Is the perfect market not so perfect after all?
Google, the dominant navigator and king-maker of the web, is finally getting the antitrust inquiry from the Federal Trade Commission that its competitors and opponents have long hoped for, a challenge that goes to the very core of the search titan's business practices.
The feds have taken an active interest in Google's acquisitions of late, from DoubleClick to Admob to an aborted attempt at a search partnership with Yahoo. But this is , as one D.C. insider put it, "the big one."
Although there are no allegations yet to respond to, Google started to mount its public defense today. "Using Google is a choice," Google fellow Amit Singhal wrote in a blog post, "and there are lots of other choices available to you for getting information: other general-interest search engines, specialized search engines, direct navigation to websites, mobile applications, social networks, and more."
That may be the case, but Google's dominance in search queries is great, at about 65%, according to Hitwise. Its dominance in search dollars is even greater, at 75.2%, according to eMarketer.
It's unclear where exactly the FTC will focus its investigation, but it will seek comment from Google's partners and competitors, who may raise several questions.
Does Google's ad auction operate fairly?
Companies that advertise on Google bid against each another to place a "sponsored result" on its search-result pages. If General Motors, for example, was the highest bidder on the keyword "cars," it would appear on the page when users search for that term.
But according to an industry executive who is familiar with Google's bidding system, there is unfair pricing pressure in some instances. Whenever Google places a "house ad" on a search term, such as an ad for its photo product Picasa that shows up when consumers search for "photos," the company takes up a keyword ad slot and thereby boosts scarcity.
"When Google enters the auction, they're increasing what is called the bidding pressure for a search term that they, of course, didn't pay for," this executive said. If Google paid for its own house ads, it would be its own biggest advertiser. The value of house ads taken by Google for its own products was more than $83 million in only the first five months of 2011, according to AdGooroo. The second-biggest advertiser, Ask.com, spent an estimated $67 million.
Does Google favor its commerce affiliates?
Google also sometimes places links to members of its Affiliate Network, which includes marketers such as Target and Land's End, in sponsored search results. But these are effectively house ads, placed at no cost to affiliates. Google gets an affiliate fee for any product a person buys through this network, so it is in Google's interest to show affiliate links free of charge.
Does Google unfairly promote its own products in search?
Most of Google's efforts these days center on building its position outside search, in display ads, maps, mobile and social. And searches for an address, for example, typically return Google Maps results first. In some cases, competing map engines such as MapQuest don't even show up in the first page. The government might well argue this is an anti-competitive practice. Google may say its Maps product offers the best result, meaning it provides the most value to consumers.
Google's recent $700 million acquisition of travel search engine ITA Software also means Google now controls the underlying data upon which myriad other travel sites, such as Travelocity and Kayak, base their services. The Justice Department approved that merger, but under the condition that any competitor using ITA's search product to offer flight information will be able to compete fairly within search results. It is unclear, however, exactly how that will be maintained. The Justice Department's ruling required Google to provide "mandatory arbitration."
The FTC's investigation is unlikely to affect Google's biggest advertisers in the near term. "It's early in the inquiry," said David Karnstedt, CEO of Efficient Frontier, a digital advertising firm. "It could go on for months or even years. Of course Google accounts for such a large part of marketers' budgets they should follow and understand things, but for now it's wait and see."