Reports that Google is involved in financing a potential buyout offer of Yahoo’s core business in order to sell its advertising across Yahoo’s websites and/or to raise the acquisition price for its rivals, is recklessly incendiary – the functional equivalent of Google playing with matches in a fireworks factory. To fathom how reckless this behavior is for a major publicly-traded company under antitrust investigation around the world for monopolistic abuses, let’s examine the behavior (the matches) and the context (the fireworks factory) involved.
The Behaviors (the matches): Two Google behaviors implicated by the Wall Street Journal’s story are anti-competitive.
First, it is anti-competitive for #1 Google to buy part of #2 Yahoo to gain business leverage over Yahoo and to extend Google’s dominant advertising service to Yahoo’s audience, because the Google-Yahoo cross-ownership would undermine Yahoo’s ability to compete with Google. Google supplying advertising for Yahoo also would make Yahoo dependent on Google and reduce its incentive to compete with Google over time. Google’s efforts also could be a perceived as a deceptive back-door scheme to try and break-up the Yahoo-Microsoft search advertising agreement, which was approved by the DOJ in 2010, in a last ditch effort to try and create at least one viable competitive advertising alternative to Google’s online advertising dominance.
Second, it is anti-competitive, if Google is not really interested in owning part of Yahoo, but is only involved in the bidding for Yahoo in order to drive up the costs of its rivals. Using one’s market power to collude to manipulate an informal auction of a public company which is Google’s leading competitor, with the purpose of driving up the costs of rivals to make it harder for them to successfully compete, is classic Sherman Act illegal monopolistic behavior.
The Context (the fireworks factory): First, Google is recklessly thumbing its nose at the DOJ in now repeating what the DOJ has already officially warned Google not to do less than three years ago. In 2008, the U.S. DOJ threatened a Sherman Act Section 1 and 2 monopolization case against Google in order to block the then proposed Google-Yahoo Ad Agreement. A Sherman Section 2 is the most severe antitrust action the U.S. Government can take, because it involves potential criminal felonies carrying a potential ten year sentence.
Google’s largest advertising customers strongly opposed the proposed ad agreement between Google and Yahoo in 2008 as collusive and anti-competitive. One can assume major advertisers would oppose another attempt at Google-Yahoo collusion given that Google now has ~80% of U.S. search revenues per eMarketer, 97% of mobile search share per Statcounter, and is quickly approaching control of over half of all U.S. online revenues per IAB. Simply, it appears as if Google is blowing off DOJ’s most serious warnings to not collude with its largest direct competitor by essentially re-proposing to accomplish the previously-blocked 2008 Google-Yahoo ad agreement via different means.
To make matter worse, this would not be Google’s only recent willful disregard for serious warnings from law enforcement. Just two months ago, Google admitted to criminal felonies in the DOJ-Google Non-Prosecution Agreement and paid a near-record $500 million criminal forfeiture for aiding and abetting illegal prescription drug imports and sales despite being warned several years ago by law enforcement. The U.S. Attorney also made clear that Google CEO Larry Page was aware of the criminal activity for years and did not stop it.
Second, Google is recklessly pushing the antitrust envelope at the same time Google is under serious antitrust investigations around the world. Currently, Google’s business practices are under antitrust investigation by the FTC, DOJ, Texas, California, New York, European Union, and Korea. Enforcement action by the EU is most likely and most imminent, given that: Google’s market share in Europe is 90+%; there are at least nine antitrust complaints against Google pending there; the EU’s monopoly law is tougher than the U.S.; and the EU investigation is approaching the one-year mark.
Third, Google is recklessly inciting further investigation and enforcement given that it already has the ignominious distinction of having the worst antitrust track record of any major public company over the last three years. In 2008, DOJ blocked the Google-Yahoo ad Agreement. In 2009 and 2010 the DOJ twice opposed the Google Book Settlement for trying to establish an ill-gotten monopoly. In 2009, the FTC forced then Google CEO Eric Schmidt off of Apple’s board as an anti-competitive arrangement. In 2010, Google and other companies settled with the DOJ over illegally and anti-competitively colluding to keep competitors from poaching Google’s employees. And in 2011, Google entered into a court-supervised consent decree to mitigate the anti-competitive effects of the ITA acquisition.
In sum, Google is playing with antitrust fire. Just last month, a bipartisan Senate antitrust oversight subcommittee strongly urged Google to recognize that Google’s market dominance carries special responsibility to not act anti-competitively. In this context, Google’s reported efforts to co-opt its leading competitor Yahoo are at best provocative, and at worst a catch-us-if-you-can taunt to law enforcement. Most curious is why private equity firms would consider working with Google to raise capital for a joint bid for Yahoo. Google’s involvement raises their acquisition costs and lowers their potential returns by pumping up the deal price, while also dramatically increasing deal risk and time to close. What are they thinking?
Scott Cleland is President of Precursor LLC, a consultancy serving Fortune 500 clients, some of which are Google competitors; he is also author of Search & Destroy: Why You Can’t Trust Google Inc.