HERB KOHL: Good Afternoon to you all. Our hearing today will examine the consolidation currently under way in the Internet advertising industry, including the planned acquisition of DoubleClick by the Internet giant Google.
HERB KOHL: Advertising on the Internet is a $17 billion business annually, and it's grown by about 30% a year, an amount which will only continue to increase dramatically as more news and entertainment content is delivered over the Internet.
HERB KOHL: With similar acquisitions announced by Microsoft, Yahoo, and AOL, the total value of merger activity in this industry does exceed $30 billion already this year.
HERB KOHL: Much more than Internet advertising is at stake; this consolidation has profound consequences for all those who use the Internet, and for all those who sell products and services on the Internet. The Internet offers consumers an amazing array of information and entertainment choices.
HERB KOHL: Best of all, beyond the fee consumers pay to access the Internet, this incredible wealth of information is available for free. With the companies that bring this content to consumers, recognizable names such as Google,
HERB KOHL: Microsoft, and AOL are not charitable organizations. Advertising is the fuel that drives the Internet. Search companies like Google sell advertisers the right to place advertising on their search result pages; advertising which is highly targeted based on the words used in the consumers' search.
HERB KOHL: Content companies like CNN.com or WashingtonPost.com make money by selling graphics-rich display ads on their websites.
HERB KOHL: These display ads are closely related to the content of the webpage and the demographics of the audience that views the webpage. The leading company placing Internet display ads on behalf of advertisers and on behalf of website owners is DoubleClick.
HERB KOHL: Currently under review at the FTC is Google's planned acquisition of DoubleClick. For literally hundreds of millions of Americans and consumers around the world, the name "Google" is synonymous with a quick,
HERB KOHL: easy, and reliable way to access a wealth of information and entertainment choices. Not even in existence a decade ago, Google has become universally known as the best and fastest way to search the Internet. In harnessing the power of Internet advertising,
HERB KOHL: Google has developed into one of the wealthiest and most profitable corporations in the world, with a current market capitalization of $170 billion in its very short corporate life.
HERB KOHL: Google now seeks to acquire DoubleClick. The acquisition of a leading server of display ads, DoubleClick, by the dominant seller of search-based text ads, Google, obviously warrants close examination by the AntiTrust Regulators at the FTC.
HERB KOHL: Will advertisers and Internet publishers have no choice but to deal with Google, giving Google a strangle hold over Internet advertising and the power to raise ad rates? Once these two companies have joined forces and combined their gigantic information resources,
HERB KOHL: will the barriers to entry for a new entrance into the new marketplace simply be too high? On the other hand, will the likely benefits to the advertising market and consumers by improving the targeting and precision of Internet advertising outweigh the potential damage to competition arising from this merger
HERB KOHL: This merger and the ongoing consolidation in the Internet advertising industry as a whole weighs as equally important issues of consumer privacy. Google collects an enormous amount of information on computer users' search history and Internet preferences.
HERB KOHL: DoubleClick also collects a vast amount of information regarding consumers' Internet preferences. While DoubleClick assures us today that this information is shared with no one other than the advertiser or the website carrying on the advertising,
HERB KOHL: what will happen to this treasure trove of consumer data once Google gains control of DoubleClick? Do consumers need to worry about the security and use of their private personal information as Google continues to grow more powerful
HERB KOHL: Some commentators believe that AntiTrust policymakers should not be concerned with these fundamental issues of privacy and merely be content to limit their review to traditional questions of effects on advertising rates.
HERB KOHL: Respectfully, we disagree. The AntiTrust laws were written more than a century ago out of a concern with the effects of undue concentrations of economic power for our society as a whole, and not just merely their effects on consumers' pocketbooks.
HERB KOHL: No one concerned with AntiTrust policy should stand idly by if industry consolidation jeopardizes a vital privacy interest of our citizens so central to our democracy.
HERB KOHL: So we express that we have not reached a conclusion with respect to any of the vital questions that we will be exploring today. We have an open mind, and we have a need to examine these issues closely as the stakes for our society and the increasingly Internet-based economy are very high.
HERB KOHL: We look forward to the testimony of our distinguished witnesses here today, and before we call on you for your statements, we turn to the ranking member on this committee, the very distinguished Senator Orrin Hatch.
ORRIN HATCH: Well, thank you, Mr. Chairman. We welcome all of you. Committee, I want to thank you for scheduling this important hearing. As always, it's a pleasure to be with you. I'd also like to thank our distinguished panel of witness today and thank them for agreeing to testify.
ORRIN HATCH: I especially want to welcome the committee and thank David Drummond and Brad Smith for appearing before us today; I appreciate all of you doing it. I realized being the General Counsel and Chief Legal Officer of a large corporation is a demanding job and I'm grateful to you both for taking the time to come and testify
ORRIN HATCH: The purpose of this hearing, as with all previous mergers under Senator Kohl's chairmanship, is to properly define the market in question and then discuss how the law applies. In the case of this specific hearing,
ORRIN HATCH: we will also explore the legitimate questions of privacy. My goal for that portion of the hearing will be to have a frank discussion of the facts of the consumers are informed about the products offered by the corporations involved in this merger,
ORRIN HATCH: because I believe many consumers do not fully understand the amount of data being collected about them and how it is used by these businesses. Accordingly, I anticipate that we will touch on a number of topics during this hearing,
ORRIN HATCH: but the fundamental question remains: does the Google-DoubleClick merger violate our nation's AntiTrust laws?
ORRIN HATCH: The first question to be asked, then, is what type of merger is proposed? I ask this question because Google argues, in information provided to the committee, that they are not a competitor of DoubleClick. Now,
ORRIN HATCH: is this been a conglomerate merger where we will explore the legal concepts of reciprocity and entrench law? Is it a vertical merger? Is this a merger between two competitors competing for a portion of the Internet advertising market?
ORRIN HATCH: If this is the case, then the question of market power has to be addressed. Market power has been defined as: "The ability to profitably maintain prices above competitive levels for a set price without a resulting decrease in consumer demand." Google competitors have argued that if the transaction is finalized,
ORRIN HATCH: then, in addition to the 70% of the text-based advertising that Google currently controls, the combined firm will account for nearly 80% of display ads.
ORRIN HATCH: This poses the question: Can any firm, even one with the resources of Microsoft, overcome such a market position? Then there's the question of privacy. I believe that Google's intent is to act in a responsible manner with the information that it collects; however,
ORRIN HATCH: I also believe the American consumer must be made fully aware of the fact that when they use search engines or click on an advertisement, whether it's a text or display ad, there's a strong possibility that personal information is being collected and stored.
ORRIN HATCH: It is then up to the consumer to decide if that consumer wishes to use the services offered by these companies. Now, Mr. Chairman, these are important questions. I look forward to learning the thoughts and conclusions of this august panel of witnesses that you have invited to be with us today.
ORRIN HATCH: Again, I welcome all of you here, and I am going to be extremely interested in this particular hearing. Thank you, Mr. Chairman.
HERB KOHL: Thank you very much, Senator Hatch. We would now like to introduce our distinguished panel of witnesses. The first witness today will be David Drummond. Mr. Drummond is the Senior Vice President for Corporate Development and Chief Legal Officer at Google.
HERB KOHL: In this role, Mr. Drummond works with management teams at Google to evaluate new business opportunities, including alliances and mergers.
HERB KOHL: Our next witness will be 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.
HERB KOHL: He's also serving as Microsoft's Chief Compliance Officer.
HERB KOHL: Following him, we'll have Dr. Thomas Lenard. Dr. Lenard is currently a Senior Fellow at the Progress and Freedom Foundation. He'll be leaving that organization at the end of the week to join a new think tank specializing in high-tech issues.
HERB KOHL: Dr. Lenard has also served the office of Management and Budget, the Federal Trade Commission, and the Counsel on Wage and Price Stability.
HERB KOHL: Following him, we will have Scott Cleland. Mr. Cleland is the founder and president of Precursor, a consulting firm specializing in the technology and telecommunications industries. Before founding Precursor,
HERB KOHL: Mr. Cleland was Senior Policy Advisor for the Secretary of State in the first Bush administration as well as Director of Legislative Affairs for the Department of Treasury.
HERB KOHL: Finally, we'll have Mark Rotenberg. Mr. Rotenberg is the Executive Director of Electronic Privacy Information Center, a public interest research center focusing on protecting privacy and civil liberties. Mr. Rotenberg chairs the ABA Committee on Privacy and Information Protection,
HERB KOHL: and he teaches Privacy Law at Georgetown University Law Center. We thank you all for appearing at the subcommittee hearing today, and now I would ask you all to stand and take the oath. Raise your right hand.
HERB KOHL: Do you affirm that the testimony you are about to give before the committee will be the truth, the whole truth, and nothing but the truth, so help you God?
ALL: We do.
HERB KOHN: Thank you. Mr. Drummond, we'll take your statement.
DAVID DRUMMOND: The online advertising business is complex, but my message to you today is simple: Online advertising benefits consumers, promotes free speech, and helps small businesses succeed. Google's acquisition of DoubleClick will help advance these goals while protecting consumer privacy and enabling greater innovation and greater competition
DAVID DRUMMOND: In our experience, users value our ads, because, like our search results, they connect them to the information, the products, and the services they seek. Our online advertising promotes freer, more vigorous,
DAVID DRUMMOND: more diverse speech. We know that many bloggers and website owners can actually afford to dedicate themselves fulltime to that endeavor because of online advertising. In fact, last year we paid $3.3 billion in advertising revenue to our website partners,
DAVID DRUMMOND: and it's a great satisfaction to us that we were able to help this proliferation of online speech and activity.
