Drummond, in your testimony
you state that Google does not control the prices charged to an
advertiser. How can you say that when Google does not determine
the winner of its auctions based solely on the amount the
advertiser is willing to pay? Do you not take into account
``quality scores''? Can you explain what ``quality scores'' are
and how they affect who is declared the winner of your
auctions?
Mr. Drummond. Sure. Actually, we are actually quite glad
that we pioneered this concept of quality scores in auctions
for search, and it has actually been a big part of our success,
which has now, I should add, been copied by Yahoo! and
Microsoft, who both use them, as well as minimum bids in the
auction.
The point of these are to set neutral auction rules that
apply to everyone who is in the auction, and think of it this
way: Is it a better experience for a--is it a better overall
experience to have an advertiser for a camera go in and say,
``I will pay $50 for an ad on vacation,'' when it could well be
that that is not a particularly relevant--in other words, when
people go on vacation, they want places and so forth, right? So
by attaching, by saying it is not just by how much you bid but
also the quality of your ad, how relevant it is likely to be--
and we have a variety of things that we have done over the
years to try to figure out those signals and try to make them
better, if you factor that into the auction, it turns out that
you get better ads, you have more people clicking on them, and
advertisers are then going to come up--going to actually
compete with each other, not only just on price but to make
sure that the ads are very relevant. That is good for them, and
ultimately it generates more value overall and more revenue.
These are neutral rules that apply to the ad auction. They
are the same--we have some differences between the companies,
but all three companies use these, both of these rules. And we
are not behind the scenes manually manipulating them any more
than we are manipulating the algorithms that drive our search
results. It is an article of faith really at Google that, you
know, we build this auction, we build our search results, and
we use computers--we really like computers--to make these
decisions and to make these calculations and to drive these
outcomes.
So we have never done any of this manipulation of quality
scores or bid prices to affect the outcomes of auctions, and we
never will.
Senator Hatch. Mr. Carter, when you are marketing your own
products, do you believe that you have ever been unfairly-well,
have you ever unfairly lost a bidding competition because of
these so-called quality scores?
Mr. Carter. Not at all. And, Senator, that is a great
question. I would like to explain very quickly exactly how all
this works from a layman's standpoint and one who is actually
buying the ads from these three gentlemen to my right. Here is
what is so amazing about this process.
What happens is I can actually-if I am extremely creative
in my ad writing and it is compelling text and it really solves
the consumer's problem, I actually may be paying very, very--a
much smaller amount for my ad than a competitor that is paying
three, four, or five times the amount. He is willing because,
remember, it is a free auction. In other words, I am going in
and saying--for my crown molding e-book, I may say, ``I will
pay you 25 cents a click.'' I may have competitors who say, ``I
will pay you $1 a click, Google.'' So here is a competitor who
is willing to pay more. But you know what? If my ad is better
written and more people click it, say 100 people a day click my
ad for 25 cents, Google gets $25 or Yahoo! gets $25, or
Microsoft, whatever is collecting the money. But that person
who is willing to spend a dollar for a click, four times more
than me, and his ad is only clicked, say, five times, Yahoo!,
Microsoft, or Google only gets $5.
So they have created technology that recognizes that that
is happening dynamically in the auction, and if you were either
of these three companies, what would you do? You would force
that ad, my ad, which is getting more clicks, higher up in the
stack. So these three companies are not controlling the pricing
of the auction. It is we as consumers, all of us businesses out
there that are buying these ads, we are competing against each
other. All that they are doing is matching us up. They are just
matching up the people who are coming to search with those of
us who create these ads, you know, and those of us who can
write the right ad, the really compelling ad.
So, no, I have not been ever treated unfairly. In fact, I
wish I could give more money each day to these companies.
Senator Hatch. Well, I have to leave. That is a very unique
comment there, is all I can say.
[Laughter.]
Senator Hatch. We love that form of generosity in the
Federal Government.
I have got to leave, but, Mr. Smith, do you have anything
to add on this, on this quality score issue, or anything else,
for that matter?
