Brad Smith: As Prepared Oral Testimony, U.S. Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights
Sept. 27, 2007
As-prepared oral testimony of Microsoft Senior Vice President and General Council Brad Smith, before the U.S. Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights, Sept. 27, 2007 in Washington D.C.

As Prepared – Oral Testimony of 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.
September 27, 2007

Thank you, Mr. Chairman, for the opportunity to provide Microsoft’s perspective on these important issues this afternoon.

The future of the Internet will be decided by developments in online advertising. Online advertising is rapidly emerging as the fuel that powers the Internet and drives our digital economy. Online advertising is already a $27 billion market. This is projected to double, to $54 billion, in the next four years alone. That is roughly equal to the size of America’s radio and television industries combined.

These changes are not only of tremendous economic importance, but have serious societal implications as well. Online ads will increasingly provide the economic foundation for a free press and for political life more broadly.

I will be the first to admit that Microsoft is not disinterested in this issue; competitors never are. But I do think we’re in a good position of identifying important questions. We know this market very well. And it is absolutely clear to us that this merger raises serious questions that deserve serious answers.

I would like to address two of those questions briefly:

First, what are the economic consequences of allowing the largest company in online advertising to acquire its most significant competitor?

While there are millions of web sites and advertisers on the Internet, there are actually a very small number of “intermediaries” that provide the tools and services that connect them. These intermediaries play a gateway or middleman role if you will, much like the natural gas pipelines that connect refineries to distributors and to consumers in their homes. If you are a web site and want to sell ad space on your site, or if you are an advertiser who wants to display your ads online, you have to work with them or one of their intermediaries.

Already Google is the dominant company for one of the two main types of online advertising - namely online search ads. Roughly 70 percent of global spending on search-based advertising today flows through Google’s AdWords.

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 – non-search ads. Today Google and DoubleClick are the two largest competitors in this area. Combined, Google will account for nearly 80 percent of all spending on non-search ads.

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

This merger will almost certainly result in higher profits for the operator of the dominant advertising pipeline, but it will be bad for everyone else. It will be bad for publishers, bad for advertisers, and most importantly, 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 served based on user data. As consumers we give up this data – though 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 a 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 what you type and use that information to target ads. Yet with this merger, Google seeks to record almost everything you see and do on the Internet and use that information to target ads. One question is whether this merger will create a whole new meaning to the term “being googled.”

These privacy issues have antitrust consequences. Given the nature and economics of online advertising, this concentration of user information means that no other company will be able to target ads as profitably. It will substantially reduce the ability of others to compete.

I appreciate that this technology and this business model are new, and I agree the Internet continues to change.

Yet amidst constant change, it is worth bearing in mind that one rule of the road has remained fixed in this country for the 117 years since the Sherman Act was adopted. That principle is this: We are all encouraged to work hard every day. We are all encouraged to earn our way to success. But no one is permitted to buy success by purchasing its largest competitors.

That principle has served this country well through generations of new industries and technologies. We’re discussing today what is almost certain to become one of the most important markets of the 21st century. The question for this Congress – and for the Federal Trade Commission and this country – is whether we should abandon this principle now.

Thank you very much. I look forward to answering any questions you may have.

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