DAVID DRUMMOND: Our advertising work also helps small businesses connect with consumers that they otherwise wouldn't be able to reach, and to do so affordably, efficiently, and effectively. Let me give you an example: Allen-Edmonds,
DAVID DRUMMOND: the shoemaker in Wisconsin, is a great example of how this works. Allen-Edmonds has frequently appeared as a sponsored link, or ad, to people searching for terms like "men's dress shoes". Now, according to Allen Edmund's marketing director,
DAVID DRUMMOND: the company's online sales rose 40% in 2005 because of the type of advertising that Google does. Mr. Chairman, there are thousands of other companies throughout America, most of them are very small businesses,
DAVID DRUMMOND: that also advertise with us.
DAVID DRUMMOND: We believe our acquisition of DoubleClick will help us provide even more benefits to consumers, support even more free speech, and help drive the success of even more small businesses throughout the country. By combining our advertising network with DoubleClick's display ad serving products and technology,
DAVID DRUMMOND: and by investing resources in the display ad business, we think we will be able to provide better and more relevant advertising to consumers, and help publishers and advertisers generate more revenue. All of this new economic activity will fuel the creation of a more-rich,
DAVID DRUMMOND: more diverse content on the Internet, which of course benefits consumers and society at large.
DAVID DRUMMOND: Let me address the issue of competition. We're confident that our purchase of DoubleClick does not raise ant-trust issues because of one simple fact: Google and DoubleClick do not compete with each other,
DAVID DRUMMOND: despite what some might be saying. DoubleClick does not buy ads, does not sell ads, does not buy or sell advertising space. What it does do is provide technology tools that enable advertisers and publishers to deliver and manage ads once they have come to terms,
DAVID DRUMMOND: and there are many, many others who do these sorts of things. The simplest way to look at this is by using an analogy: Google is to DoubleClick what Amazon is to FedEx. Amazon sells books; FedEx delivers them.
DAVID DRUMMOND: By analogy, we sell ads; DoubleClick delivers ads: two different businesses.
DAVID DRUMMOND: Our acquisition of DoubleClick does not foreclose other companies from competing in the online advertising space. Recent acquisitions in the space by Microsoft, $6 billion acquisition of aQuantive, which was a competitor of DoubleClick,
DAVID DRUMMOND: acquisitions by Yahoo!, AOL, and others, are strong signals that the market believes this space has a lot of room for growth and a lot of room for competition. Beyond the recent acquisitions, there are thousands of companies that are competing and selling online ad space.
DAVID DRUMMOND: Despite what they're saying here today, Microsoft actually appears to agree with this.
DAVID DRUMMOND: Brian McAndrews, who's the Microsoft Senior Vice President of the Advertiser and Publisher Solutions Group, and before that the CEO of aQuantive, recently commented that the online advertising business is "in the first inning or second inning of a long game here." He goes on to say,
DAVID DRUMMOND: "There's no monopoly on innovation. I don't think you're going to see two or three big players and then game over. There will continue to be a broad range of companies." We certainly agree with that.
DAVID DRUMMOND: If it were one stray comment in an unguarded moment by a Microsoft executive, it would be one thing, but we've compiled a lengthy list of similar statements from Microsoft senior executives, all made after the announcement of the DoubleClick transaction and after the aQuantive transaction,
DAVID DRUMMOND: and they completely contradict what Microsoft's saying here today.
DAVID DRUMMOND: It seems that the only place that Microsoft is making these arguments about fear of declining competition in the online space is here, in Washington. I'd be happy to discuss this list of quotes during Q and A,
DAVID DRUMMOND: or to submit it following the hearing with your permission.
DAVID DRUMMOND: My final point today is that Google will continue to protect its users' privacy. For us, privacy does not begin or end with our purchase of DoubleClick. Privacy is a user interest that we've been protecting since our inception,
DAVID DRUMMOND: and we'll continue to innovate in this area. We spent a lot of time designing our products on the principles of transparency and choice: transparency about what information we collect and how we use it,
DAVID DRUMMOND: and user choice about whether to provide us with any personal information at all. We were the first leading internet company to decide to anonymize IP addresses and server logs after 18 months. Most of our products allow people to use them anonymously,
DAVID DRUMMOND: and do not use any personally identifiable data unless we fully disclose that use in our Privacy Policy.
DAVID DRUMMOND: We support Federal Privacy legislation and the development of global privacy standards that can help build consumer trust and confidence in the Internet. We will also participate in the FTC's upcoming town hall on privacy and online advertising,
DAVID DRUMMOND: which we think is a great vehicle for further examination of this subject. We'll continue to innovate in this area.
DAVID DRUMMOND: Looking ahead, we're approaching our entry into the ad serving business with a fresh eye. Here are some examples of the privacy protections and innovations we're working on in third-party or this ad serving business.
DAVID DRUMMOND: We'll be including an opt-out mechanism so that people can choose not to have an advertising cookie placed on their computer. Our industry-leading decision to anonymize logs data after 18 months will also cover any log data generated in our ad serving programs that we're testing now.
DAVID DRUMMOND: We're exploring the use of what we're calling "crumbled cookies" so that user data isn't stored just in one cookie, which I know concerns some people. We're working on better forms of notice within ads so users can better understand who's behind the ads that they see
DAVID DRUMMOND: Now, some of these ideas are experiments, and like all experiments, they may or may not work out, but we're excited to start innovating in this area for our advertising customers and for our users to deliver better ads for the
DAVID DRUMMOND: As I conclude my testimony, it seems like a lot of activity, and you may wonder why we focus on it. For one reason, protecting privacy is really part of the Google culture. It's also a priority because our business simply depends on it; if our users don't trust us with the way we manage their information,
DAVID DRUMMOND: they simply won't use us, and they're one click away from switching to any other competing product.
DAVID DRUMMOND: I appreciate the opportunity to discuss these issues with you and in the question session. Thank you for allowing me to testify.
HERB KOHL: Thank you, Mr. Drummond. Mr. Smith?
BRAD SMITH: Thank you, Mr. Chairman, for the opportunity to provide Microsoft's perspective on these important issues this afternoon. We believe that the future of the Internet will be decided by developments in online advertising.
BRAD SMITH: As you noted, Mr. Chairman, online advertising is rapidly emerging as the fuel that powers the Internet and drives the digital economy. We estimate that online advertising is already a $27 billion business,
BRAD SMITH: and it's projected to double to $54 billion in the next four years alone. To put that into perspective, that will be roughly the same size as the television and radio industries in this country today, combined.
BRAD SMITH: These changes, as you noted, Mr. Chairman, are not only of tremendous economic importance, they have serious societal implications as well. Online ads increasingly provide the economic foundation for free press and for political life,
BRAD SMITH: more broadly. Now, I will be the first to admit that Microsoft is not disinterested when it comes to this issue; competitors never are. But I do think we're in a good position to identify the right questions; we know this market well.
BRAD SMITH: It is absolutely clear to us that this merger raises serious questions that deserve serious answers.
BRAD SMITH: I'd like to address two questions myself, very briefly. The first one is this: What are the economic implications of allowing the largest Internet company in online advertising to acquire its most significant competitor?
BRAD SMITH: There are millions of websites on the Internet, and many, many advertisers, as David notes. There are actually a very small and declining number of intermediaries; intermediaries that provide the tools and services that connect advertisers and website publishers together
BRAD SMITH: These intermediaries play a gateway or middleman role, if you will, much like the natural gas pipelines that connect refineries to distributors, and ultimately, to consumers in their homes. If you're a website operator and you want to sell ad space on your site,
BRAD SMITH: or if you're an advertiser and you want to display your ads, you have to work with and through one of these intermediaries. Already, Google is the dominant company for one of the two main types of online advertising: search online ads.
BRAD SMITH: Roughly 70% of global spending on search-based advertising today flows through Google's Adword service. If Google is allowed to proceed with this merger, it will also obtain a dominant gateway position over the other main type of online advertising: non-search ads,
BRAD SMITH: the non-search ads that are displayed on websites that we visit.
BRAD SMITH: Today, Google and DoubleClick are the two largest competitors in this area. As I hope we will discuss more, they are competitors in this area, and yet combined, Google will account for nearly 80% of all spending on non-search ads served to third-party websites.
BRAD SMITH: In short, if Google and DoubleClick are allowed to merge, Google will become the overwhelmingly dominant pipeline for all forms of online advertising. This merger will undoubtedly result in higher profits for the operator of the dominant advertising pipeline.
BRAD SMITH: We believe that will be bad for everyone else. It will be bad for publishers, it will be bad for advertisers, and most importantly, it will be bad for consumers.
BRAD SMITH: This leads to the second question I'd like to address: What are the AntiTrust and privacy implications of giving a single company sole control over the largest database of user information the world has ever known?
BRAD SMITH: Online ads are typically served based on user information, user data. As consumers, we give up this data, often without knowing it, in exchange for access to free content and services. Today it's generally believed that Google and DoubleClick have amassed the two largest databases of online user data in the world.
