The Samba of Bad Moves: Eric Schmidt Changes His Testimony -- Again

It is an important Sherman Act question if Google used its profits from its dominance in search to subsidize its dominance in video through YouTube. Google should honestly answer that question.
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Chairman Herb Kohl and Senator Mike Lee of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights wrote an interesting letter urging the Federal Trade Commission to investigate the issues raised against Google by several of the subcommittee's senators. This passage is striking:

"As discussed at our Subcommittee hearing, Marissa Mayer, Google's Vice President of Local, Maps, and Location Services, admitted in a 2007 speech that Google did in fact preference its own websites [link mine]. She acknowledged that, in the past, Google ranked links 'based on popularity ... but when we roll[ed] out Google Finance, we did put the Google link first. It seems only fair, right? We do all the work for the search page and all these other things, so we do put it first ... That has actually been our policy, since then ... So for Google Maps again, it's the first link, so on and so forth. And after that it's ranked usually by popularity.' In response to written follow-up questions asking whether her statement was an accurate statement of Google policy, Eric Schmidt stated that 'it is my understanding that she was referring to the placement of links within a one box ... and her description was accurate.'

While the basis for Mr. Schmidt's "understanding" is not clear, even if her statement was in fact limited to the "one box" result, this is a clear admission of preferencing Google results. As consumer surveys show that 88 percent of consumers click on one of the first three links, these statements appear significant when analyzing Google's potentially anti-competitive practices."

The Vanity of False Distinctions

While Mr. Schmidt's careful recantation may sound like "the vanity of false distinctions" (N.B.: RFK), it came as no surprise to many in the music industry. After Chairman Kohl's reminder of how Google executives stated they preference Google properties, even some of the biggest Google fans questioned how far this went. Did Google rig the search ranking of its heavily subsidized YouTube affiliate's videos? For many, Chairman Kohl articulated a phenomenon they had seen frequently--the first page of a Google search for top music videos returned only YouTube videos. This result was not replicated on other search engines.

How to explain the chances of this happening? It is well known that Google heavily subsidizes its YouTube affiliate (Kohl and Lee suggest that Google may be extracting monopoly rents from online advertising sales).

As the Wall Street Journal's Peter Kafka put it four years after Google's 2006 acquisition of YouTube, "[D]oes anyone want to guess when, if ever, Google will tell us that YouTube is actually profitable?" Or said another way, when, if ever, will Google stop subsidizing YouTube with profits from its dominance in search?

Schmidt Changes His Testimony About Google's Dominance

The senators also noted this discrepancy:

"Google is dominant in general Internet searches, with a 65 to 70 percent market share in computer-based Internet search, and a market share of at least 95 percent for Internet searches done on mobile devices. Indeed, in response to Senator Kohl's question at our Subcommittee hearing to Google's Executive Chairman Eric Schmidt as to whether Google is a monopolist in online search, he responded, 'I would agree, Senator, that we're in that area...' The precise question Mr. Schmidt was asked was "do [you] recognize that ... your market share constitutes monopoly ... dominant firm, monopoly firm? Do you recognize you're in that area?' Schmidt replied that he 'would agree.' However, in response to written questions for the record following the hearing, Mr. Schmidt revised this answer, stating: '[i]nferring that Google is in any way 'dominant' in search would be incorrect'." (emphasis mine)

Given the YouTube phenomenon, I would suggest that the "revised" answer doesn't pass the laugh test and it sounds like Chairman Kohl might agree.

Clapping on One and Three

It is an important Sherman Act question if Google used its profits from its dominance in search to subsidize its dominance in video through YouTube. Google should honestly answer that question.
Google should also honestly answer why it paid a billion dollar premium for YouTube -- was Google's plan to use YouTube to achieve market dominance over video search? Not to mention Google's willingness to subsidize YouTube's losses for five years (and counting). Dallas Mavericks' owner Mark Cuban recently called the YouTube acquisition "crazy" -- was the deal illegal because it was crazy or crazy because it was illegal? Chairman Schmidt should know the answer; he reportedly was the champion of the YouTube acquisition and billion dollar premium to his board of directors.

And Google should honestly answer whether Google's ownership of both YouTube and the dominant means to find YouTube resulted in "cooking," to use Senator Lee's metaphor. Senator Richard Blumenthal observed: "'You run the racetrack, own the racetrack...and your horses seem to be winning.' To which his colleague from Minnesota, Al Franken, joked: 'Google might be doping the horses.'" (Now that's irony.)

Chairman Kohl and his colleagues clearly get it. But they can only do so much by themselves.

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