Mr. Smith. Well, I think the important thing to focus on
here is this is not about Google's overall business, this is
not about the model in and of itself for the way auctions take
place. That does have an important impact because prices are,
in fact, set in what is in truth, I think, a combination of
bidding by advertisers and the minimum prices that are set. In
fact, our understanding is that Google sets a different minimum
price for each advertiser and different quality scores as well.
Those are important, but that is really not the heart of
the issue. The heart of the issue is the agreement, and the
heart of the issue is whether two competitors that account for
this kind of market share should be able to come together and
enter into this type of agreement.
Senator Hatch. Well, thank you all. This has been very
interesting to me. I want to thank the Chairman for allowing me
to go on here. I have a lot of other questions, but these
hearings are--you folks are among the most intelligent people
who appear before the Judiciary Committee. That may not be
saying much, but we still think--
[Laughter.]
Senator Hatch. We always enjoy having you. It is wonderful.
Mr. Carter. Thank you, Senator.
Mr. Smith. Thank you.
Chairman Kohl. Thank you very much, Senator Hatch, for your
excellent questioning.
Mr. Drummond and Mr. Callahan, as part of this agreement,
the parties have agreed to allow the Justice Department a
hundred days to review the agreement. Clearly, Justice would
not have taken this unusual step unless they believed that
there were legitimate questions about this agreement that need
to be addressed.
Mr. Drummond and Mr. Callahan, if the Justice Department
says it has problems with the agreement, then are you prepared
to either abandon or change the agreement? Mr. Drummond?
Mr. Drummond. Well, let me just first say that we actually
voluntarily called the Justice Department and kind of gave them
the opportunity to look at it. We just felt that although we
believe it absolutely is pro-competitive, you know, in terms of
all the attention in the space and the size of two companies,
it made sense to have them review it. We are cooperating with
them on a day-to-day basis, giving them all the information
they need and explaining the agreement to them. We are
confident that they are going to, once they understand it and
go through all of the facts, they will see it the same way. If
they have any issues with it, we will work through those issues
with them, most certainly.
Chairman Kohl. Mr. Callahan?
Mr. Callahan. Yes, sir, I would echo Mr. Drummond's comment
and also add that, given the attention that had been on the
Yahoo! situation from the time of Microsoft's unsolicited
proposal through this weekend's coordinated--what at least we
see as a coordinated approach to Yahoo! between Microsoft and
Carl Icahn and the disruption of a proxy fight, the annual
meeting that is coming, we did reach out to the Department of
Justice, as Mr. Drummond indicated, and I think I would echo
his comments that we would look forward to working through any
issues.
Chairman Kohl. Mr. Crowley, we have spoken a lot today
about the strength of Google in search advertising, yet there
are, as we know, other forms of Internet advertising, such as
display. Google has a very small share of these types of ads.
Doesn't the fact that advertisers do have other ways to
advertise on the Internet make it unlikely that this deal will
cause ad prices to rise? And if prices were to rise for search
ads, as you suggest, wouldn't advertisers just switch to
display ads?
Mr. Crowley. Thank you for the question. No, we don't
believe and I don't believe that display ads are an adequate
alternative to search marketing. Display ads are generally
brand advertisers. They are generally wrapped around the page.
There is a phenomenon called ``banner blindness'' where
Internet users have been trained not to look at the display
banners but to look into the search results.
So there is a place for display advertising on the web, no
doubt. It is a different type of advertising than sponsored
search. And from the small businesses that we sell our
advertising solutions to, we do not see that as a viable
alternative. There was, in fact, a point in time where we did
sell display banner advertising to small businesses, and we got
out of that business and replaced it with the search engine
marketing solution that we offer today because that is where
the demand was and that is where the value was at the time we
made that decision.
Chairman Kohl. Mr. Callahan, as we have discussed this
morning, Yahoo! estimates that it will eventually earn $800
million more annually with this outsourcing arrangement.