BRAD SMITH: This country doesn't permit the phone company to listen to what we say and use that information to target ads. The computer industry doesn't permit a software company to record everything we type and use that information to target ads.
BRAD SMITH: Yet, with this merger, Google seeks to record nearly everything you see and do on the Internet and use that information to target ads. One question is whether this merger will create a whole new meaning to the term "being Googled".
BRAD SMITH: These privacy issues, in fact, have AntiTrust consequences, given the nature and economics of online advertising. This concentration of user information means that no other company will be able to serve as profitably.
BRAD SMITH: In short, it will substantially reduce the ability of other companies to compete. I appreciate that the technology and business models are new and dynamic, and I fully agree that the Internet is continuing to change very rapidly.
BRAD SMITH: Yet, amidst constant change, it is worth bearing in mind that one rule of the road has remained constant in the 117 years since the Sherman Act was adopted: we're all encouraged to work hard, we're all encouraged to earn our way to success,
BRAD SMITH: but no one is permitted to buy a dominant position by acquiring its single largest competitor. That principle has served this country well through generations of new industries and technologies. The question for this congress,
BRAD SMITH: indeed for the Federal Trade Commission, is whether we want to abandon this principle now. Thank you very much, Mr. Chairman. I look forward to answering your questions.
HERB KOHL: Thank you very much, Mr. Smith. Mr. Lenard?
THOMAS LENARD: Thank you, Mr. Chairman. Thank you very much for the opportunity to present my views on the important competition and privacy issues raised by the Google-DoubleClick merger. Although I haven't done the detailed economic analysis that's often part of a merger review,
THOMAS LENARD: from what I do know, I don't believe that this acquisition threatens to be anticompetitive or harmful to consumers' privacy. I do think, however, the government interference with this evolving market,
THOMAS LENARD: which is still very much in its infancy, could be quite harmful to consumers.
THOMAS LENARD: Google's purchase of DoubleClick is part of a spate of recent acquisitions in online advertising, where companies are adding new capabilities in order to better serve their customers and to better compete with each other.
THOMAS LENARD: The FTC is doing a careful review of the Google deal, as it should, but these reviews are much more difficult when the markets are changing rapidly, as they clearly are here.
THOMAS LENARD: In many ways, Google epitomizes the digital revolution. As you indicated in your opening remarks, Google's business model was difficult to envision just a few years ago, an illustration of the fact that the digital revolution is not just a technological revolution but is also very much a revolution in the design of business models and in the evolution of markets.
THOMAS LENARD: When technologies and markets are changing rapidly, it is much more difficult to avoid policy mistakes. Policy makers should do everything possible to create an environment in which both the Google's and the DoubleClick's of the future can emerge and thrive
THOMAS LENARD: For many entrepreneurial ventures, acquisition by another company is a major way to generate capital and pay off early investors. The most likely acquirers are larger firms in the same or related sectors. And it would not go unnoticed by early investors if AntiTrust enforcement were to make it more difficult for the ventures in which they invest to be acquired.
THOMAS LENARD: Such a policy would raise the hurdle for investment in these firms with potentially adverse effects on innovation in this critically important sector of our economy.
THOMAS LENARD: Opposition to the Google acquisition is focused on two arguments, both of which I think are flawed. The first argument is the standard AntiTrust claim that both Google and DoubleClick have a large share of the activities that they undertake,
THOMAS LENARD: so a merger would create market power problems. I believe these firms are engaged in different activities, and so even if we believed that Internet advertising was a market in AntiTrust terms, which is debatable,
THOMAS LENARD: since it still comprises about 5% of all advertising, the firms will not gain market power from this merger because they don't have business in common.
THOMAS LENARD: The second argument concerns privacy. Privacy advocates allege that Google's and DoubleClick's conduct "has injured consumers by invading their privacy" but there's no evidence to support any assertions that consumers have been harmed or would be harmed.
THOMAS LENARD: The great appeal of the Internet as an advertising medium is the ability to target ads to consumers much more precisely than can be done through other media. Using information from a variety of sources,
THOMAS LENARD: including sometimes the past history of Internet browsing, Internet advertisers can develop an understanding of consumers' interests, deliver ads that are most useful to them, and avoid delivering those that are of less interest
THOMAS LENARD: More information can facilitate more precise targeting, and all of this serves consumers well. In addition, the revenues from online advertising support a variety of valuable services provided to consumers at no charge by companies represented here as well as many others,
THOMAS LENARD: such as search services, free email, and content that is customized to the individual. Internet advertising firms also provide customized advertising to smaller websites that use the revenues to support themselves.
THOMAS LENARD: In my view, AntiTrust and privacy are really separate issues, but some people have tried to connect the issue by arguing that the aggregation of data serves as a barrier to entry. The argument seems to be that the aggregation of data would enable Google to provide a better service and do so more efficiently and therefore would be more difficult to compete against the company.
THOMAS LENARD: Whether or not that's true, we need to approach such arguments with great caution, because they go to the heart of what we want our competitive economy to do, which is provide consumers with better goods and services at lower costs
THOMAS LENARD: The worst thing AntiTrust enforcers, or any other policy makers, could do is to implement policies that prevent companies from getting too good at what they do, because it makes it harder to compete against. That might be helpful to some competitors,
THOMAS LENARD: but the goal of the AntiTrust laws is to help consumers and not competitors. Thank you.
HERB KOHL: Thank you, Mr. Lenard. Mr. Cleland?
SCOTT CLELAND: Mr. Chairman, thank you for the opportunity and honor to testify. I'm Scott Cleland, President of Precursor LLC. The views expressed by me in this testimony are mine alone and are not the views of any of my clients.
SCOTT CLELAND: The online advertising market is rapidly consolidating and becoming highly concentrated. Yahoo! has bought Right Media, Microsoft's bought aQuantive, Google's bought YouTube, Abjucate Media, DoubleClick,
SCOTT CLELAND: Veeper, and others. I have done the in-depth work on this, on the facts of the case, and of all the recent mergers, I believe that Google-DoubleClick is uniquely anticompetitive and really represents a watershed moment for Internet competition.
SCOTT CLELAND: I think it's clearly one of the most far-reaching, least-understood, and most important mergers this subcommittee will ever review.
SCOTT CLELAND: The biggest challenge here, Mr. Chairman, is to see the forest for the trees. Online advertising is the only proven business model for monetizing Internet content. Consequently, and also, the Internet is the ultimate network of networks,
SCOTT CLELAND: so in AntiTrust terms, it also creates the ultimate network effect of network effects. Essentially, the network effect is a positive feedback loop where the leader extends one's lead. In a nutshell, this merger creates an exponential network effect in that the merger expands Google's network of viewers,
SCOTT CLELAND: advertisers, website publishers, and data. Now the biggest risk for Congress and the FTC is missing the critical importance of the essence of online advertising. That essence is the exceptional interconnectedness and interrelated segments,
SCOTT CLELAND: networks, people, products, services, and technology; they are all webbed together.
SCOTT CLELAND: The traditional concept in AntiTrust wants to have separate markets. I would argue "be careful here" because arguably, separate markets are the least applicable and most artificial and contrived when they are applied to an Internet business.
SCOTT CLELAND: I know others have said, "We are separate markets; we don't compete." Be very wary when they say they're separate when they're heavily interrelated by the same viewers, the same advertisers, the same websites,
SCOTT CLELAND: and the same core data. The analogy I would like to use is if I'm to argue that search and display are separate markets and don't compete, it's like saying your eyes and your ears don't compete for the brain's attention.
SCOTT CLELAND: It makes no sense; of course they compete.
SCOTT CLELAND: This merger should also concern you, Mr. Chairman, because every politician understands that information is power. Google openly aspires to be the world's most powerful information broker. Listen to Google's own uniquely monopolistic public vision in its well-known vision statement: "To organize the world's information and make it universally accessible and useful." No other entity in the world currently has such a naked ambition to control and effectively corner any world commodity,
SCOTT CLELAND: let alone the world's information, both public and private, and have the wherewithal, infrastructure, technology, capacity, expertise, and acquisitions to actually pull it off.
SCOTT CLELAND: What I ask to you is: what checks and balances would exist to Google-DoubleClick's web of market power over the world's information? The combined Google-DoubleClick merger would have little accountability to consumers,
SCOTT CLELAND: to competition, to regulators, or even third-party oversight. So what's my recommendation? Oppose the merger. This is not a hard AntiTrust call in my opinion. In my 15 years' of relevant experience,
SCOTT CLELAND: I have never seen a merger that facilitates such extreme global concentration, both horizontally and vertically simultaneously, generates more powerful and cumulative network effects of increasing barriers of entry,
SCOTT CLELAND: tips so many sub-segments to substantially less competition: let's talk search, text ad serving, contextual ad serving, graphic display ad serving, rich media video ad serving, consumer behavior data, ad publishing analytical tools,
SCOTT CLELAND: cross-market performance analytics, ad brokering, and ad exchanges- I've never seen anything like this. I've never seen anything that accelerates a dominating platform effect so quickly and so completely where dominance in one segment can be cross-leveraged to dominate related segments.
