The U.S. Federal Trade Commission staff is urging the filing of an antitrust suit challenging Google Inc.’s $750 million acquisition of AdMob Inc., according to three people familiar with the matter. It will be up to the five-member commission to decide whether to follow the staff’s advice or approve the deal. The people familiar with the matter spoke on condition of anonymity. Peter Kaplan, an FTC spokesman, declined to comment.

The FTC staff signaled last month it was leaning toward urging a court challenge when it was disclosed the agency was seeking sworn declarations from Google’s competitors and advertisers.

Google PR has been periodically sending bloggers and analysts material critical of that position. A post from mobile app developer Wertago is the latest in that series: “Ignorance and Hubris at the FTC…” It details the company’s interaction with FTC staffers and critiques their apparent lack of knowledge and expertise around questions of mobile advertising and competition:

There is no way the FTC knows enough to support a decision to block the deal. The staff members we spoke to were not particularly knowledgeable about the mobile ad space they are considering interfering in, or about the technology sector more generally, or about mobile app development and monetization, or about the changes in the mobile advertising sector in the past year, or about the level of competition and pace of change and innovation in the market, however broadly or narrowly you define it. More generally, it seems obvious to us that the computer, web, and mobile technology sectors are so competitive and fast-moving that NO ONE has the knowledge, expertise, economic insight, or clairvoyance to say with much confidence precisely what effect the AdMob acquisition will have on competition in the market or on consumer welfare. We think a recommendation to block the acquisition would be a mistake.

Among scores of others I also spoke to the FTC. I have not talked about it because I was not really supposed to. But the post above and the prospect of the FTC’s action cause me want to make a few comments about that experience and my impressions.

My sense from the questions I heard and their underlying assumptions is that the FTC was inclined to block the deal from the start. I say that carefully; I don’t think the investigation has been a sham but my sense is that the bias was always against the deal.

The attorney I spoke to was a very intelligent person but had a limited understanding of the mobile advertising market — at best. I spent a total of about three hours over two conversations trying to help explain and describe the companies operating in the mobile advertising space and the highly dynamic nature of the market.

This is a summary of what I said about Google to the FTC:

The company will have a number of advantages if the AdMob deal goes through. And AdMob unquestionably makes Google more competitive in mobile display and in-app advertising. It also puts Google in a stronger “holistic” position than Yahoo or Microsoft in mobile, partly because Google has moved faster and done a better job of executing vs. its main rivals.

I said however that I didn’t believe competition would be affected adversely and that advertising prices were not likely to go up. Indeed, mobile CPM prices have been falling in mobile. In short I said, yes Google becomes more powerful and effective but the deal doesn’t stifle competition. The market is dynamic and highly competitive, I told the FTC.

There were also some other things that I won’t go into, in my interactions with the FTC, leading me to believe the agency wanted to block the Google-AdMob deal. Again, I don’t think the investigation was a sham or pretense but I think the FTC point of view going in was a too-simplistic one: Google is overly powerful online and we don’t want that to extend to this important new arena as well. I think that turns out to be basically the “Alpha and Omega” here.

The FTC is certainly not alone. There are many critics out there who agree with that viewpoint and want to see Google “reigned in” in one or more ways. Yes, Google is powerful. And as an abstract matter too much power or control isn’t a good thing.

I’m no laissez-faire capitalist but I think the mobile ad market is both very young and highly dynamic. It’s evolving quickly and definitely very competitive. If the objective of anti-trust law is to protect competition in the market then it is simply unnecessary for the FTC to intervene at this stage by blocking the AdMob deal.

It is similarly unnecessary for the FTC to investigate Apple around its developer rules. Apple and the iPhone are far from a monopoly in mobile. The idea that the FTC is going to try and get involved in the debate over what software tools third party developers can or should be able to use is kind of absurd. The FTC wants to protect and promote Flash?

Apple’s rules and restrictions may cause developers to spend more time with other mobile operating systems such as Android, for example. Apple might hang itself by being too controlling. But the market is in a position to make that determination better than the lawyers at the FTC. Again it’s much too early for any regulatory intervention. Apple doesn’t have a smartphone monopoly (or even the majority share); it has a very strong product and platform that lots of people want to develop for. But there are multiple platforms out there and plenty of competition: Symbian, RIM, Android, Windows Mobile, WebOS, Meego, Bada and so on.

Let the market and the competitive dynamics of the marketplace do their job at this stage.

