Brad Smith: Before the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights

Remarks by Brad Smith, senior vice president, general counsel and corporate secretary, Microsoft Corporation
Before the Subcommittee on Antitrust, Competition Policy and Consumer Rights
Committee on the Judiciary, United States Senate
Washington, D.C.
Sept. 27, 2007

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. 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 US$27 billion business, and it is projected to double to $54 billion in the next four years alone. To put that in perspective, that will be roughly the same size as the television and radio industries in this country today, combined.

These changes, as you noted, Mr. Chairman, are not only of tremendous economic importance, but they have serious societal implications as well. Online ads increasingly provide the economic foundation for a free press and for political life, 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 help identify the right questions. We know this market well. And it is absolutely clear to us that this merger raises serious questions that deserve serious answers.

I would like to address two questions myself very briefly. The first is this: What are the economic implications of allowing the largest Internet company in online advertising to acquire its most significant competitor?

While there are millions of Web sites 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 Web site publishers together. 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 are a Web site operator and you want to sell ad space on your site, or if you are an advertiser and you want to display your ads, you have to work with and through one of these intermediaries.

Now, already Google is the dominant company for one of the two main types of online advertising, search online ads. Roughly 70 percent of global spending on searchbased advertising today flows through Google’s AdWords 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, nonsearch ads the nonsearch ads that are displayed on Web sites that we visit. Today, Google and DoubleClick are the two largest competitors in this area. And as I hope we will discuss more, they are competitors in this area. And yet combined, Google will account for nearly 80 percent of all spending on nonsearch ads served to third party Web sites.

In short, if Google and DoubleClick are allowed to merge, Google will become the overwhelmingly dominant pipeline for all forms of online advertising.

Now, this merger will almost certainly result in higher profits for the operator of the dominant advertising pipeline, but we believe it 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.

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?

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.

This country doesn’t permit the phone company to listen to what you 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. Yet with this merger, Google seeks to record nearly everything you see and do on the Internet and use that information to target ads. Indeed, one question is whether this merger will create a whole new meaning to the term “being Googled.

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 serve ads as profitably. 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.

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 are all encouraged to work hard. We are all encouraged to earn our way to success. 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 and, indeed, for the Federal Trade Commission and this country is whether we want to abandon that principle now.

Thank you very much, Mr. Chairman. I look forward to answering your questions.