SCOTT CLELAND: Finally, I've never seen anything that forecloses more actual and potential competition. Another thing: conditions won't work here. It would prove futile, it would prove counterproductive, and I would actually think it would result in the worst of all scenarios,
SCOTT CLELAND: which would be a slippery slope towards Internet regulation. Why should you oppose this merger? Very simply, bottom line: if a business wants its content to succeed on the Internet, it would have no choice but to use the Google-DoubleClick-YouTube online advertising platform: no real competitive choice.
SCOTT CLELAND: Now, I've said a lot of things in my short remarks here. I do have six charts that, if it pleases the Chairman in Q and A, I can go into in-depth and explain the Internet choice paradox, the extreme concentration,
SCOTT CLELAND: the extreme media concentration, the tipping point that this creates, the bottleneck that this creates, and lastly, the extreme market power it creates. Thank you, Mr. Chairman.
HERB KOHL: Thank you, Mr. Cleland. Mr. Rotenberg?
MARC ROTENBERG: Mr. Chairman, thank you very much for the opportunity to testify today, and particularly for considering the privacy implications of the Google-DoubleClick merger. There's no question that the merger has enormous economic consequences for the two companies and its partners,
MARC ROTENBERG: but I think the greatest consequences will be felt by Internet users around the world whose privacy interests will be clearly implicated by whatever outcome we see. My organization has played a significant role at the Federal Trade Commission over many years,
MARC ROTENBERG: trying to establish strong privacy safeguards for consumers and for Internet users. What I'd like to do this afternoon is briefly summarize some of the key cases that we've been involved with as a basis for the reason that we challenged the Google-DoubleClick merger.
MARC ROTENBERG: I think it will help explain the significance of the merger, the privacy interests at stake, and also the FTC's authority to act. I'd like to begin by describing for you the fact that we challenged a similar merger in the late 1990s when DoubleClick sought to acquire a company called Abacus.
MARC ROTENBERG: At that time, DoubleClick was the Internet's leading advertiser, and we were very impressed by the company. They made a point of saying that they did not collect user identified information; that it wasn't necessary to make online advertising work,
MARC ROTENBERG: and they represented in their privacy policy, as well as in the privacy policies of all their partners, that there was no collection of personal information taking place. It was on this basis that many people accepted the DoubleClick business model.
MARC ROTENBERG: It therefore came as a surprise to us when we learned that DoubleClick proposed to acquire a database marketing firm called Abacus, which had large profiles on American consumers. DoubleClick proposed to merge the anonymous Internet profiles with the detailed customer profiles contained in the Abacus database.
MARC ROTENBERG: We filed a complaint to the Federal Trade Commission; we alleged that the company had engaged in an unfair, deceptive trade practice. It was the first time, in fact, that the Section 5 authority of the Commission had been invoked in the context of consumer privacy.
MARC ROTENBERG: The Commission undertook an investigation; there was a modest settlement reached. DoubleClick agreed to abide by certain privacy principles. Frankly, we were very happy at the time, but it was significant that it demonstrated that the Commission could act on privacy matters
MARC ROTENBERG: The second case which I will tell you about, which, I think is, in some respects, even more interesting, involves a complaint we brought to the Commission in 2001 regarding Microsoft. Microsoft's identity management system passport proposed a single sign-on for the Internet that would essentially become the gateway for access to Internet content.
MARC ROTENBERG: We said that the privacy and security issues implicit in the passport proposal were substantial and implicated the privacy rights of Internet issues. The Commission undertook an investigation and ultimately issued a consent order,
MARC ROTENBERG: which Microsoft agreed to, and Microsoft, since the time of that case, has been bound by significant privacy obligations because of the concerns about the passport system, even though it wasn't necessary for the Commission to find in that case actual harm
MARC ROTENBERG: I'll mention briefly, we also brought the Choice Point case to the Commission; that involved a large data broker that engaged in lax business practices. The Commission found in our favor and ultimately issued a $15 million judgment,
MARC ROTENBERG: the largest judgment in the Commission's history.
MARC ROTENBERG: When we decided earlier this year to file our complaint to the Federal Trade Commission along with the Center for Digital Democracy and the US Public and Trust Research Group, it was based on our familiarity with the FTC's authority to act under Section 5; it was based on our concern about the privacy interest that would be implicated in this merger,
MARC ROTENBERG: and it was based on the information that we were able to obtain about Google and DoubleClick's business practices. Since the filing of our complaint, nothing has happened that has led us to a different conclusion.
MARC ROTENBERG: In fact, all of the information that has been revealed since April indicates that there are greater data collection practices planned than were originally proposed and that our instincts about the privacy interests implicated in the deal is something that others who look at these matters also share
MARC ROTENBERG: For example, after the filing of our complaint, the Consumer Protection Board in New York State wrote to the Federal Trade Commission and expressed support for what EPIC said, and said the deal should be blocked.
MARC ROTENBERG: We learned that the FTC itself had issued a second request in this merger review, which we know from the Chairman's own analysis, indicates a strong presumption that the deal will either be blocked or modified.
MARC ROTENBERG: Now we are seeing regulatory authorities around the world, the European Commission, Australia, and Canada, moving to undertake investigations of the privacy implications of this deal. Simply stated, it is our view that unless the Federal Trade Commission imposes substantial privacy safeguards,
MARC ROTENBERG: by means of a consent order, this merger should not go forward. The privacy interests are simply too great; the safeguards are not there. This is going to be a real problem for the Internet if it's allowed to stand.
MARC ROTENBERG: Thank you, Mr. Chairman.
HERB KOHL: Thank you very much. Mr. Cleland, Google argues that DoubleClick does not really compete with Google with respect to Internet advertising. Google further argues that while Google actually sells the ads appearing on its search results pages,
HERB KOHL: DoubleClick does not sell any advertising; it just provides the technology to place ads for advertisers on websites. Doesn't Google have a point, Mr. Cleland, and if so, how could this merger harm competition or lead to higher rates
SCOTT CLELAND: They certainly do compete. Basically, what we're talking about is how ads get served to a screen. Google serves those screens as text ads in the search bar and those contextual ads. DoubleClick serves them in display,
SCOTT CLELAND: which is a banner ad or in video. Now, those are the exact same function in technology that is going that serves ones and zeros from different companies through a network and has them appear in different formats on the screen that you see.
SCOTT CLELAND: They are doing exactly the same thing, and they compete for the same ad dollars. As I've said before, they have the same audience, they have the same set advertisers they work with, they have the same websites they work with,
SCOTT CLELAND: and they have basically similar data.
SCOTT CLELAND: The analogy is a very powerful one; what I'm trying to say here is these are interrelated markets. It's like trying to say that since my eye and my ear are separate body parts, they don't have any interaction with my brain,
SCOTT CLELAND: and they don't compete with my brain for information. Of course, I may hear something, I may see something, we both know that you can see and hear completely different things, and the brain must sort out which is superior.
SCOTT CLELAND: It's classic; what we're talking about is Google is going to create a brain where it controls all the major networks. Let's look at each one of these segments that I keep repeating. It would take the Internet viewing audience from 65% to about 90%.
SCOTT CLELAND: It would take the 90% of Google's share according to William Blair, of the advertiser community, and add on 1500 of the top global customers that DoubleClick has, hundreds that Google doesn't have.
SCOTT CLELAND: Then, if we talk about websites, Google has about a million websites and it would add 17 of the top 20 from DoubleClick. As other witnesses have described, the two biggest online databases of consumer behavior would be added to,
SCOTT CLELAND: by far, what would be the world's largest. What I see here, to argue that they're separate markets is preposterous. It is artificial, superficial, and basically arbitrary distinction.
SCOTT CLELAND: Also, this whole time, Google explains and represents themselves as working for consumers. Consumers don't pay Google a dime. Generally, we would think, that the people who pay are the ones that you work for.
SCOTT CLELAND: Google says that they're just one click away from losing a customer; that isn't a customer. It is a user, and that user pays their privacy in order to use search. I don't buy Google's argument- they are competitors.
HERB KOHL: Mr. Drummond, in a minute, I'm going to give you and perhaps you, Mr. Lenard, a chance to respond. Just to add on a little bit, Brad Smith, you said that DoubleClick is the most significant and the largest competitor to Google
BRAD SMITH: Yes, absolutely, and we believe that.
HERB KOHL: You want to amplify that a little bit? Because...
BRAD SMITH: Sure.
HERB KOHL: Mr. Drummond does not think that's true at all; Mr. Lenard doesn't think that's true at all.
BRAD SMITH: I disagree with the premise, in the first instance, that Google is only in the business of selling ads and not in the business of delivering them or serving them. I just went to Google's website myself at lunchtime today,
BRAD SMITH: and this is all about their Adsense network. If you go to google.com/adsense, the first thing you're going to see is this: it says "Adsense for content automatically crawls the content of your pages and delivers ads.
BRAD SMITH: You can choose both text or image ads." You can see this not only on Google's site; you can see it on a number of other sites. I'll show you a chart of a website that we took a snapshot of the day before yesterday,
BRAD SMITH: a popular social networking site called friendster.com. You can see on this page, on the right, two ads. The top ad is delivered by DoubleClick, and the ad directly below it is delivered by Google's Adsense network.
