I had an interesting call today with Brad Smith, the general counsel of Microsoft. I was eager to understand Microsoft’s position on the Google/Doubleclick deal, and to parse the issues swirling around the companies decision to, via the press, declare that the deal should be scrutinized closely by antitrust regulators here in the US.
The conversation started with Smith explaining why Microsoft sees this as worthy of a serious review. At its heart, he contended, this is about how one might define the market in which the combined company will operate. Antitrust law, he explained, takes a dim view of companies who buy their way to market domination using cash alone. It’s fine to gain market domination by having better products and service, but not by simply buying your way in. So, does buying Doubleclick mean market domination? That question turns on whether a market is narrowly defined – is the market in this case online display advertising and online contextual advertising, or is it more broadly defined – the entire advertising marketplace?
This is not a minor question. The former is a market in the tens of billions, the latter hovers at a trillion dollars. When I asked Eric Schmidt of Google this question onstage earlier this week, he was very clear in his interpretation. After rolling his eyes at the very idea of Microsoft – star of the antitrust stage in the late 90s – even playing the antitrust card, he very clearly stated that the combo of Google and Doubleclick was a tiny percent of the overall advertising world.
Smith, as one might imagine, doesn’t ascribe to that interpretation. The market should be narrowly defined, he stated. He then went into how antitrust regulators actually view markets. “There is a defined methodology,” Smith told me, for how antitrust review is done. “You look at who is participating in the market and ask if they will shift behaviors if prices change by five percent.” Also, will one company have the ability to control pricing and, also importantly, will it be difficult or impossible for any other company to enter that market? Smith believes that GoogleClick will have such market dominance in online advertising as to be able to force higher prices upon the world – online advertisers will not easily move their budgets to offline media like TV or print, they are too dependent on online channels. Hence, one should not view the market broadly.
This raises a very important question – why didn’t Microsoft match Google’s $3.1 billion offer. Smith would not comment on this, but I can report from very good sources that in fact the company did offer to match it, and was willing to pay even more to insure that Google did not corner the online ad market. But for whatever reasons, the private equity firm that owned the majority of DoubleClick’s shares decided to go with Google. I have more detail on how that deal went back and forth – it involves a no shop deal between Google and Doubleclick, for example, but I have heard strong assertions that the owners of DoubleClick did not get the highest and best price for their asset. But that is now history. In short, it’s clear Microsoft has the cash to match or even beat Google at this game, but did not in the end win the asset. Why? That’s for another post.
“The bigger question,” Smith asserted, “is what is the market share and will it be easy for others to enter this market once this deal is done?” He continues: “There’s a fixed cost to developing the technology, but that’s not the hard part.”
Indeed it is not. The hard part is getting the economies of scale and knowledge that come with having a massively scaled base of advertisers and publishers all using the system. That allows for maximum efficiencies in the market and maximum profits. Google already has this in the contextual advertising space. With DoubleClick, it will have it in the display ad space as well, Smith points out. That means it’s very hard for anyone else to enter the market.
That may well be. It’s hard to say what the government will do with this case, but under the HSR antitrust act, it has 30 days to decide. It will take one of three approaches, Smith told me. One, it will, after a 30 day review period, simply decline to investigate further and allow the transaction to continue. Two, it might decide early that this is not a material issue, and approve it before the 30 day period. Or three, it will make a “second request” for more data, which can take months for the companies to respond to. Once that response has come in, the government will make its final ruling – block or allow – in another 30 days.
Clearly, Microsoft wants to see a second request. I asked Smith about the irony of Microsoft asking the government to support it on antitrust. His response was interesting. He pointed out that Eric was never shy about asking for the government’s help against Microsoft when he was at Sun, Novell, or even Google (remember the browser issues?) . “I think regulators take competitors (in this case, Microsoft’s) views with a grain of salt, and they should,” Smith said. “I would point out that over the years our competitors have been raising a number of antitrust issues that they want regulators to review, and I don’t think it’s ironic that we ask for the same thing.”
In the end, the matter is in the government’s hands. If the deal does go through, it will create an entirely new landscape for Google’s competitors, one that will require, in my mind, that Yahoo, Microsoft, and other large players consider moves that previously were unsavory. To my mind, the most obvious of these moves is a strong partnership or even merger between Yahoo and Microsoft (remember Soverture?). To that end, what Yahoo’s Jeff Weiner had to say on stage, at the end of our discussion at Web 2 this week, is both timely and very pertinent. I asked him about Yahoo’s view of Microsoft, given the state of the chess match as it currently stands. His response was direct: Yahoo would be very open (scroll to bottom) to discussions with Redmond. After all, it wasn’t that long ago that Microsoft was running Yahoo search (via Inktomi), and monetizing using Overture.
