*Google’s former CEO Eric Schmidt is appearing today before a committee of U.S. Senators who want to know if the company is engaged in anti-competitive behavior. The event is more about political theater than substance, but Google (NSDQ: GOOG) will be in trouble if Schmidt flubs his lines. Here is an explanation of today’s hearing and what will happen next.
What is Google doing before the Senate in the first place?
It is not the job of the Senate to enforce the country’s antitrust laws. That task belongs to two agencies housed in the Justice Department (DOJ) and the Federal Trade Commission (FTC). But the investigations of those agencies are confidential, meaning it can be hard for the public to know what is going on. The Senate hearing puts Google and its rivals on a public stage to talk about issues that are important to citizens and the internet economy.
“It’s good theater. This will allow the public to learn more about these issues, to learn about Google’s perspective and to hear what its rivals’ concerns are going forward,” said Andre Barlow, a lawyer and antitrust expert in Washington.
On a more specific level, rivals like Yelp say Google is being anti-competitive through its acquisition of restaurant and travel sites. The rivals worry Google will use its dominance of search to punt its competitors to the Siberia of search results, and they want to share those fears with the Senate.
Did Google break the law?
Most anti-trust investigations are based on Sections 1 or 2 of the Sherman Act. The first section is about companies colluding with each other to fix prices or gang up on competition. The Senate hearing will focus instead on the second section of the Act which forbids individual companies from abusing dominant market position. This is not an easy call for the agencies because it requires two separate findings. First, an agency must find that a company has market dominance in the first place. Then, it must also find that the company is abusing its dominance.
Google will deny that it is dominant in the first place. It may do this by saying that its sales are only a fraction of the overall advertising market. Rivals will counter that the market to consider is not advertising overall but instead the market of search advertising. A dispute over the relevant market size is a typical feature of antitrust debates.
If people conclude that the relevant market is indeed search advertising, Google will have a hard time denying its dominance in light of a market share that is upwards of 65%. Many will not buy its argument that Bing and other competition is “just a click away.” But, once again, even if Google does have dominant market power, that does not necessarily mean it is abusing that power.
What will happen after the Senate hearing?
The ball will be back in the court of the agencies to decide what to do next. They will have an increased political imperative to go after Google if CEO Schmidt performs poorly at the hearing or if the rivals succeed in painting the company as an abusive monopolist. They would do this by threatening to sue Google in federal court or actually filing a lawsuit as happened last month with AT&T.
Keep in mind that both agencies — the DOJ and FTC — are conducting separate investigations into Google. It is a quirk of American antitrust law that two separate bodies are charged with enforcing the Sherman Act. Typically, they decide behind the scenes which agency conducts what investigation. Right now, the DOJ is looking at Google’s acquisition of Motorola (NYSE: MMI) Mobility, while the FTC is looking at the broader question of whether Google is abusing its market position.
Even though Google is a high-profile target, it is unlikely that either agency has enough evidence to form an antitrust case, according to Barlow, the Washington lawyer. Barlow says that, unlike Microsoft (NSDQ: MSFT), Google does not really have presence yet in secondary markets like travel or restaurants. “It’s tough to take a pre-emptive strike when the company hasn’t really entered the market.”
How does this compare to the Microsoft hearing?
Recall that a Senate hearing in 1998 led the DOJ to ramp up court proceedings against Microsoft (NSDQ: MSFT). The Google hearing is similar in that it involves a powerful tech giant having its business practices placed under the Senate spotlight, but there also a number of key differences. One of these is that Microsoft, at the time, had actually used its dominance in operating systems to kill off a number of competitors and enter new markets (think Word vs. Wordperfect or Explorer vs. Netscape). Another big difference is that Google appears to recognize the importance of the theatrics, and has prepared accordingly. The company, no doubt eager to avoid the calamitous pile-on that befell Bill Gates in 1998, successfully fought to keep Eric Schmidt from appearing at the same time as Google’s competitors . Google has also issued a “Guide to the Senate Judiciary Hearing” to help it get a leg-up on the barrage of spin that will follow the hearing.
Update: The hearing is now over and while the dust is yet to settle, it is clear that Google held its own. Schmidt d not make any damning admissions and his opponents did offer any startling revelations. The hearing also produced soundbites that will help to shape the perception of Google in the coming year, depending on which ones are adopted.
Google will be pleased that nearly every media outlet picked up on Schmidt’s message of humility — “We get it [...] we get the lessons of our corporate predecessors” — and also repeated his line that the company is popular and creates jobs. If this message resonates, the company should be free from regulators for a while longer. On the other hand, Google’s opponents will be pushing hard in coming weeks to amplify a line by Utah Senator Mike Lee — “you cooked it” — which suggests the company rigs its results.
Overall, this was hardly a day that Google was eagerly anticipating. But Schmidt did not make any unforced errors and so the company came away from Washington as well as it could have hoped.
Hard core politicos can check out the C-SPAN footage.