BRAD SMITH: To the best of our knowledge, if you buy an ad through Adsense, it may sometimes be delivered by DoubleClick, but it's also sometimes delivered by Google Adsense directly itself. What's more, if you look at what DoubleClick was doing before this merger and what Google was doing before this merger,
BRAD SMITH: they were each building out off the pieces in the pipeline, the piece that connects with publishers, the piece that connects with advertisers, and this electronic exchange in the middle. So, I'm not persuaded myself by Google's analogy.
BRAD SMITH: I think a better analogy is this: Google is already Amazon, it's already FedEx. Now they're proposing to buy the post office. I think, if that happened, not only Barnes and Noble, but every book buyer in the country would have a real problem
HERB KOHL: Mr. Drummond, would you like to take those two arguments and rip it to shreds, please?
DAVID DRUMMOND: Sure, I'll give it my best shot, but first I have to express a little bewilderment. I keep hearing that DoubleClick is our single largest competitor over and over again. When I hear single largest-- I showed up at a hearing about a DoubleClick transaction,
DAVID DRUMMOND: and it appears to be a hearing about our acquisition of Microsoft. There's a lot of rhetoric being thrown around here, but we've got to be clear, and I can even use Brad's prop here to make the point. We are very different than DoubleClick.
DAVID DRUMMOND: We've never sat around a board room and talked about our competition with DoubleClick. It is a very different business. We sell ads, largely search ads; we don't actually participate in this display ad segment very much.
DAVID DRUMMOND: We very much would like to, and that's part of the reason we purchased DoubleClick, because of their tools. DoubleClick does not sell any ads. When you see an ad from DoubleClick, all they do is deliver it.
DAVID DRUMMOND: The buyer of the ad, the seller of the ad, have already gotten together and done the deal together; DoubleClick has nothing to do with that. All they do is deliver the ad.
DAVID DRUMMOND: Conversely, we don't sell any ad serving products. Yes, we have our own fleet of trucks, but we don't offer any truck delivery services to anyone else. These comparisons are quite specious. They're very different markets,
DAVID DRUMMOND: and they simply don't overlap. This notion that DoubleClick's our biggest competitor seems strange in light of the total revenues that DoubleClick generated in their ad serving tools business, about $143 million dollars in revenue last year in North America.
DAVID DRUMMOND: That hardly seems like the kind of business compared to Google, compared to Microsoft, compared to others, that would serve as our biggest competitor.
DAVID DRUMMOND: I think you need to think about it a little differently. What seems to be being said here is that because the DoubleClick tools are used by some sellers of ads and some buyers of ads, therefore DoubleClick controls and dominates this market; that's not true.
DAVID DRUMMOND: It's no more true than a company that delivers trucks from say, the docks to the dealer controls the car or truck market; it doesn't. It's an enabler, and that's all. So I think we need to be a little bit more precise with what we're talking about here
DAVID DRUMMOND: I also wanted to address this database notion that's being tossed about. The information that DoubleClick has is standard web information, not personally identifiable information, that all web companies,
DAVID DRUMMOND: including Microsoft and others, have and collect. It's a very standard thing. DoubleClick cannot use that data for anything else, and this data is not a unique situation that gives Google some leg-up. Obviously,
DAVID DRUMMOND: lots of companies are in this space and are competing in this space. Microsoft just acquired aQuantive, which does all the same things; they are now saying that aQuantive is the leading ad serving company,
DAVID DRUMMOND: bigger than DoubleClick, so it's somewhat surprising to hear them saying now that DoubleClick has this vast trove that is greater than any other data that anyone else has. DoubleClick can't do, by contract,
DAVID DRUMMOND: with its customers. It can't do all these things with this data, so it's just not something that we need to worry about.
DAVID DRUMMOND: I do need to say that I'm not saying this to say that this isn't something that we should be looking at in terms of data that ad companies have, and we're going to participate in the FTC town hall on this issue.
DAVID DRUMMOND: We believe that that's the right way to go, rather than attempting to make this a single-company issue, which it clearly is not. Let's unpack this notion of Google having the biggest database or having this treasure trove of information.
DAVID DRUMMOND: Microsoft already has what it claims as the biggest ad serving company. It is, with the acquisition of aQuantive, in addition, the largest purchaser of online ads. It has a decimation site with hundreds of millions of users; email with 280 million or so users,
DAVID DRUMMOND: $1 billion or so in revenue from display advertising, compared to Google's small amount, and this is not even talking about any other products that Microsoft has. I think they have a lot more information than Google has.
DAVID DRUMMOND: Quite frankly, they've announced many new initiatives with behavioral targeting and the like, so I think what we need to do here is put things a little bit more in perspective and look at the facts. Thanks.
HERB KOHL: Senator Schumer from New York has joined us, and I'd like to call upon him for remarks and questions.
CHARLES SCHUMER: Thank you, Mr. Chairman. First, I want to thank you for holding these hearings. You're always right there when there are issues that are important in AntiTrust and other related areas,
CHARLES SCHUMER: so I thank you for holding the hearing, because given the high-stakes and important issues on all sides, it's appropriate to look at the AntiTrust and other implications of mergers in this sector. I am concerned about consumer privacy as these companies,
CHARLES SCHUMER: who hold vast amounts of information, do consider merging. And of course, Mr. Chairman, it's been amazing to watch computer technology develop. It wasn't long ago when nobody had personal computers. I remember,
CHARLES SCHUMER: in college, I learned about computers and we had all these punch cards and it took days to write a program and more days to punch in the cards, and then didn't work. These big, huge machines like you used to see in the movies in the 60s
CHARLES SCHUMER: Now, of course, we can almost hold them in the palm of our hand. Of course, each of these new innovations brings new challenges. They're all to the good, but they're all challenges. One of these is the complicated but interesting issue of online advertising that brings us here today.
CHARLES SCHUMER: We can't ignore the fact that an increasing portion of the advertising dollar around the world is going to online advertising. Text or picture ads that show up every time we do a search or go on an ISP like AOL or Google.
CHARLES SCHUMER: The companies at issue here are some of the largest and most profitable in America. It is my sincere hope that as they continue to grow, they will use their expansions for the good of consumers.
CHARLES SCHUMER: I want to make sure that three things are addressed in the online advertising deals, particularly this one that has relevance in New York: first, AntiTrust laws, as you are carefully watching over, Mr. Chairman; second,
CHARLES SCHUMER: privacy; and third, jobs in New York. On the AntiTrust side, there are certainly questions about what impact a merger such as this will have on the advertising market. Those questions should be answered by this committee,
CHARLES SCHUMER: Justice Department, and FTC as they review this merger. In addition, I have some concerns on the privacy side. As the Internet expands, the amount collected about our personal life grows. Some of it's collected to better target ads to each of us
CHARLES SCHUMER: So because of my concerns, I met with the Google CEO, Dr. Eric Schmidt. I asked for a specific commitment from Google, that it will protect privacy following the merger, given the increased abilities and powers that they have.
CHARLES SCHUMER: At this time, Mr. Chairman, I'd like to place into the record, a copy of the letter from Dr. Schmidt to me that lists some of the steps Google tells me that it will take to protect privacy.
HERB KOHL: No objection.
CHARLES SCHUMER: Thank you, Mr. Chairman. Google's looking for ways to provide users with better forms of notice to help users understand what's behind the ads they see. Google's looking into "an opt-out" mechanism in the future so that individuals can choose not to have cookies placed on their computers,
CHARLES SCHUMER: and it's also experimenting with new privacy protection features. For instance, they're looking into the idea of using "crumbled cookies", so that the user data isn't stored in any one single place. Mr. Chairman,
CHARLES SCHUMER: these steps, I think, are important measures toward addressing my privacy concerns, and I thank Google and Dr. Schmidt for doing them. I'm hopeful that Google will take these steps as a heart of this merger and part of an ongoing effort to protect privacy,
CHARLES SCHUMER: because that's what's going to make customers happy, so it's in your interest and everyone's interest.
CHARLES SCHUMER: Google's also talked to me, Dr. Schmidt has, about commitments of jobs in New York. Obviously, DoubleClick is a New York company. Google has hundreds and hundreds of their top researchers in New York,
CHARLES SCHUMER: a lot of them, I think, at 111 Eighth Avenue. It's one of our high-tech buildings, and we're very interested in growing a high-tech industry in New York, as best we can, and Dr. Schmidt has assured me,
CHARLES SCHUMER: as a net effect of the merger, the number of jobs is going to grow in New York, which matters a great deal to me as well. These commitments are significant and meaningful. I thank Google for responding to my requests in this way,
CHARLES SCHUMER: and Mr. Chairman, I thank you for having the hearing and thank the witnesses for coming.
HERB KOHL: Thank you very much, Senator Schumer. Mr. Cleland, most analysts agree that as a result of all these Internet advertising deals and the Google-DoubleClick merger in particular, advertising will become more targeting to a customer's interests and therefore,
HERB KOHL: more efficient. Customers will get ads for products that they're more interested in, advertisers will get access to people more interested in their products, and websites will be able to sell their ad space at the best possible prices.
HERB KOHL: Now, wouldn't you say that's a good result for consumers, for the economy as a whole?
SCOTT CLELAND: I think what this does is it brings to mind the Internet content paradox- if you could put up the first slide here. What I really want to do here is- I think there's a lot of misdirection that's going on,
SCOTT CLELAND: of trying to have people talk about- the point I'm making here is that Google represents itself as working for consumers and gets everybody to focus on the consumer side; that's a smart thing for it to do.
