Google Gets Ready to Man the Barricades

Google has a problem: How can the Internet giant concentrate on crushing the competition when an army of government agencies is investigating whether it’s crushing the competition? Google disclosed on June 24 that the U.S. Federal Trade Commission has issued the company a subpoena demanding information about how it does business. The FTC probe will take a broad look at how Google operates, according to several people familiar with the investigation. The agency will likely examine Google’s advertising practices, how it handles search queries, and whether it’s using its dominant position in Internet search and advertising to subdue competitors and jack up ad rates.

The FTC joins a long list of government agencies seeking to unlock the secrets of the Googleplex. In September, Google disclosed that the state of Texas had begun examining whether its search results favor some businesses over others. Two months later the European Union launched an investigation after competitors alleged they were getting pushed down on Google’s search pages. New York and California are also in the early stages of antitrust investigations into Google’s operations, according to a person with knowledge of the matter.

The U.S. Justice Dept. is already reviewing Google’s $400 million acquisition in June of Admeld, the Internet advertising company, to determine whether a merger would violate antitrust laws. Justice also is monitoring Google’s compliance with an April agreement with the government that allowed it to buy ITA Software, which compiles travel information. The many inquiries share a common theme: They all seek to determine whether Google—like Microsoft before it and AT&T before either of them—has become too big and powerful to play fair. With so many entities weighing its future, Google may find itself in the unfamiliar position of having to act … humble.

The multiple probes could temporarily curb the company’s appetite for splashy, expensive acquisitions or lead it to look for more opportunities beyond the U.S. and the European Union. To avoid giving investigators ammunition, Google should try to appear as accommodating as possible in the coming months, says Scott Kessler, an equity analyst with Standard & Poor’s in New York: “To suggest that it’s business as usual without any further repercussions is a little naïve.” Tom Ensign, a Washington antitrust attorney who once worked for Intel, says the wet blanket of a federal investigation tends to make employees even at ambitious companies cautious. They watch what they say to each other, especially in memos and e-mail.

Google, which says it is happy to cooperate with the investigators, is playing it cool. Spokeswoman Mistique Cano says the government scrutiny won’t change the way the company operates. “Our management team is laser-focused on our business and delivering great products,” she says. Neither is Google stockpiling lawyers or consultants. “It’s the legal team that’s handled four previous reviews,” Cano says, “and they’ll handle this as well.”

Whether Google can maintain its equanimity under increasing scrutiny will likely depend on how hard its interrogators intend to push. Other targets of major government antitrust actions have had their businesses transformed by the experience. At first, Microsoft took a similarly cooperative stance when the Justice Dept. began investigating its competitive practices in the mid-1990s. Things turned acrimonious as the probe dragged on and it became clear the government aimed to break up the company. The consent decree Microsoft eventually signed with Justice to prevent that from happening resulted in the software maker operating under U.S. court supervision for a decade, submitting to periodic checks to ensure it gave computer makers freedom to promote rival products. A decade earlier a federal antitrust investigation led to AT&T’s 1984 breakup. In exchange, the government lifted restrictions that kept the company from expanding beyond the phone business. It’s far too early to tell what, if any, remedies the various government entities might seek if they find Google has overstepped. One thing’s for sure: The inevitable court battle would be epic.

Google has a more pressing concern. At the same time it is attempting to demonstrate how it’s doing everything right, its competitors will be gaining in size and strength in the ferocious online advertising business, where the company makes its billions. Facebook is poised to seize the biggest share of the fast-growing online market in display ads. Google still dominates search advertising, where growth is slowing. “Google can’t afford to slow down,” says Jeff Chester, executive director of the Washington-based Center for Digital Democracy, which has filed complaints with regulators about Google’s acquisitions and data collection practices. “You can’t sit still in the digital advertising business.”

There is one government body that wants Google to sit still at least long enough to answer its questions. In mid-June a U.S. Senate subcommittee asked Google’s top executives, Eric Schmidt and Larry Page, to testify before the panel in Washington. Schmidt and Page said they’d send a lawyer instead—a sure way to get a bunch of senators’ backs up. Now the subcommittee’s chairman, Democrat Herb Kohl of Wisconsin, is threatening to subpoena the Googlers. Clearly, this acting-humble business is going to take some getting used to.

— With assistance by Brian Womack, and Karen Freifeld


    The bottom line: As Google tries to satisfy questions about its business practices, its rivals are moving quickly to challenge the company’s dominance.

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