Wow, I love this business. It’s such a great story. Happy Friday…..
Updated: I have not had time to review this, but Gary has the merger docs filed with the SEC. And I have a few more thoughts on this topic. The more I think about it, the more the fact that DBCLK went to Google strikes me as a seminal moment in the history of this industry. Microsoft could not win it, despite the cash it was willing to spend. Why?!
In another of your recent posts, John, SearchBlog reader/commenter “mb” writes: As I commented in your 4/16 GoogleClick post, analysts are missing the point when they see the DoubleClick deal as an attempt to “corner the market” for display ads. The real benefit isn’t control, it’s relevance. Search history is a pretty good “database of intentions,” but it’s still very incomplete.
This is a good argument, and it is one that I can also see Google making. But if this interpretation is true, i.e. if the real benefit is not control, but relevance, then that favors a narrow interpretation of the advertising market. No matter how much Eric rolls his eyes.
Why does mb’s arguments lead to the narrow interpretation? Because online advertising has something that radio and print advertising do not have: closed-loop feedback on user activity and intentionality. I.e.: Relevance.
Think about it. When I sit down at Hobee’s and whip out a copy of today’s San Jose Merc as a patiently wait for my order, the newspaper staff has no idea about what stories I have actually read and what stories I have skipped. Beyond the fact that the Merc appeals to a particular demographic, they have no idea what my personal interests are, and therefore cannot increase the relevance of their advertising to me. There is no feedback loop.
In the online ad markets, on the other hand, Google is able to monitor what I read and pay attention to, what I search for, what I click as a result of the search, etc. The feedback loop is closed, and so you have a whole different type of advertising that is enabled by this fact.
So the online, closed feedback loop advertising market is significantly different than the offline, no-feedback market, simply due to the fact that the set of behaviors that permeate throughout the two markets are different. The advertising buyers, sellers, and ad viewers behave completely differently in the two (offline and online) marketplaces.
Google’s arguments, saying that closed-loop, feedback ad markets are part of the same exact marketplace as no-feedback ad markets would be like Microsoft trying to claim that it did not have a monopoly, because its software did not run on the majority of the world’s microprocessors.
“Personal computers”, Microsoft could have argued, “represent just a tiny share of the entire marketplace around microprocessors (less than 1%, I believe). Think about all the microprocessors inside of automobiles, cell phones, traffic lights, microwaves, washing machines, industrial manufacturing equipment, refridgerators, VCRs, coffee makers, TV remote controls, etc. Microsoft software runs next to none of these. So how can Microsoft have a monopoly?”
But of course Microsoft had a monopoly, because the PC microprocessor market had very different behaviors and interactions from the coffee maker microprocessor market. Sure, it is all microprocessors, just like Google claims that it is all advertising. But.. give me a freaking break here.. these various advertising realms are just as much a different market as the various microprocessor realms.
Can Google really not understand this? [rolls eyes]
JG, if I understand you correctly, you’re saying the DoubleClick deal is anti-competitive no matter how you slice it. If we define the market as “Web display ads”, Google has much of the market locked up. And if the market is “closed-loop ads”, then Google’s got that cornered as well.
But is that really true? Even if we assume that the market for all advertising is too broad, and it’s the “closed-loop ads” market that applies, that’s still a pretty big and untapped market.
Seems to me there’s an enormous market for “closed-loop ads” beyond Google’s reach, even with DoubleClick:
+ Microsoft is building massive data centers to link desktop apps to the Web. There are 650 million PCs globally (1 billion by 2010), 95% of which already run Microsoft products. It’s not hard to imagine “closed-loop” ads tied to software subscriptions or online services integrated with Microsoft apps. Imagine Microsoft Live Meeting, Live Drive, or “Live Excel,” extending the desktop software with collaboration tools — and unobtrusive, targeted ads. Heck, you don’t have to imagine anything, look at Live Messenger today.
+ How many cable boxes, satellite receivers, Xboxes, Nintendos, Wiis, TiVos and AppleTVs will be IP-addressable by 2010? 200 million? Each one can deliver closed-loop advertising, but how many of them does GoogleClick have locked up?
+ Cell phones and PDAs are an ideal platform for closed-loop ads, but Google and DoubleClick aren’t close to dominating this billion-device market.
+ Comscore says Yahoo has 46.1% of toolbar searches. Those toolbars are busy transmitting browsing activity to Yahoo, which can be used for closed-loop ads.
+ Let’s not forget about the NBC+NewsCorp+Viacom+Microsoft+TimeWarner+Yahoo juggernaut lining up against Google to control video content. This is all potentially closed-loop ad inventory, none of which is controlled by Google.