SCOTT CLELAND: It's not on the business, it's not being paid by consumers, not one dime; it serves advertisers. What I'd like to do is to get people to understand that the consumer side had many choices, free access to reach any content,
SCOTT CLELAND: but on the business side, there's very little choice; there's a bottleneck for that access. How I would answer your question is, when you talk about consumers, that's where they'd like to take this. But,
SCOTT CLELAND: this is an AntiTrust hearing; this is about competition. This is talking about where's the competition. They say they're one click away from somebody using another search engine. They didn't get paid dime one by that user that's leaving them.
SCOTT CLELAND: Now, on the other side, they'd be worried about losing a big competitor. What's going on with Facebook right now? There's a fight between Google and Microsoft over who's going to get access to that traffic,
SCOTT CLELAND: that large website. That's where the action is: it's on the business side. All this talk about the consumer side in an online advertising model where consumers don't pay for the service, I consider a huge misdirection,
SCOTT CLELAND: and that's why I've put this together on the slide. Focus, people: competition issues are on the right side on the bottleneck access to online advertising. Does that answer your question?
HERB KOHL: Somewhat. [laughter] Mr. Drummond, after Google's deal to acquire DoubleClick was announced, Google Deputy Council Nicole Wong stated that Google hopes to "integrate the two companyies' non-personally identifiable data" in order to provide "better and more relevant ads for consumers".
HERB KOHL: This makes perfect sense: as you gain more and more information about consumers, you'll be able to do a better job of targeting ads. Both Google and DoubleClick collect a huge amount of information on consumer preferences,
HERB KOHL: including what websites they search and what advertising they view online. Could any new entrant, without such access to consumer information, possibly be able to compete with the combined Google/DoubleClick? Doesn't a tremendous amount of information that will be held by the combined Google/DoubleClick after the merger constitute a barrier to entry to any new rival entering this market a huge barrier to entry and isn't it,
HERB KOHL: in fact, one of the goals that you wish to achieve?
DAVID DRUMMOND: Let me address that. No, that's not true. We don't have any unique or stranglehold on all the information out on the Internet for online advertising purposes. There are other competitors in this space; aQuantive is a big competitor with DoubleClick,
DAVID DRUMMOND: as the same kind of data. There are ample ways for others to come into this market. Again, if you look at the data that...
HERB KOHL: Just want to be sure that we...
HERB KOHL: Isn't it true that one of the offshoots of this merger is that it will make you a much stronger player in that whole field?
DAVID DRUMMOND: Sure.
DAVID DRUMMOND: Well, we hope that it will help make us a much stronger in a field that we've actually been fairly weak in, and that's in display advertising. You know, one of the things that we actually hear from customers is that they'd like all of us to offer more integrated solutions that have an Ad serving component,
DAVID DRUMMOND: the ad placement components, as well as selling the ads. Now Microsoft, Yahoo!, and AOL are all going down the same path, and it's really in response to customer demand, and that's why you're seeing a lot of these transactions in the marketplace.
DAVID DRUMMOND: So, yes, we definitely want to be a stronger competitor in display advertising where there's enormous competition. There are some incumbent larger players such as MSN, AOL, Yahoo!; we're not one of them,
DAVID DRUMMOND: but there's a lot of competition in that space. Thousands of sites that are selling advertising space, so we think it's a great space. All of the companies are moving forward with ideas about better targeting to create better ads.
DAVID DRUMMOND: Yes, that uses some of the data that is created in the process, but I have to tell you that when people come in here and say that DoubleClick is the only place that has this data, it's just not true. aQuantive has this data,
DAVID DRUMMOND: lots of other folks involved in ad serving have this data, so this is not a barrier to entry issue.
HERB KOHL: Mr. Cleland.
SCOTT CLELAND: Can I reply to that? Could you pull up the chart that says "Tipping Point"? Let's look at the world from a competitor's standpoint and look at what this does. What do people want when they buy advertising?
SCOTT CLELAND: They want an audience. They will pay a larger amount if they have a larger audience. In this instance, Google's 65% of Internet viewer's share, they would get 25% of the share that they don't have, up to about 90% according to my estimates,
SCOTT CLELAND: and if you are a website, what do you want? You want to have access to lots of advertisers, and you're willing to pay for that and that's what you seek. With that 90% share of the advertisers and this is going to give them hundreds of the ones they don't have
SCOTT CLELAND: So once again, if you're a website, who are you going to turn to? You're going to turn to Google, because they're the only game in town that can give you access to all the world's advertisers. If you're an advertiser globally,
SCOTT CLELAND: and you want to reach all the consumers, you've got to go to Google, because they've gone from 65% to 90%, and Microsoft, Yahoo!, and the others? Baby stuff, relative to those numbers. Then, if you look at the consumer data that they combine,
SCOTT CLELAND: remember, these are network effects upon network effects. It is acquisition. If you deconstructed this and asked Mr. Drummond how long it would take them to replicate organically what DoubleClick has,
SCOTT CLELAND: it would take them years. Ask them if DoubleClick could ever catch Google, they would say "no". It's ridiculous.
SCOTT CLELAND: So, when you realize what Google will get by buying it, instantly, they will own this market. They will control it via acquisition. Now, that's what the law, at least the way I understand it, says you can't,
SCOTT CLELAND: via acquisition, substantially lessen competition. There's a tipping point here, and then in the next slide, I won't talk about it, but what I do is explain very clearly, is that it facilitates a bottleneck,
SCOTT CLELAND: and it talks about many of the same points I just made, but in a different dimension.
HERB KOHL: Mr. Smith?
BRAD SMITH: Yes, if I could address that? I wouldn't be here if we didn't believe that this merger does create two very important barriers to entry. I go back and say to think of this as a pipeline. Think about this as something that,
BRAD SMITH: in fact, is not all that different from other kinds of delivery channels, even like the passage shipping issues that you've been addressing, Mr. Chairman, in other contexts. This pipeline has advertisers on the one end and website publishers on the other.
BRAD SMITH: The pipeline itself principally has three broad components: there's a component that serves the publishers; there's an exchange that's electronic in the middle; and there's a component that serves the advertisers.
BRAD SMITH: David keeps talking about aQuantive, but what's important to keep in mind is aQuantive's business is principally on the side of addressing the needs of the advertisers.
BRAD SMITH: When you go to serving the publishers, the third party publishers on the Internet, aQuantive had a business that was in the single digits. DoubleClick had a business that was at about a 50% share, and Google had a business that was about a 30% share.
BRAD SMITH: Keep in mind, yesterday, Google was saying that they weren't in the delivery business at all; today they have a fleet of trucks. Yesterday, they were saying they didn't do delivery of ads, and today, when David answered your question,
BRAD SMITH: he said they don't do delivery very much.
BRAD SMITH: The fact is that they're not only in the business of selling advertisements to publishers, but delivering those ads. They have, in this business, this pipeline business, they have a million customers who advertise.
BRAD SMITH: Microsoft has 85,000 or thereabouts. The businesses are really not comparable today. So there is, on the one hand, this barrier to entry that consists of what you might think about as the advertising inventory barrier to entry for all of these ads.
BRAD SMITH: There's also a barrier to entry that consists of this massive accumulation of user information. It all comes together, not only on these two ends, but in the middle.
BRAD SMITH: In a lot of ways, this merger would be like combining the New York Stock Exchange and the NASDAQ. If the New York Stock Exchange and the NASDAQ were to combine, somebody could build an alternative exchange,
BRAD SMITH: but would anybody go there to take their company public? It's hard to believe that would be the case: that's the kind of thing that will result here.
HERB KOHL: As I understand it, Mr. Drummond is suggesting that these businesses are dissimilar, and there really isn't much synergy between one and the other. Are you suggesting that he's being somewhat disingenuous here today
BRAD SMITh: I'm not going to second guess his motives. Off the basketball court, we can be friendly, but I do respectfully disagree with what we're saying.
HERB KOHL: Are you a basketball player?
DAVID DRUMMOND: I am not. I don't know where that came from.
HERB KOHL: Only when they're playing in Wisconsin.
DAVID DRUMMOND: Mr. Chairman?
HERB KOHL: Go ahead.
DAVID DRUMMOND: I'm not sure where that came from, but I have to say: I didn't say that these were completely similar. They're certainly complementary businesses. We would like to have an integrated offering that includes the kinds of things and the kinds of ad serving tools for display advertising,
DAVID DRUMMOND: which Google does not have. We'd like to add that to our product sweep, the same reason why Microsoft wanted to add aQuantive to their product sweep. It still is the case that we have not been in the ad serving business to date.
DAVID DRUMMOND: Just to say that we deliver our own ads is not saying that we're in the ad serving business.
DAVID DRUMMOND: Every website, many websites, have ways to place ads independent of DoubleClick, Atlas, aQuantive, or anything else. So, the fact that we happen to deliver ads doesn't put us in the business. No advertiser,
DAVID DRUMMOND: no publisher, in evaluating their choices for these ad serving tools, will sit down and think, "Should I purchase from DoubleClick, Atlas, or Google?". Google's not in the conversation, because Google doesn't have a product.