I’d much rather have the good folks at the FTC pay attention to things like the United-Continental merger and other potential consolidation in the airline industry. Ticket prices are high and getting higher it would appear. Combinations and acquisitions in that sector pose real risks to competition and ultimately to consumer prices.

Mobile advertising, by contrast, is a new and highly dynamic industry with intense competition. It’s literally evolving on a monthly basis. I would challenge the FTC and anyone to find a market more competitive.

Postscript From Danny Sullivan: I’ll also add something I shared on a publisher’s mailing list yesterday.

The last time the FTC acted against Google to “protect” competition, it was to suggest that if Google moved ahead with a deal to provide search results to Yahoo in 2008, it would face an anti-trust complaint. Google quickly backed down.

Google’s proposal would have left Yahoo with its own search technology. All along, Google’s argument had been that its move was intended to help a competitor stay a competitor in the space. Crazy? In Google’s view, it’s a better company if it faces competitors. They ensure Google stays on its toes. Unsaid is that they also help ensure Google can point to a healthy competitive market and say “look, no need to regulate us here!” In addition, having two weak competitors (Yahoo and Microsoft) might be better than a single one that potentially grows stronger (Microsoft).

Still, Yahoo would have kept its search tech and stayed a search player. In contrast, Microsoft also wanted a deal with Microsoft, to buy its technology outright. That deal would have been worth at least $9 billion.

After the FTC’s action to preserve competition, suddenly, Yahoo was no longer so valuable. It didn’t have Google that it could play against any Microsoft offer, no were there any other companies stepping forward to match the rich offers that both Google and Microsoft had put on the table. As I read it, the FTC effectively undermined Yahoo’s value, pretty much gift-wrapping the company for Microsoft.

A year later, with a leadership change at Yahoo, Microsoft came back with a new deal proposal. It still wanted Yahoo’s search technology, but it would no longer buy $8 billion in stock nor pay $1 billion in cash for it. Instead, it would simply allow Yahoo to keep 88% of sales form search ads on Yahoo’s site. Here’s the side-by-side of the two deals.

Only one thing had changed to produce this firesale price. Google was no longer allowed to compete for Yahoo’s business. As a result, the marketplace appears to have gotten less competitive, not more. Microsoft offered far less for Yahoo’s assets than a year before. In addition, Yahoo effectively signaled it would no longer be in the search game. Yes, the spin remains that Yahoo will still be a major search player, that it doesn’t need to own its own search tech, etc. etc.

A Search Eulogy For Yahoo article from last year debunks this from my experience in watching the same. Perhaps I’ll be proven wrong. But so far, since the launch of Microsoft’s Bing, all we’ve seen according to comScore figures is Bing taking share away from Yahoo. The deal’s not even in place, and Yahoo’s dropping. It’s hard to imagine that it’s going to recover, especially after it sells its technology.

So the FTC might block a Google purchase of AdMob? All that leaves me with is the idea that Apple might get the same gift-wrapped present — plus a feel a little sorry for any start-up that may be looking for a payday by being purchased by Google. The more it is prevented from buying, the more its competitors are likely to be handed bargain gifts.

Yahoo CEO Carol Bartz is banking heavily on the idea that Yahoo can stay competitive in search even without its own search technology. I wondered if Schmidt agreed, given how much he knows Google spends on its own technology. Last week during an interview, I asked if he felt Yahoo could stay a competitive player, if it gave up its search tech.

Schmidt dodged answering that one, saying he wanted to avoid specifics, as Google hasn’t taken an stance on the deal:

We have not taken a position on the deal. First place, as you know we proposed a deal which we came within an hour of being sued by the U.S. government over. So, in the annals of Google and Yahoo, that’s the deal we would like. And obviously that can’t happen right now. So I think it probably would sound like spoiled, whatever the term is, complaining to talk a lot about the Yahoo-Microsoft stuff. Historically Microsoft has not been a very good partner in these things. And so we’ve decided to take the perspective of just waiting. Let’s see more. I’m trying to avoid answering a specific question about Yahoo. Because one, I think it’s a little unfair for me, and second is that we truly don’t know.

But Google has taken a position to some degree, putting out this statement after the deal was initially announced:

There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. We’re interested to learn more about the deal.

