Oral Testimony by Brad Smith before the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights

Brad Smith:  Thank you for the introduction my colleagues at the table, thank you Senator Kohl, Senator Hatch, other members of the subcommittee. 

Let me be the first to acknowledge that Microsoft is not disinterested when it comes to the issues before this committee.  No competitor ever is, none of us are disinterested.  But we do know a lot about this market.  And using that information, we can help identify the questions that are important for reviewing this agreement. 

I think the principle question is this:  Can a single company establish effective control of the pricing of 90 percent of the market for search advertising by entering into an agreement with its single largest competitor?  Now, the technology is complicated, but the antitrust issues are straightforward, that’s what I’d like to address this morning. 

First, search has become the gateway to the Web.  Many Americans sit down at a computer and the first thing they look at is a search page.  When they get the results, they use those results to determine what else they’re going to look at or perhaps use or buy from a company across the country. 

Search advertising has become the fuel that is supporting a lot of the content on the Internet today, as Senator Leahy referred to earlier.  It may be a news score — I’m sorry, a sports score, it may be a news story, it may be entertainment, but all of this free content is frequently paid for, including by search advertising.  It has become a very large market. 

By 2011, it’s estimated that the market for search advertising will exceed $16 billion.  That will come close to rivaling the $20 billion that is paid today on all advertising for all cable television across the country.  We believe the Internet today is at a moment of historical importance in its evolution.  If you look at the market for search advertising, there are three principle competitors:  Google has 70 percent of this market, Yahoo has 20 percent, and Microsoft has less than 10 percent. 

So the fundamental question is what effect will this new agreement between Yahoo and Google have on the future of competition on the Internet?  We believe the effects will be fourfold:  First, it will lead to an unprecedented level of concentration when it comes to search advertising.  In the history of advertising, no single company has managed to take control of pricing of 90 percent of all of the advertising in any medium, not in television, not in radio, not in publishing, it shouldn’t happen on the Internet. 

Second, this is going to mean fewer choices for advertisers.  Today, there are many advertisers that choose to advertise on Yahoo either instead of or in addition to advertising on Google.  And yet under this agreement, many of these advertisers are going to lose that choice.  They’re going to have to go buy ads from Google simply to get the very same ad placed in the very same place on a Yahoo search page. 

Third, this agreement will mean higher prices, the whole basis for this agreement is the opportunity for Yahoo to raise its prices.  When Yahoo has filed its statements with the Securities and Exchange Commission, it’s referred to the opportunity for, quote, “better monetization”  unquote.  Mostly, that’s a fancy way of describing a price increase.  When Yahoo says it sees an $800-million opportunity to increase revenue, that’s money that’s going to come out of the pockets of American companies large and small, companies that are buying cheaper ads on Yahoo today. 

Finally, this agreement does raise important questions for privacy.  It’s not just what is shared between the companies, but what information flows from users to Google.  If search is the gateway to the Web, as most believe it is, then this agreement creates the prospect of a single company, Google, taking control of that gateway.  It raises the prospect of information from up to 90 percent of search advertising flowing to Google.  If this agreement goes forward, this Congress may not need to enact a federal privacy policy, we’ll have a national privacy policy, it will be Google’s privacy policy. 

So in sum, let me say we acknowledge that this technology continues to change rapidly, but for 118 years since the Sherman Act was enacted, one rule of the road has remained constant:  We’re all encouraged to work harder in order to succeed.  We’re all encouraged to offer consumers a better product, but no one is permitted to buy control of up to 90 percent of the market by entering into an agreement with its single largest competitor. 

The question before this Congress, and indeed the Department of Justice and the country as a whole, is whether that principle should be abandoned now.  Thank you.