DAVID DRUMMOND: When you talk about competitors, you need to talk about firms that are choices for consumers. There is no choice here. They operate in completely different markets.
DAVID DRUMMOND: The same goes on the advertising sales side. If you're an advertiser, and you're looking to sell ads on websites, you don't come to DoubleClick to do that, because DoubleClick doesn't sell any space. You'd go to websites; many websites have their own direct sales forces; you can go to advertising networks,
DAVID DRUMMOND: such as Microsoft's ad center, Yahoo!, to Google- lots of places like that. The place that you would not go is to DoubleClick or to an ad serving company. You would use and ad serving company, perhaps,
DAVID DRUMMOND: and you have many choices there, but you wouldn't use Google. That is being lost over here, but it's clearly the case that these are very different, complementary, but very distinct businesses.
HERB KOHL: Senator Hatch?
ORRIN HATCH: Thank you, Senator. Mr. Drummond, with respect to the broadband service market, Google seems to contend that consolidation harms consumers and, "downstream" application service providers,
ORRIN HATCH: at least that's the way I interpret it. Yet, the Google-DoubleClick merger represents a much more significant concentration of Internet advertising market share. Why are there too few players in the broadband service market?
ORRIN HATCH: Why won't the Google-DoubleClick transaction create too few players in the Internet advertising market?
DAVID DRUMMOND: Senator, I'd be happy to address that. They use very different businesses, very different markets. I think, in the broadband sector, it is very apparent to all of us that we have very few choices for broadband service.
DAVID DRUMMOND: In many markets, you have two choices, and in many, many markets you have just one. That is simply not the case in online advertising. In the sale of ads, which is what Google does, there are many, many choices: there are display ads; there are search-based ads; there are many,
DAVID DRUMMOND: many outlets to get those ads. We simply don't have that same dynamic. This acquisition changes that not at all. By acquiring DoubleClick, it doesn't reduce the choices of anyone who's looking for ad serving technology products.
DAVID DRUMMOND: It doesn't reduce the choices of anyone who's looking to buy or sell ads, because DoubleClick simply doesn't do that. These are very different markets. You're talking about one market where there are a few players that the customers can touch and one where there are multiple players,
DAVID DRUMMOND: and they're only growing, not shrinking, in many ways.
ORRIN HATCH: Mr. Smith, for as long as I can remember, Microsoft that has stated that an entrepreneur operating from a garage can put your company out of business. As astounding as that sounds, I understand what you are saying.
ORRIN HATCH: Whether or not that is true, it strikes me that a similar statement can be said about Google. If someone writes a better search algorithm, Internet users will literally jump to the entrepreneur's site and perform their searches there.
ORRIN HATCH: Simply put, if Google does not have Internet users using its search engine, then it does not have anyone to advertise to. In addition, DoubleClick's percentage in the overall Internet advertising market is much smaller by comparison,
ORRIN HATCH: so I think we have to ask, "What is the concern?". If Microsoft or another company comes along and creates a better search engine, Google might not be as dominate a player in the market as it is today. If that's true,
ORRIN HATCH: where is the AntiTrust's problem? Why not just build a better product? Have you not just purchased a DoubleClick competitor? These are a lot of questions.
BRAD SMITH: That's a very good question, Senator, and if we believed that this was a market where better technology or better value by itself could carry the day, I wouldn't have come here today, but that's not the market that we're dealing with.
BRAD SMITH: Indeed, if that were this market, Microsoft wouldn't have paid a 83% multi-billion premium to acquire aQuantive, and I don't think that DoubleClick would have sold for the premium that it sold for. This market is consolidating.
BRAD SMITH: We certainly believe that when this consolidation is finished, and it's going to be finished very quickly, we're either going to have one company that provides the pipeline for advertising, or we'll have two or maybe we'll have three.
BRAD SMITH: I can't imagine more than three. I am skeptical that we'll even have as many as three. Once we reach that point, I don't think that better technology or better value can make a difference. The barriers to entry created by the accumulation of all of the inventory in the ads and all of the user information is too great.
BRAD SMITH: It really is, as I was saying before, Senator, it really is like the combination of the New York Stock Exchange and NASDAQ. Somebody could offer a better stock exchange, but if that one exchange were to come into existence and have all of the brokerage relationships and all of the purchasers in the country,
BRAD SMITH: why would anybody take their company public anywhere else? That very much, I believe, is analogous to this situation.
SCOTT CLELAND: Senator, could I also answer that question?
HERB KOHL: Sure.
SCOTT CLELAND: One of the most preposterous notions that I've heard is Google saying that any day, another search engine could come and knock them out. Let's break that down. What Google has is the world's largest infrastructure of a parallel processing grid.
SCOTT CLELAND: It's a super computer. There's a million customized servers that Google has bought and dispersed around the country. Those million servers copy every single page, reported by their terms, every single page of the Internet every day,
SCOTT CLELAND: and keep it stored and recovered. That's how you can get a quick response.
SCOTT CLELAND: They also have a million advertisers, a million websites they deal with; they have 90% of the advertisers; they have 650 million users and 80% of the data on consumer's research patterns in order to do targeted advertising.
SCOTT CLELAND: I would say the accumulated aspect of two guys or one guy in a garage, it would require tens of billions of dollars, and years and years for them to replicate something that could compete with Google. It isn't just what search engine you have.
SCOTT CLELAND: If that was true, ask.com would be really- they've made some tweaks to their engine- and they would be improving. Or Yahoo!: when it tweaked and improved its search engine, which it used to outsource to Google,
SCOTT CLELAND: it would be better. The cost, the barriers to entry are just enormous about what Google does. Hopefully that was helpful.
HERB KOHL: It was, it was. Mr. Smith, much has been made about how Google and DoubleClick maintain information to their users. With your acquisition of aQuantive, what other types of information will you store?
HERB KOHL: For how long? What are Microsoft policies to maintaining the privacy of Microsoft's users?
BRAD SMITH: I think there's two things to think about, Senator in the context that you raised. They're both quite important. First, I would say that we need to think about this in the context of this merger.
BRAD SMITH: This merger, in my opinion, is about creating a single pipeline that has virtually all of the user information on the Internet. If things go in this direction a little longer, as consumers live in a world where our user information is divided and held by a variety of different companies,
BRAD SMITH: it'll all be in the hands of a single company. I think you're quite right to ask: "What are the policies and practices of us when it comes to protecting user information?" We announced new privacy principles in July.
BRAD SMITH: We built on privacy principles that we have had in the past and I believe that they are, I would have to say, the best principles that you can find in this industry. We said, for example, that we will anonymize all user information,
BRAD SMITH: for example, all the IP addresses, after 18 months. Now, Google likes to say that they were the first to anonymize information. In fact, I don't think Google is anonymizing anything, and I say that with respect.
BRAD SMITH: All of our computers basically have the equivalent of a phone number; it's an IP address; it's basically nine digits. What we announced at Microsoft is after 18 months, we would delete that IP address- that phone number- in its entirety.
BRAD SMITH: What Google announced was that they would take that IP address after 18 months and they will delete the last few digits. This very much reminds me of when I moved to Paris in 1993. I quickly found that when you get a phone bill in France,
BRAD SMITH: you get the list of phone numbers that were called from your house, but the last four digits have been deleted. Apparently, it was considered socially awkward for spouses to be able to know who was being called from their house; and yet,
BRAD SMITH: any good divorce lawyer in France can tell you that they can still figure out, quite a bit- it may make it harder, but it doesn't make this information anonymous.
MARC ROTENBERG: Senator, may I speak on this issue?
HERB KOHL: Yes, sir.
MARC ROTENBERG: I didn't raise some of the privacy concerns that we identified before in Google's practices, but I think it's appropriate now. I think it's particularly important because Google has made a number of representations to this committee,
MARC ROTENBERG: and I sense that as well in Senator Schumer's remarks regarding what it will do to safeguard privacy. But it uses these terms such as "anonymize" very loosely. What Mr. Smith said is correct. When Google says that it's anonymizing the Internet protocol address,
MARC ROTENBERG: it's much like taking the last two digits off the telephone number. In context, it is very easy to recreate the identity of the computer tied to the Internet. It's very similar with the cookie, as well,
MARC ROTENBERG: and we've actually put together an analysis. Our simple conclusion is that what Google describes as non-person identifiable information, which is the information it retains on every single search query,
MARC ROTENBERG: and that is the Internet Protocol address, the cookie information, the date and time of the query, the query search term, they describe all of that as non-personal identifiable. That is actually a remarkable claim,
MARC ROTENBERG: because in so many different respects, that information is uniquely tied to the Internet user who made the search query. In fact, it's the reason that the Department of Justice, for example, goes to search companies and requests those files,
MARC ROTENBERG: precisely to identify Internet users. I'll say, further, I've recently had an exchange with Dr. Schmidt, the CEO of Google, in the pages of the Financial Times. He described his proposal to safeguard privacy for Internet users.
MARC ROTENBERG: I published a response and explained that many of the safeguards that Google is recommending will not adequately safeguard the privacy interests of Internet users. This is precisely the reason that the pending complaint of the Federal Trade Commission is so important.
MARC ROTENBERG: We need a much clearer description of what the business practices will be of this merged entity to ensure that the privacy interests of Internet users will be protected.