In other words, the search space currently has Google, Yahoo and Microsoft currently as major competitors. The worry in that statement is that the Microsoft won’t leave Yahoo as competing. In contrast, when Google announced its proposed deal with Yahoo, the fact that Yahoo would keep its technology was positioned as important for Yahoo to stay strong. When I raised this issue, Schmidt reflected lightly on the differences between the two deals and how ultimately, he thinks an independent Yahoo helps search competition:

There are some significant differences. As we understand it there are some significant differences in the deal. In our deal it was non-exclusive. In our deal they would remain in the search space. In our deal they would maintain a direct advertising sales force. There are quite a few differences. But as I said, that’s not a deal that we could get through today, and we didn’t get it through in November. So it’s sort of like, what’s to say about it? It’s part of history. We took a very strong position that an independent Yahoo was important. And I think that remains our view. Because an independent Yahoo means more competition in the space in general. It’s better for advertisers, it’s better for content. You know, Yahoo has basically become a good company.

Here’s an excerpt:

[John Kelly, Microsoft's head of strategic relations,] sprang into action, activating his company’s vast Washington infrastructure.Microsoft’s protracted antitrust battles had left it with an army of lawyers and lobbyists and deep institutional knowledge of which politicians to approach and how best to sway them. Soon, Microsoft’s lobbyists were meeting with Herbert Kohl, chair of the Senate’s Antitrust Subcommittee. By early July the subcommittee was holding hearings. In October, Kohl wrote to [Tom Barnett, assistant attorney general for antitrust] warning that “important competition issues are raised by this transaction.”

But that was all familiar, the kind of campaign Microsoft had routinely run. Kelly wanted to take a different approach this time—not just opposing the deal but persuading other interested parties to speak out as well. The arguments of a known competitor may not sway the Justice Department, but customers’ opinions hold special influence. If advertisers—Google’s customers—voluntarily declared their opposition, the DOJ would listen closely.

Kelly turned to Michael Kassan, an advertising consultant who had been advising Microsoft off and on since 2002. Kassan—whose clients have included AT&T, Disney, and Viacom—recently had been named by Advertising Age as possessing the third-most-impressive Rolodex in the industry. Kelly asked Kassan to start talking to his contacts and drum up opposition to Google. Kassan assured him he knew just how to do it; there was plenty of fear and mistrust of Google among advertisers. “Google has badly misjudged how it is perceived,” he reassured Kelly. “We have a clear and easy story to tell.”

Other “Google enemies” mentioned in the story include AT&T, the National Association of Broadcasters, Verizon, Comcast and several others.

The story casts Google as the green (as in naive) political victim of more experienced and cunning adversaries who saw Google disrupting or undermining their respective franchises and markets. The now-tarnished myth of American capitalism is that markets are transparent, fair and operate largely on their own. In fact, as this case shows in microcosm, success in the “free” or “open” market is as much about politics and political influence as it is almost any other factor.

The Wired piece even implies the killing of the Google-Yahoo search deal is partly a Republican political vendetta for Google’s historical support of Democrats. However U.S. Senator Herb Kohl, chairman of the Senate Antitrust Subcommittee and Google critic, is a Democrat.

As much as Microsoft may have orchestrated the objections to the Google-Yahoo search deal, Google’s hands aren’t entirely clean either. Google was involved in thwarting the MicroHoo deal, by throwing Yahoo a search lifeline and providing some political cover for former Yahoo CEO Jerry Yang who wanted to find a way to preserve the independence of his company. And as much as the Wired piece portrays a conspiracy, as the quote above suggests — “We have a clear and easy story to tell” — Google’s increasing success itself raised concerns in enough quarters that it was not hard organize opposition to the deal.

Success is admired in this country. Too much success breeds envy, distrust and fear.

Here are some excerpts from the article/interview:

“We were going to file the complaint at a certain time during the day,” says Litvack, who rejoins Hogan & Hartson today. “We told them we were going to file the complaint at that time of day. Three hours before, they told us they were abandoning the agreement.”

The never-filed government complaint would have charged that the agreement violated Sections 1 and 2 of the Sherman Act, Litvack tells the Am Law Daily in one of his first interviews since the companies canned the venture. Section 1 bans agreements that restrain trade unreasonably. Section 2 makes it unlawful for a company to monopolize or attempt to monopolize trade.

“It would have ended up also alleging that Google had a monopoly and that [the advertising pact] would have furthered their monopoly,” Litvack says.

Litvack acknowledges that Microsoft Corporation and other companies lobbied the department to block the agreement, both publicly and and in private meetings. Litvack insists, though, that Microsoft’s lobbying had no bearing on his recommended course of action or on the division’s ultimate decision.