Does this sound like Google’s dominating the market for closed-loop ads?
Let me just react to the main thread of your post, mb, and then we can nitpick over details. First, let me explain that what I was reacting to this bit of Battelle’s post:
“After rolling his eyes at the very idea of Microsoft – star of the antitrust stage in the late 90s – even playing the antitrust card, [Eric Schmidt] very clearly stated that the combo of Google and Doubleclick was a tiny percent of the overall advertising world.”
Essentially, Schmidt is trying to define the market broadly by equating closed-loop relevance advertising with all of advertising.
So when you make the argument that it “seems to me there’s an enormous market for “closed-loop ads” beyond Google’s reach, even with DoubleClick:“, you are moving into the next stage of the discussion. You are saying that, with the market defined narrowly, Google’s position might not be problematic. You may very well be correct about what you say. But in that case, if you are indeed correct, then Google will have no problems welcoming a government investigation into that matter.
But that is not what Schmidt is saying. Schimdt is still stuck on the previous stage of the discussion. Schmidt dismisses outright the idea that the market is defined narrowly. He dismisses outright the idea that the government needs to make any sort of review and information request by saying that the market is defined broadly, equating the current market in closed-loop, relevance advertising with all of advertising, claiming that Google’s marketshare is in the fractions of a percentage.
That claim is what I am reacting to. That is what I consider a ridiculous argument. It really would be like Microsoft saying that it didn’t have a monopoly because it controlled less than 1% of the OS market for all microprocessors. Inanity.
[As a funny aside: Could you imagine what it would be like if Microsoft did control the operating system of every single microprocessor? Our traffic lights would have four colors.. green, yellow, red.. and blue, for when the traffic light OS crashes! lol]
So let me reiterate: You may very well be correct in saying that Google does not have the closed-loop, relevance advertising marketplace monopolized. But determining that is not for you or I to decide; it is for the government to decide. And for Schmidt to dismiss any government inquiry by defining the market broadly is, frankly, disingenuous. How would he feel, I would like to ask, if Microsoft had made that exact same argument, by equating the PC microprocessor market with the entire microprocessor market. Would he have said, “Oh, yes, of course! So silly of me to think otherwise”?
That is my only point.
JG, this seems like an argument of appearance over substance. You don’t like Schmidt’s posturing, even though the substance of his argument is sound.
Regardless of whether we’re talking about all advertising or just “closed-loop relevance” ads, Google has just a small fraction of the addressable market. Corporations with far greater resources and influence than Google already control much of this territory and are fighting to impede Google’s innovations.
For Microsoft and AT&T to play the anti-trust card is truly disingenuous, both in appearance and substance. And for AT&T to lecture Google on privacy is the height of hypocrisy.
Their arguments deserve Schmidt’s eye-roll. And if Microsoft and AT&T succeed in using government power to inhibit Google’s innovation, they will deserve contempt from all of us.
JG, this seems like an argument of appearance over substance. You don’t like Schmidt’s posturing, even though the substance of his argument is sound.
You are correct that I do not care for his posturing. But what makes the posturing distasteful is that I do not believe that his argument is sound.
I apologize for repeating this line of reasoning yet again, but I don’t think I was clear enough when I said it above. Let’s remind ourselves: What makes Google unique, what constitutes Google core mission? Organizing the world’s information. How does Google interpret that core mission? Relevance-based search and relevance-based advertising. Not just any old advertising. Relevance-based advertising.
It was that posturing that got us all to accept Google’s ads in the first place, back when they first started showing ads (despite my protestations, even back then). Remember? That’s why Google went from zero ads, to a few on the right, to now up to three above the SERPs. Because it wasn’t just any old “punch the monkey” ad. It was a relevant ad. Advertising that is not based on relevance is not part of Google’s core. It does not belong to their mission statement. It is not part of their market. Quotes from Google’s “ten things” philosophy, at least as it appears today:
“Google firmly believes that ads can provide useful information if, and only if, they are relevant to what you wish to find.”
“We’ve found that text ads (AdWords) that are relevant to the person reading them draw much higher clickthrough rates than ads appearing randomly.”
“In addition, thousands of web site managers take advantage of our Google AdSense program to deliver ads relevant to the content on their sites”
So if you are talking about plastering posters near my bus stop, erecting billboards on the freeway and posting banners inside football stadiums, you are talking about areas of the advertising marketplace that are, by their very structure, un-Googlifiable. They are forms of advertising that, by their very nature, do not fit Google’s relevance-based core mission.
Google as a company is of course free to do what it wants. But until Google changes its mission statement, it has already idealistically self-selected itself out of certain aspects of the advertising marketplace. Google has defined itself as a company that serves information and ads based on relevance. By its own definitions, if it cannot base an advertisement on relevance, then it is not being true to its mission, and therefore has no place in that area of the market.