According to industry estimates, this is an increase of more
than 50 percent from what Yahoo! currently earns. If that is
the case, why would Yahoo! ever terminate this arrangement? In
fact, if Google does a much better job of making Yahoo! money,
will there not be every incentive in the long run for Yahoo! to
outsource all of its Internet advertising to Google?
Mr. Callahan. In the analyst conference call around June
12th, we did note that we saw this as a potential revenue
opportunity of $800 million on an annual basis, but that we
expected in the first year following implementation
approximately $250 million to $450 million of operating cash
flow. And our incentive under this agreement reflects how the
agreement is structured, that we have the option to use the ads
where we think it helps on the quality and obviously helps
Yahoo! generate this additional cash-flow. Our incentive is to
sell as many Yahoo! ads as possible. We keep all of the revenue
from those ads. Our incentive as we go forward is to maintain a
robust marketplace in search advertising, and that depends upon
advertisers like Mr. Carter but also user traffic. And creating
user traffic and drawing user traffic is based upon a relevant
page, which is the overall relevance that is helped by better-
quality ads, and some of those may come from Google.
Chairman Kohl. Well, Mr. Smith, wouldn't you agree with the
premise of my question?
Mr. Smith. I absolutely would agree with the premise of
your question, Senator, because to the extent that prices on
Google continue to rise, then it is clear that Yahoo! will have
every incentive to send more ads to Google.
Now, it is certainly true as well, as Mr. Callahan
suggests, that in some cases their prices may already be as
high as they are on Google and they will not send those. But
where they are lower, every incentive is to send ads. When you
put that together, it really does constitute an effective floor
on prices. Yahoo!'s prices may never be lower than Google's
prices because whenever they are, Google will set the price and
Yahoo! will send them the ads.
It is bad news for advertisers.
Mr. Crowley. Chairman Kohl, if I may comment on that?
Chairman Kohl. Yes, Mr. Crowley.
Mr. Crowley. Mr. Drummond did mention that this is hard, it
is complicated, and I think that is the point: that it is
difficult, it is not easy to do, and we want to see Yahoo!
competing vigorously, fairly in the market to bring their
services up to par, to be an adequate alternative to Google.
And by renting out their real estate to Google and accepting
the money from Google and decreasing that incentive to innovate
and compete, we think it is bad for the market and bad for the
future.
Chairman Kohl. Mr. Smith, let's be as frank as we can in
this hearing this morning. Is it not true that your opposition
to this agreement between Yahoo! and Google is highly motivated
by the fact that Microsoft wants to acquire Yahoo! yourself?
And wouldn't such an acquisition be just as anticompetitive as
the deal we are talking about this morning?
Mr. Smith. A fair question, certainly, Senator, and let me
say a few things in response.
First, yes, Microsoft has obviously been strongly
interested in coming to some kind of important transaction with
Yahoo!. Now, there have been different terms, different forms
that have been discussed over the last 6 or 7 months, but we
clearly have that interest, and that is unquestionable.
But, second, we would have serious concerns about this
agreement regardless of whether there was any possible
transaction with Yahoo!, and there may not be a possible
transaction with Yahoo!. It has not worked very well so far, as
everybody has seen. So independent of whether there is ever an
opportunity for Microsoft to do anything with Yahoo!, we do
have concerns about this kind of arrangement.
But then, third, it is also a fair question: What would the
world look like, what would this market look like, if Yahoo!
and Microsoft were to come together in some way around search
and search advertising? We believe that would create a more
competitive market because this is a very scale-based business.
It does require very substantial capital investments. One needs
to have a critical mass of market share in order to ensure an
ongoing and sustainable level of competition. And if Microsoft
and Yahoo! were to team up in some way, you know, we would
bring together 20 to 30 percent of the market. We would have a
critical mass, and the market would be more competitive.
So our view is that if you put a small number 2 and an even
smaller number 3 together to balance this gigantic number 1,
that is going to lead to a more competitive balance and more
competition that is sustainable.