What’s significant is that the US DOJ effectively considers Google to be a monopoly, although it’s important to note that the question has not been adjudicated and so it’s merely a legal opinion. Google did not want to expose itself to potential regulation on the basis of an adverse finding by a court on the question of whether it was in fact a “monopoly;” hence, the cancellation of the Yahoo deal.

This also likely means that Google’s future deals involving online advertising may be scrutinized much more carefully and closely than they have been in the past.

The search collaboration that Ballmer referred to would presumably be similar to the search (as opposed to acquisition) deal previously offered to Yahoo — essentially to have Yahoo outsource search (both organic and paid ads) to Microsoft in exchange for guaranteed revenues over a several year period. Danny did a detailed post on the prior Microsoft search offer to Yahoo (compared with the now defunct Google deal).

That offer, as with the larger acquisition offer itself, was previously rejected by Yahoo as undervaluing the business. It was also rejected because it was seen by Yahoo as removing a strategic component of the company’s larger suite of advertising capabilities.

Circumstances have dramatically changed since Yahoo rejected Microsoft’s offer. And today Yahoo might be more open to a modified version of the earlier Microsoft search proposal; one could imagine a version of the Google-Yahoo deal. However, Microsoft doesn’t have as many advertisers as Google and couldn’t offer as much inventory for “the tail.”

A Microsoft-Yahoo search tie-up wouldn’t incur the wrath of the justice department, however, because combined they would only control about 30% of the consumer search market in the US.

Yahoo has many initiatives in various stages of execution and still has tremendous value to the consumer public (consumers don’t care who the CEO of Yahoo is). But if Yahoo were a parliamentary regime, there would be a vote of “no confidence” coming from much of the tech press and many bloggers.

(My personal view is that Yang seems to have lost the confidence of marketplace and that a new, more charismatic and forceful leader may be required to restore that confidence.)

Both the BBC and TechCrunch report on Yang’s chat with John Battelle at the Web 2.0 conference yesterday. The primary message that these reports convey is that Yang wants another bid from Microsoft. BBC quotes Yang saying, “To this day the best thing for Microsoft to do is buy Yahoo.” While that statement could be read as Yang’s unsolicited advice to Redmond, given Microsoft’s challenges in search, it could also be read as a plea of sorts.

In the latter context, Yang denied that he/Yahoo was responsible for killing the negotiations with Microsoft the last time around. According to the TechCrunch live notes from the talk:

Battelle says that a lot of people claim Yang is to blame for the deal falling apart. Yang counters, saying he is indifferent about keeping Yahoo independent and just wants what’s best for the company. He also reiterates that they went back to Microsoft after the offer was revoked to get them interested again.

This would appear to be a bit of “revisionist history,” looking back at Yahoo’s behavior and at all external appearances at the time. It certainly appeared that Yahoo was actively pursuing alternatives — and not just to maximize shareholder value. One of those alternatives came in the form of a paid-search deal with rival Google, which is now defunct. Another much-discussed alternative, an AOL acquisition or merger, was not discussed much during yesterday’s interview:

Battelle asks if Yahoo is talking to Microsoft about any kind of deal. Yang says no. Battelle asks if Yahoo is buying AOL, Yang says “I can’t talk about that.”

From my read of the various reports, it appears that Yang is sending a very mixed message, something like: “Yahoo is executing, Yahoo will continue to acquire other companies, Yahoo is strong . . . Microsoft, please buy us.”

Here’s more discussion from Techmeme.

Yahoo issued a public statement expressing disappointment with Google’s decision:

Yahoo! continues to believe in the benefits of the agreement and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court. Google notified Yahoo! of its refusal to move forward with implementation of the agreement following indication from the Department of Justice that it would seek to block it, despite Yahoo!’s proposed revisions to address the DOJ’s concerns.

While the implementation of the services agreement with Google would have enabled Yahoo! to accelerate its investments in its top business priorities through an infusion of additional operating cash flow, this deal was incremental to Yahoo!’s product roadmap and does not change Yahoo!’s commitment to innovation and growth in search. The fundamental building blocks of a stronger Yahoo! in both sponsored and algorithmic search were put in place independent of the agreement.

The combined statements reveal that the US Justice Department was indeed preparing to bring an anti-trust case against Google and the company didn’t want the fight. The confirmation of the impending action comes in a NY Times quote of US assistant attorney general Thomas O. Barnett:

“The companies’ decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action . . . The arrangement likely would have denied consumers the benefits of competition — lower prices, better service and greater innovation.”

