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As the DOJ appears to be intensifying its antitrust review of Google’s advertising deal with rival Yahoo, analysts wonder if the companies might find themselves defending the partnership in court.
The DoJ’s antitrust division has retained Sandy Litvack, one of the most prominent antitrust attorneys in the country, to advise its review as it determines whether or not to take legal action to block the ad deal, according to a report in The Wall Street Journal.
On another regulatory front, Google (NASDAQ: GOOG) today announced that it has taken the notable step of cutting in half the amount of time it holds IP addresses on its server logs, reducing the retention period from 18 months to nine. That move came in response to increased scrutiny from European and U.S. policymakers and regulators about the privacy implications of Web giants such as Google collecting and storing massive amounts of information about their users.
On the surface, the two issues are unrelated: The DoJ’s review is focused on the antitrust issues relating to the deal with Yahoo (NASDAQ: YHOO), which would take effect only in the United States and Canada, while the privacy concerns, largely the voice of a European Union advisory group, apply to all Internet companies that collect users’ data.
But that hasn’t stopped one of the deal’s most vocal opponents, Microsoft (NASDAQ: MSFT), from trying to introduce privacy into the antitrust review. At a Senate hearing on Internet privacy earlier this summer, Mike Hintze, Microsoft’s associate general counsel, warned, “We definitely see a nexus between competition and privacy, in that if there does become a dominant player in the online advertising space, that means there is a single company that is collecting more data.”
Through the partnership, Google would serve a portion of the ads that appear on Yahoo’s search results pages. Critics charge that an alliance of the two largest players would turn the search-advertising market into a monopoly, driving up prices and diminishing competition.
The DoJ opened a formal antitrust review of the deal in June, just days after it was announced. They did not need regulatory approval, but Google and Yahoo voluntarily put the deal on hold to accommodate a review.
Next page: Competitive threat?
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Competitive threat?
The companies have maintained their confidence that the DoJ will ultimately conclude that no competitive threat exists, but the revelation that the agency has been deposing witnesses and recruited a star litigator raises the specter of a government lawsuit to block the deal.
“It’s impossible to tell,” Glenn Manishin, an antitrust attorney and partner with Duane Morris, told InternetNews.com. “There have been instances, as in DOJ’s investigation of [Microsoft’s] Windows 95, when outside counsel was brought in to lead the investigation and bring some outside experience, and Justice did nothing.”
But in 1998, the DoJ brought in attorney David Boies to represent it in its case accusing Microsoft of exercising monopoly power for bundling its Web browser with its operating system, Manishin pointed out. In that case, which ultimately resulted in a judgment against Microsoft, Manishin penned a white paper proposing a divestiture solution on behalf of the Software and Information Industry of America.
For Blair Levin, policy analyst with Stifel Nicolaus, the pattern of the more recent Microsoft case and other similar DoJ actions suggest that a legal challenge could be on the horizon.
“The fact that the DOJ is taking depositions is not a good omen in our view, but the agency will do this when it is reviewing a close case, even when it ultimately decides not to oppose a merger, as it most recently did with XM-Sirius,” Levin wrote in a research note. “The hiring of a lawyer with this kind of background is far more rare, and, in our memory, the times when this has happened the department brought a case.”
As a political appointee, Litvack headed the DoJ’s antitrust division under the Carter administration. Litvack, the former vice chairman for Walt Disney (NYSE: DIS), has argued numerous high-profile cases and appeared in all but three federal courts, including the U.S. Supreme Court.
“Sandy Litvack is a legend in antitrust circles,” Manishin said. “He has probably been brought in to guide the staff, which is relatively junior.”
At this point in the review, the DoJ attorneys are likely assessing the merits of an antitrust case, and Litvack could help advise them on how well it would stand up in court, Manishin said.
The reaction throughout the advertising community has been mixed. On Sunday, the Association of National Advertisers, a prominent trade group representing many of the nation’s largest corporate advertisers, announced that it had appealed to the DoJ to block the deal.
Google and Yahoo have defended the partnership on the grounds that it will give advertisers a more effective means to reach Yahoo’s substantial user base. Because prices for search ads will still be set at auction, they have rejected the claim that the overall cost of search marketing will increase as a result of the tie-up.
Google spokesman Adam Kovacevich said that Google has been cooperating fully with the department.
“While there has been a lot of speculation about this agreement’s potential impact on advertisers or ad prices, we think it would be premature for regulators to halt the agreement before we implement it and everyone can judge the actual impact,” Google spokesman Adam Kovacevich told InternetNews.com.
When they announced the partnership in mid-June, Google and Yahoo said they would put the deal on hold for up to three and a half months, giving regulators until roughly the end of September for their review.
“Ultimately we have confidence that they’ll be able to conduct their review within that time period and allow us to move forward,” Kovacevich said. He said that Google continues to “work cooperatively” with the Department.
In a statement, Yahoo again asserted that the partnership would improve competition, echoing Google’s confidence that the deal would pass muster with federal and state regulators.
“We have been informed that the Justice Department, as they sometimes do, is seeking advice from an outside consultant, but that we should read nothing into that fact,” the company said.
A DoJ spokeswoman declined to comment on the reported hiring of Litvack.
Defining the market
As with most antitrust reviews, the critical issue will be how the relevant market is defined, Manishin said. “That’s really the key question — if it’s Internet search, they might be in trouble,” he said. But if the market was broadened to include display advertising, where Google holds a comparatively weak position, Manishin said the case would be thin.
“I think people have used mushy logic in arguing that Google’s too big,” he said.
[cob:Special_Report]For its part, Yahoo has been promoting what it calls the convergence of search and display advertising as a key element in its turnaround strategy. In light of Manishin’s relevant-market analysis, two companies would likely be using that talking point in their discussions with regulators.
If the DoJ does not reach a decision before the companies’ three-and-a-half-month deadline expires, Manishin said they would be ill-advised to force the government’s hand by implementing the deal before securing approval. Because it is not a merger, they don’t need the DoJ to sign off on the deal, but Manishin said the conventional wisdom is that “if you force the government to decide before they’re ready, their only option is to ask for an injunction” blocking the deal.
“It would be brash and perhaps foolish to proceed unilaterally,” he said.
Updated to include comments from Yahoo.