Mr. Drummond. Senator, do you mind if I just respond to
that?
Chairman Kohl. Yes, Mr. Drummond.
Mr. Drummond. Let me just say that there really are two
alternative scenarios here, and I guess when you start
thinking--you have got to think about which one is better. You
have an independent Yahoo! that makes an arrangement with
Google that is going to lead to better ads for consumers, so
they get better information than they had before because of
Google's ad technology. Advertisers are going to get more leads
than they had before. The pie of advertiser value grows
incremental from what we have today. And Yahoo! actually is
able to generate additional--you know, gets a share of that,
the lion's share of that, I should say, and reinvests that into
the rest of their businesses and stays as an independent
competitor in this market.
Or you can have a situation where Yahoo! is gobbled up by
Microsoft, eliminating them from the competitive playing field,
and Mr. Smith wants you to believe that the only business that
our three companies are engaged in is search. Well, it turns
out that is Google's primary business, but it turns out also
that both Microsoft and Yahoo! have very large display
advertising businesses. Yahoo! is number 1. Microsoft is number
2. They have hundreds of millions of e-mail customers between
them. They are two of the leading instant messaging companies,
and on and on and on.
So this is not about search entirely. It is about the
Internet in general. I think there would be significant
concerns about a combination of those two companies.
Chairman Kohl. Mr. Carter?
Mr. Carter. Senator Kohl, I can tell you that from my
standpoint as a publisher and as a consumer, I want all three
of these companies to survive. I do not want anybody to be
gobbled up by anybody because as a buyer of ads and as a
business that can actually take that same advertising, please
understand, I am currently doing the exact same deal with
Google, and I was approached by Yahoo! several years ago to do
what we are here talking about today, meaning I display Google
ads on AsktheBuilder.com. It took me 5 or 10 minutes to put the
code on my website to do that. Then, instead of me out there
trying to sell my own ads, I am able to go back and write more
columns or write more content or make more videos so that I can
have more ads.
So I want all three of these companies to survive and to
thrive, and I can tell you that the marketplace is making that
happen now. And once again, I will just reiterate, the reason
that I feel that Google is so powerful in the search marketing
area is because they did such a good job early on in being able
to match those ads with the search term that people were
searching for. And that is really what the crux of the matter
is, in my opinion. And we absolutely want to see Yahoo! improve
their search algorithms. I want to see Microsoft work 24 hours
a day to improve theirs. And I want to see who the number 4
player is. I don't know who that is. Maybe Dogpile is going to
come back to life. Maybe AltaVista is really going to get
juiced up again. But the point is there are other search
engines that are out there, and I am telling you, history will
prove it right, and we may all be dead in this room when it
happens. But I am telling you that there will be a company that
is going to crush all three of these people.
[Laughter.]
Mr. Carter. It will happen. They don't want to hear that,
but history has shown that to us. And we have got a rich
history in this country.
And remember, once again, all I want to add is that if you
block this deal, if you go down that pathway, am I going to get
a letter from you 1 day? I mean, that is a question I will ask
you, because I am on my way to becoming the most popular home
improvement website, Yahoo! is the most popular, most visited
website right now. So are you going to then say, ``Tim, sorry,
you cannot do Google ads anymore''? Come on. That is un-
American.
Chairman Kohl. OK. Mr. Callahan?
Mr. Callahan. Yes, Mr. Chairman, I thought I should
comment. There has been some discussion about Yahoo!'s future,
and I thought it would be appropriate for me to say that,
consistent with what we have said from the beginning, Microsoft
had made an unsolicited proposal and then subsequently withdrew
it. They made a joint proposal to acquire a search business and
restructure the company with Mr. Icahn over the weekend, and we
rejected that. Consistent throughout that process has been
Yahoo!'s board's focus on stockholder value, and I would like
to reassure Mr. Crowley and Mr. Carter and others that we will
continue to innovate with this agreement in place, continue to
compete, and continue to build a stronger Yahoo! for the
future, however that path may take us.