The end of the deal represents a potential loss of hundreds of millions of potential dollars in search revenue to Yahoo. Right now Yahoo’s stock is up slightly and doesn’t seem to be affected by the news. Google’s shares are down by comparison.

Yahoo board member Carl Icahn has been trying to restart talks between Microsoft and Yahoo around search. One of Microsoft’s offers to Yahoo was to acquire its search business. This development may give him some more ammunition with other board members. It may also create the opportunity for Microsoft to go after Yahoo again, in whole or part.

Also “out there” is the possibility that Yahoo might merge with or acquire AOL’s internet business (though not the ISP unit). AOL revenues were off because of online display ad weakness in Q3 results announced today.

For more, see related discussion on Techmeme.

Since Icahn joined the Yahoo board, and since the rejection of the multiple Microsoft offers, the company has lost roughly 40 percent of its value.

Yahoo and Google just resubmitted their proposed paid search agreement with some modifications in hoping to mollify critics and pass US Justice Department muster. The Google paid search deal was presented to shareholders as an alternative to the more narrow Microsoft search deal that followed the failure of the outright acqusition of Yahoo.

If the newly revised deal fails, Icahn will have considerably more ammunition to argue for renewed talks with Redmond.

According to the Wall Street Journal, the new deal changes the agreement from 10 years to two years and limits the amount of money that Yahoo can collect up to 25% of its search revenue. The new plan also includes an opt-out mechanism for Google advertisers who don’t want their ads to show on Yahoo.

The original Google-Yahoo deal was announced in June and drew immediate concerns over antitrust issues. At that time, Yahoo CEO Jerry Yang said that the two companies didn’t need regulatory approval for this deal because it’s open and non-exclusive. Google’s blog post about the deal went out of its way to dampen any antitrust claims.

That didn’t stop the Justice Department’s Antitrust Subcommittee from investigating the agreement. Last month, the two search engines agreed to delay implementing the deal while the Justice Department continued its investigation. As recently as last week, rumors circulated that Google and Yahoo were preparing to call off the agreement altogether due to Justice Department demands.

More discussion on Techmeme.

Postscript from Greg: While the new deal offers a more limited duration and caps potential Yahoo revenues — so that Yahoo doesn’t become “lazy” and too dependent on Google, presumably — it’s not clear that these changes will satisfy the objections raised by some marketers and trade groups: that Google controls too much of the search marketplace.

We know from talking to Yahoo quite a bit that they’re not complacent about consumer search and are rolling out (and planning) numerous innovations in the coming weeks and months.

I would assume that this new deal explicitly addresses some of the DOJ’s concerns because Google and Yahoo have been in ongoing talks with anti-trust regulators. Thus, on that speculative basis, I would imagine this has a much better shot at being approved. We’ll see.

The two companies met Thursday with the Justice Department, part of a series of meetings to address the concerns of regulators. While the parties may agree to continue the talks — or they could reach a resolution — there are signs they are unwilling to make compromises to address the Justice Department’s objections . . .

The option to scrap the deal has been on the table before, but Google in particular has begun considering it more seriously as Justice Department talks haven’t progressed. One sticking point has been the department’s discussion of having the companies sign a consent decree stating the terms of the partnership. That would subject their compliance to continuing oversight by a judge.

Google and Yahoo originally took the position — Google in particular — that the deal wasn’t even subject to government approval because it didn’t constitute a merger or an acquisition. The companies said they were voluntarily cooperating with the Justice Department rather than being compelled to do so. Google made the case that this agreement was like its arrangements with AOL or Ask, in which Google ads are provided via those companies’ search results.

Yet, in September, on the heels of some very public objections from various advertisers and publisher trade groups, the government hired former Disney vice chairman Sanford Litvack to prepare a potential antitrust case against Google. Publicity surrounding that development arguably caused Google stock to take a significant hit.

Lobbying by Google and Yahoo then intensified in favor of their deal. Google and Yahoo went online (Google, Yahoo) to explain “the facts” and promote the deal to interested parties and regulators. Meanwhile Microsoft publicly and privately had been doing the same thing to try and kill the deal.

Google and Yahoo have agreed to a couple of delays to allow the government to complete its anti-trust review. It appears those delays have been part of an effort by Google and Yahoo to negotiate with and satisfy regulators’ issues and objections to the deal.

If in fact the parties did “walk away” both Google and Yahoo are likely to see some investor fallout, perhaps Yahoo more than Google. But it would also signal that Google has bumped up against some limits that it hasn’t encountered before: it’s own success in search and the US government.

There’s more discussion at Techmeme.