So again, is completely disingenuous for Schmidt to claim that Google’s market is all advertising, because it is clear that there are realms of the marketplace that the Google relevance approach structurally cannot function. Google cannot tread there until it compromises its core mission statement.
Now that we have established that Google’s marketplace is not all of advertising, that Google’s marketplace is a narrower subset thereof, as Microsoft’s Brad Smith was saying above, we can get into the second question of whether Google does or does not dominate the remaining narrower marketspace. I have not said anything about that; it may very well be that Google does not dominate. I have only said that it needs to be looked into.
But my protestations are not just sound and fury. They are not just appearance with no substance. They are of utmost importance if you have any menschliche sense of principle. Schmidt’s comments about Google’s marketspace being all of advertising flies in the face of Google’s core relevance-based mission statement. For that reason alone, the fact that Google has strung us along for 9 years on the promise of relevance, it is of utmost substance that we hold Google to its own standards.
I do not work for Microsoft. I do not work for AT&T. So who cares of those companies roll their eyes? I am rolling my eyes. And I am rolling my eyes because Google is compromising the very things that made it Google.
From my perspective, it was inevitable that google would have to face the antitrust card (I blogged about it back in Feb. – http://www.sawickipedia.com/blog/2007/02/27/so-when-does-google-get-sued-for-antitrust-violations/). Given the previous generation of tech titans all got sued – IBM, MSFT and Intel – Google’s more then 50% of all online ad revenues was just begging for the same treatment as the titans before it. As MSFT learned from its own antitrust troubles – it’s largely a lobbying game and as such google should be worried. MSFT, ATT and TW have some of the largest numbers and best quality lobbyists in the game.
JG, your billboards and newspapers argument draws attention away from the real issue. If we accept your definition of Google’s market as the one where relevance can improve ad effectiveness, that market is huge. And Google has a tiny slice of it.
Microsoft, AT&T, NBC/GE, Verizon, Vodafone, NewsCorp, Comcast, Viacom, Disney, TimeWarner, Sony, et al already control the vast majority of content and distribution. Some of these corporations have vastly greater resources and influence than Google does.
You may be correct that Google’s market doesn’t include undifferentiated ads like highway billboards. But the market for relevant ads should include anything delivered through a device that differentiates the audience — cable boxes, DVRs, satellite receivers, mobile phones, web browsers, game consoles, IM clients, MMOGs, MMORPGs, and networked business applications.
Google has just a sliver of this market, and they’re decades away from market dominance no matter what assumptions you make.
Google’s innovation is disrupting many entrenched players, and they’re fighting to hold Google back through government intervention rather than through their own innovation and investment. As citizens we should be incensed and disgusted. Schmidt’s eye-roll was just being polite.
mb: I have consciously avoided discussing the details of just how big or small I think the market for relevance ads actually is. Mainly, I have avoided this because it was not part of my original point, which was simply to say that it is ridiculous of Google to claim “all of advertising” as their market. But I have also avoided this latter discussion because this is my third or fourth post on this thread and I think I run the risk of starting a flame war. I would rather not do that on a blog that is not my own, in front of a readership that probably largely does not care.
Let me say that I do understand your point. You are essentially saying that it doesn’t matter if Eric Schimdt was not being technically accurate by claiming Google’s market as all of advertising. Even if it is not, you say, the remaining market is so large, and Google has such a small share of it, that it might as well be all of advertising. Right?
I get it. I honestly do. Naturally, I disagree, and have some strong reasons for that. But again, I don’t want this to turn into a flame war while it is still an active thread. So I’ll tell you what: If you really care about my opinion (let me stress: opinion!) on all this and want to have some more arguments, disagreements and slanging matches, I can meet you back here on Thursday after most folks have “moved on” from this thread. And we can argue to our hearts content. Otherwise, I can let it go.
JG, I don’t see much point in continuing this thread as I have little more to add beyond rehashing old arguments. Thanks for your insights and for the spirited discussion.
🙂
I have heard from an INSIDE sources mother in law that this merger has been accepted in the us but not in the Europeon Union has anyone else heard this?
Google back through government intervention rather than through their own innovation and investment. As citizens we should be incensed and disgusted. Schmidt’s eye-roll was just being polite.
it interesting about “After rolling his eyes at the very idea of Microsoft – star of the antitrust stage in the late 90s – even playing the antitrust card, [Eric Schmidt] very clearly stated that the combo of Google and Doubleclick was a tiny percent of the overall advertising world.”
I think I run the risk of starting a flame war. I would rather not do that on a blog that is not my own, in front of a readership that probably largely does not care.