Mr. Crowley. Senator Kohl, if I may? Like Mr. Carter, I
agree. I want three viable, four viable, five viable
alternatives in the search market. Mr. Carter also stated that
it is working today. My concern is that I don't know that there
is just two options, as Mr. Drummond has suggested. I don't
know that there are not other alternatives for Yahoo! to get
funding or to continue to innovate. And in this situation, we
see it as a concern because you have got Yahoo!, who is wanting
to innovate, we are wanting to compete, getting out of a large
part of their business, ceding it to their largest rival.
If you take a comparison, let's just look at an auto deal.
What if the by far No. 2 auto dealer gave up a significant
amount of its floor space to the dominant auto dealer in the
market, but then said that they were going to use the proceeds
from those sales to come back and compete with that same auto
dealer? It just--it does not seem to make a whole lot of sense,
and I think there are better ways for Yahoo! to compete, and I
think there are better ways for us to have a better search
marketing ecosystem.
Chairman Kohl. All right. One last question, folks.
Generally, bid prices for search advertising are lower on
Yahoo! than on Google. If Google's higher prices are now used
to sell ads on Yahoo!, does not this deal eliminate the choice
for small advertisers who would rather allocate their marketing
budget to Yahoo!? Mr. Smith.
Mr. Smith. Well, that is precisely one of our concerns, and
while Mr. Callahan talks about Yahoo! taking the proceeds and
reinvesting, the reality is that advertisers who find that
their ads are no longer being winnable at Yahoo! are going to
have a lot of incentive to just shift their business to Google.
And the Yahoo! folks have talked about various ways they would
like to avoid that, but I think that result is, in fact,
unavoidable the way this agreement has been set up.
The reality is when Google's prices rise, Yahoo! makes more
money. That is not the way the number 1 and two players in a
market are supposed to interact.
Chairman Kohl. Yes, Mr. Carter?
Mr. Carter. Senator Kohl, I think the reason for the facts
of why those prices are lower is because there are fewer people
in that auction at Yahoo!, and with no disrespect to Mr. Smith,
the same is happening at Microsoft, meaning when I buy ads on
both of those search engines, I can get clicks for less money.
But that being said, if I can get--from my standpoint as a
businessman, I make more money than when I am buying from
Yahoo! and Microsoft. So, in other words, that is why I want
all three of them--and just like Mr. Crowley said, I want a
fourth and a fifth search engine to come into the marketplace
because I want there to be even more competition than there is.
So I can tell you that the marketplace is controlling these
prices, and don't forget, sir, that each of these websites--
Microsoft, even Google, even Yahoo!--they have other real
estate on their pages that they can devote to revenue. And one
of the points that Mr. Callahan said earlier is really, really
important. Please understand that when a person at Yahoo!
clicks a Yahoo! ad, Yahoo! keeps all the money, just like at my
website. When I sell ad space of my own, I get all of the
revenue. I do not have to split it with Google or anyone else.
So that is really, really key here. Remember, you are only
talking about a small slice, potentially, of the real estate on
these pages. And if Yahoo! discovers that all of a sudden they
are making more money by selling these particular ads, they are
going to either turn off the Google ads, like I do--I turn off
Google ads on my own pages. They probably don't like to hear
that, but I get more money from certain advertisers. Too bad.
You know, maybe they need to do a better job and get better
prices in the auction.
So it is a very dynamic thing, and you have to go very,
very slowly here, because you may end up hurting somebody like
me 5 years from now, and I will not be real happy about that.
Chairman Kohl. All right. Gentlemen, that will conclude
testimony at the hearing. We will leave the record open for a
week. I would like to thank all of our witnesses for being
here.
Today's hearing demonstrates the importance of this market
and that this deal does raise significant competition concerns.
So we will continue to examine this transaction closely in the
days and weeks ahead. We will also be following the news
regarding the possibility of future consolidation in this
market and its impact on competition.
We thank you all for being here. The hearing is adjourned.
[Whereupon, at 12:24 p.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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