CHARLES SCHUMER: Thank you. Dr. Lenard, as you well know, one of my major concerns about Antitrust laws is the creation or enhancement of market power. In the context of sellers of goods or services,
CHARLES SCHUMER: market power may be defined as the ability to profitably maintain prices above the competitive levels for a significant period of time. Market power may be exercised not only by rise in price, but also by reducing quality or slowing innovation.
CHARLES SCHUMER: How can one argue that a standard Antitrust claim cannot be made if Google already controls 70% of the search advertising, and if the merger is permitted, Google-DoubleClick will account for nearly 80% of the non-search or display ads.
CHARLES SCHUMER: I'd like your opinion, and I'd like to give other members of the panel an opportunity to respond as well.
THOMAS LENARD: Thank you, Senator. There are several responses to that. The first one, I think, is the one we've been consulting about a lot. This is really not a merger between direct competitors,
THOMAS LENARD: really, for the reasons that Mr.
THOMAS LENARD: Drummond said. If the price of the ad space that Google is selling goes up, you can't substitute for that by going to DoubleClick and buying ad serving capabilities; they're just not direct substitutes of each other.
THOMAS LENARD: Obviously, what DoubleClick provides is an input into the Internet advertising market, but it is not, by any means, a direct substitute for what Google is supplying. The second thing gets to the- it hasn't been talked about that much; I mentioned it a little bit in my statement- what we're talking about here is providing better quality for consumers.
THOMAS LENARD: All of these companies are integrating with other firms in order to provide a better product for consumers. There's this notion that, maybe, if Google acquires DoubleClick, the product will be too good,
THOMAS LENARD: and it's going to be hard to compete against. As I've said, I think it's really a risky proposition to go down that road, because we don't want to grab onto the belt of somebody's who's in the race, and say,
THOMAS LENARD: "Let's make them run a little bit slower so everybody can catch up a little bit." That would provide all sorts of bad incentives to the system. The other thing that hasn't been mentioned in this so far is the customers,
THOMAS LENARD: the firms that buy advertising services. A lot of them are very big companies that are very sophisticated. They are very price-sensitive. They buy from multiple suppliers. If somebody starts raising price on them,
THOMAS LENARD: they're going to go someplace else very quickly. That's going to discipline the market.
HERB KOHL: Anybody else?
DAVID DRUMMOND: If I may, this notion of 80% of all advertising keeps getting tossed around here as if it is some kind of a fact. It's a made-up number. We've not seen any support for it- I don't think there is any- and it relies on this premise that is utterly false,
DAVID DRUMMOND: that DoubleClick somehow controls some major sector of spending on display ads. It doesn't control it; no one pays DoubleClick to place an ad. To say somehow that there's this control or domination of the display advertising business because,
DAVID DRUMMOND: as part of our products, we now have ad serving technology, is crazy. What Brad talks about, the $27 billion market potentially this year in online advertising, of course a big chunk of that is display advertising,
DAVID DRUMMOND: and the entire market for ad serving companies, is about $300 and some million dollars. Those are the revenues of all of the companies- Atlas, DoubleClick, and everyone combined. How can it be that one participant in a $300 million market controls and dominates a multi-billion dollar market.
DAVID DRUMMOND: It's impossible. I urge you not to be misled by some of these numbers that are being tossed around today.
SCOTT CLELAND: I have to reply to that. If Google is representing that this is the online advertising market, they're going to have a very hard time making that case. As you know, Congress, for years,
SCOTT CLELAND: has media ownership limits that it restricts how much you can control of certain media, and online is clearly a separate media. There are just mountains of evidence of how Google has explained how online advertising is better because it's targeted,
SCOTT CLELAND: it's relevant, and it's measurable, and therefore people should move ads off of TV, radio, and newspaper, and move it online. Now, if that's not different markets, I don't know what is. Because where the other advertising is just kind of general,
SCOTT CLELAND: this is stuff that you can target to an individual user; you can measure it, and you can argue that the consumer might say, "Boy, that's relevant." Now, the other point you made about extreme market power,
SCOTT CLELAND: if you could put up this slide. What you have here is extraordinary. You can't just say, "These guys don't compete." What we're talking about is an ecosystem. They're going to corner this market. Remember: online advertising is an indirect market.
SCOTT CLELAND: Consumers don't pay a dime to Google. There's a three-way transaction here, so you have to understand that this is a three-sided market. You've got the users, content providers/websites, and advertisers. Once again,
SCOTT CLELAND: this merger adds the #1 and #2 Internet viewer audiences, the #1 and #2 best Internet content website networks, and the #1 and #2 best advertiser networks. What it does, because this is the brains of the Internet and the brains of online advertising,
SCOTT CLELAND: what it will allow them to do over time is, on this platform, cross-leverage and ads go more to brokering, and if ads go more to ad exchanges- whether it's a pipeline, whether it's a bottleneck, whatever we call- they're almost all going to have to go through DoubleClick/Google/YouTube.
SCOTT CLELAND: So, this notion that there's lots of choice- a big advertiser, if it wants to reach the world audience, it's gotta go to Google/DoubleClick. If a website wants to reach all the advertisers out there, it has one choice: it's gotta go to Google/DoubleClick.
SCOTT CLELAND: Thank you.
HERB KOHL: Brad?
BRAD SMITH: If I could just make two points, Senator, I do think it's helpful to be clear about what we're not talking about and what we are talking about. We're not talking about, in my opinion, whether Google should continue to have the opportunity to innovate and develop a better product and service.
BRAD SMITH: I say "Hat's off" to Google; they've done a lot of good innovation and we've all benefited from that this decade. What we're talking about is not that, but whether Google can buy its way to what we regard as a dominant market position.
BRAD SMITH: Also, we should be clear: we're not talking about buying up this entire $300 billion market for all of the advertising in the world, or even all of the $27 billion online advertising business. We're talking about this pipeline.
BRAD SMITH: There's a lot of markets that are characterized by these concerns about passive shipping or pipelines, for example. In the very first Antitrust case ever brought against Standard Oil, was brought at a time when there were lots of different oil wells owned by different people in the country.
BRAD SMITH: There were lots of different people that were distributing oil to customers, but what Standard Oil was accused of doing was solidifying and monopolizing the railroad network, and thereby the pipeline for effectively moving oil downstream in the economy.
BRAD SMITH: That is analogous to what we're talking about here. I do believe that when you look at this pipeline, it is absolutely fair and it is absolutely accurate to say that if this merger is approved, Google will account for 80% of the ads that are served to publishers
DAVID DRUMMOND: We will not account for that. Simply because some portion of display advertising is delivered using a tool from DoubleClick when there are many other tools available, does not mean Google accounts for- again,
DAVID DRUMMOND: no control over the advertising, no ownership of the data that comes with that, that is collected in the process of the advertising. The data is owned by the customers- publishers and advertisers- and DoubleClick or Google can't do anything with it.
DAVID DRUMMOND: It's simply not true that by doing an acquisition like this, there's some control of this display advertising market.
ORRIN HATCH: Well, this has been a very interesting hearing. I'm sorry I've been in and out, but I've been on the floor all day and had to go back and forth. I've got a lot of other questions, but I think I'll snip them,
ORRIN HATCH: Mr. Chairman, so that we don't keep these folks too long. Very interesting set of questions; you have a very interesting two companies here, and other companies involved. I'm actually fascinated by your industry,
ORRIN HATCH: and I just have to see what they're going to do.
HERB KOHL: Thank you very much. I quite agree, Senator Hatch. One more question, Mr. Rotenberg, to you. Should there be federal laws to ensure the customer information from searching and from advertising information be kept separate,
HERB KOHL: should we put conditions on this deal to ensure that information be kept separate, what other condition would you propose in terms of this merger?
MARC ROTENBERG: Thank you, Senator, for asking me this question. One of the things that we've done in the various findings that we've made to the Commission regarding this merger is to propose a number of different remedies that the Commission,
MARC ROTENBERG: we believe, could enforce through a consent order. I think the most simple and most direct one is to say that there should be enforceable privacy standards that safeguard the information that's being collected to ensure that it's not being misused
MARC ROTENBERG: Google has, in various ways, said that it shares that goal and is prepared to do that, argues that it is the company's position. This is the perfect opportunity, perhaps even a unique opportunity, to get that in writing through a consent order,
MARC ROTENBERG: and at the Commission, we'd like to see it happen. There are, in fact, I think in our three different filings, between 20 and 25 different recommendations that we've made. One of the recommendations concerns this very interesting issue of data retention.
MARC ROTENBERG: As you may be aware, there is a lot of controversy today, particularly among users of the Internet, about the amount of information that's being collected and retained by these companies. Now, to be fair to Google,
MARC ROTENBERG: it is very much a reflection of the Internet architecture that some information needs to be accessed by any Internet advertiser, generally speaking, to respond to a query.
MARC ROTENBERG: That's basically because of the stateless nature of the Internet, if the Internet user was, in fact, a new entity every time they went to a website, it would be almost impossible to interact. Now, there are ways to get around that.
MARC ROTENBERG: But, generally speaking, we understand why Internet advertisers collect a little bit of information. The question is: why do they keep it for so long? Why is it necessary, after they've answered the search request,
MARC ROTENBERG: after they've provided the advertising links that their business partners provide so there's a successful business model, w