Microsoft’s acquisition of aQuantive was recently approved by the US Federal Trade Commission (FTC) and Yahoo completed its acquisition of ad exchange Right Media after a green light from the FTC. That just leaves Google-DoubleClick as the last major acquisition on the regulatory table. Now a telecom consultant, Scott Cleland, president of Precusor LLC, has written a much-discussed and very dense 35 page white paper that argues in favor of blocking the “Google-Click” deal and predicts it won’t happen accordingly.
I know nothing about Cleland’s history or his politics; however TechCrunch’s Duncan Riley argues that Cleland’s analysis is informed by conflicts of interest:
Cleland is also an anti-net neutrality activist who has backed the position of the existing telecommunications players in testimony to a Congressional hearing; simply as with any analyst or lobbyist, he makes a case that is usually in line with the concerns or beliefs of the industry that backs him. The only real question with this report: who wants Google’s DoubleClick acquisition to fail this badly?
Regardless of whether Cleland is on some level doing the bidding of Google competitors with his white paper, it clearly also seems opportunistic and designed to gain publicity for him and his firm. But ore importantly, let’s turn to his argument.
The section of the document that’s getting all the play is the following summary, which tries to make an analogy to the financial services or banking sector:
To equal Google-DoubleClick’s level of market concentration, one single financial services company would have to own: • The top ~15 Wall Street banks/asset managers; • ~60% of the hedge fund and private equity industries; • The New York and London Stock Exchanges; • The two leading providers of financial analytic tools: Bloomberg and Factset; • Two of the three national providers of credit profiles: Experian and Equifax; and • ~60% of the Federal Reserve’s and U.S. Census Bureau’s raw market and consumer data.
Most of the FTC committee members (and probably their aides) have limited understanding of the online ad marketplace and its dynamics. At best they’re going to be sophisticated lay people; at worst they’ll be in the category of Ted Stevens (US Senator from Alaska) who famously opined, “The Internet is a series of tubes.” (He wasn’t talking about YouTube or Yahoo Pipes.)
Cleland’s memo and the related media coverage it is bringing are bad news for Google because the above analogy and analysis will be more accessible to the committee members and probably strike them as a bad thing. However, the Bush administration has been historically unwilling to intervene and has allowed M&A activity to proceed willy nilly seemingly without concern for the impact on the market or the public interest. In that context and especially in light of the just-approved Microsoft and Yahoo acquisitions, it would be very surprising if the deal were blocked.
However, committee members are certainly going to be open to influence and one could take a quite cynical view of the entire process in that regard. But slightly less cynically, in this particular case, you have an alignment of powerful corporations, such as Microsoft and telecom companies, which oppose the Google-Click deal for self-interested reasons, as well as selected consumer groups who fear its impact on privacy. The seemingly unified anti-Google message of those bedfellows could also have a significant impact on committee members’ thinking.
But somewhere in all this there are supposed to be legal standards and rules ultimately intended to protect the public interest. While consumer groups generally are seeking privacy assurances from Google, the Cleland arguments and the corporate opposition go to the notion that if the acquisition is allowed to proceed Google will be the dominant online advertising company. The applicable law here is the Hart-Scott Rodino antitrust act (and underlying law), the purpose of which is to ensure that market consolidation doesn’t eliminate competition and lead to higher consumer prices. Review is typically triggered automatically by acquisition price thresholds.
In accordance with the legal standards, Cleland argues “With ~60% share of each of their respective technology platforms, search and display, technologies which are mutually-reinforcing, the combination would enable a horizontal merger to monopoly, which would harm users, advertisers and content providers with higher prices and less choice.”
There are simply too many complex arguments in the Cleland document to discuss and dissect here. There is certainly truth to the notion that while Google dominates paid search advertising, it is comparatively weak (vs. Yahoo and others) in display advertising, which the DoubleClick acquisition is precisely intended to remedy from Google’s point of view. Accordingly, approval of the merger would make Google a much more powerful advertising company.
There are several parts of Cleland’s white paper that I found to be unconvincing and/or inaccurate. For example, he argues that Microsoft doesn’t consider Google a primary competitor (based on SEC filings). That is simply a mischaracterization of Microsoft’s attitude. But, overall, his analysis is thoughtful and can’t be quickly dismissed.
My guess is that Google will essentially have to offer the FTC a point-by-point refutation of Cleland’s arguments at some point.
This is a very complex case that raises numerous questions that are not easily or quickly answered. The Cleland document makes a great many predictions – often called a “parade of horribles” in legal circles – about the future of online advertising in the wake of a Google-Click deal. Some of those predictions are undoubtedly correct, while many would likely not come to pass.
The “knee-jerk” response to Google’s intended acquisition of DoubleClick is that the company is just getting too big and powerful. But that’s not a value that the FTC or the Bush administration seem to care about, having presided over considerable market and media consolidation without concern. In addition, one could credibly argue, they don’t really take consumer privacy seriously either – recall the search engine subpoena flap of a year or so ago.
Again, given the laissez faire political climate and the FTC’s historical behavior during this administration, I would be surprised if the acquisition were blocked. But this Cleland white paper is a powerful weapon for those who oppose the deal on anti-competitive (as opposed to privacy) grounds.