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45–092 PDF 2008

S. HRG. 110–568 

THE GOOGLE–YAHOO! AGREEMENT AND THE 

FUTURE OF INTERNET ADVERTISING 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ANTITRUST, 

COMPETITION POLICY AND CONSUMER RIGHTS 

OF THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JULY 15, 2008 

Serial No. J–110–106 

Printed for the use of the Committee on the Judiciary 

( 

(II) 

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

ARLEN SPECTER, Pennsylvania 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

WILLIAM CASTLE, Republican Chief Counsel and Staff Director 

SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND CONSUMER RIGHTS

HERB KOHL, Wisconsin, Chairman 

PATRICK J. LEAHY, Vermont 

JOSEPH R. BIDEN, JR., Delaware 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

ARLEN SPECTER, Pennsylvania 

CHARLES E. GRASSLEY, Iowa 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

JEFFREY MILLER, Chief Counsel 

WILLIAM CASTLE, Republican Chief Counsel 

(III) 

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page 

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah ............................ 4 

Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin ............................ 1 

prepared statement .......................................................................................... 79 

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 3 

prepared statement .......................................................................................... 80 

Schumer, Hon. Charles E., a U.S. Senator from the State of New York ............ 4 

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 2 

WITNESSES 

Callahan, Michael J., Executive Vice President and General Counsel, Yahoo! 

Inc., Sunnyvale, California .................................................................................. 6 

Carter, Tim, President and Chief Executive Officer, AsktheBuilder.com, Cincinnati, Ohio ......................................................................................................... 12 

Crowley, Matthew, Chief Marketing Officer, Yellowpages.com., Glendale, California ..................................................................................................................... 13 

Drummond, David, Senior Vice President of Corporate Development, and 

Chief Legal Officer, Google, Mountain View, California ................................... 8 

Smith, Brad, Senior Vice President and General Counsel, Microsoft, 

Redmond, Washington ......................................................................................... 10 

QUESTIONS AND ANSWERS 

Responses of Michael J. Callahan to questions submitted by Senator Kohl ...... 32 

Responses of Matthew Crowley to questions submitted by Senator Kohl .......... 36 

Responses of David Drummond to questions submitted by Senator Kohl .......... 39 

Responses of Brad Smith to questions submitted by Senator Kohl .................... 46 

SUBMISSIONS FOR THE RECORD 

Callahan, Michael J., Executive Vice President and General Counsel, Yahoo! 

Inc., Sunnyvale, California, statement ............................................................... 50 

Carter, Tim, President and Chief Executive Officer, AsktheBuilder.com, Cincinnati, Ohio, statement ...................................................................................... 60 

Crowley, Matthew, Chief Marketing Officer, Yellowpages.com., Glendale, California, statement .................................................................................................. 64 

Drummond, David, Senior Vice President of Corporate Development, and 

Chief Legal Officer, Google, Mountain View, California, statement ................ 71 

Small Business & Entrepreneurship Council, Karen Kerrigan, President and 

Chief Executive Officer, Oakton, Virginia, letter .............................................. 81 

Smith, Brad, Senior Vice President and General Counsel, Microsoft, 

Redmond, Washington, statement ...................................................................... 82 

(1) 

THE GOOGLE–YAHOO! AGREEMENT AND THE 

FUTURE OF INTERNET ADVERTISING 

TUESDAY, JULY 15, 2008 

U.S. SENATE, SUBCOMMITTEE ON ANTITRUST, COMPETITION POLICY AND

CONSUMER RIGHTS, COMMITTEE ON THE JUDICIARY, Washington, D.C. 

The Subcommittee met, pursuant to notice, at 10:31 a.m., in 

room SD–226, Dirksen Senate Office Building, Hon. Herb Kohl, 

Chairman of the Subcommittee, presiding. 

Present: Senators Kohl, Leahy, Schumer, Cardin, Hatch, and 

Specter. 

OPENING STATEMENT OF HON. HERB KOHL, A U.S. SENATOR 

FROM THE STATE OF WISCONSIN 

Chairman KOHL. We will call this hearing to order at this time. 

Today we are going to examine the Internet advertising market. 

We have read daily news accounts of Microsoft’s efforts to buy all 

or part of Yahoo! and proxy wars being fought for control of 

Yahoo!’s future. 

No one knows the outcome of those events, but today we will examine what we do know. Google and Yahoo!, the two largest competitors in search-based advertising, have reached an agreement 

where Yahoo! will outsource a portion of its advertising business to 

Google and the two companies will split the proceeds. Yahoo! contends that this will add $800 million annually and enable them to 

become a stronger independent competitor to Google. Critics, on the 

other hand, ask how the agreement could possibly be good for competition. They argue that Google is paying its largest competitor a 

premium not to compete as vigorously as Yahoo! had previously. 

And the higher ad rates it will earn will encourage Yahoo! to compete even less. So we are forced to ask today whether this agreement will reduce Yahoo! to nothing more than the newest satellite 

in the Google orbit. 

While we will need to study this deal carefully, what is indisputable is the vital importance of Internet advertising to the national economy. As we increasingly rely on the Internet for commerce, entertainment, communication, and news, advertising on 

the Internet has become ever more essential to business. In 2007, 

more than $21 billion was spent on Internet advertising in the 

United States, more than the amount spent on advertising on cable 

television, broadcast TV networks, radio, or billboards. And it has 

tripled in just the last 5 years. 

2 

Google, Yahoo!, and Microsoft perform essential functions. Not 

only do they serve as gateways to the Internet, but in doing so, 

they help businesses and consumers find each other with the most 

relevant advertising ever seen. So the stakes are very high in 

maintaining a vibrant and competitive Internet advertising sector. 

One type of Internet advertising, the advertising that is displayed 

with Internet searches, is particularly impacted by the Google/ 

Yahoo! deal. The two companies together have a 90-percent market 

share in Internet search advertising, with Google alone controlling 

more than 70 percent of that market. In examining the competitive 

impact of this deal, we will need to find answers to a number of 

important questions: What will be the effect of Yahoo! outsourcing 

a portion of its search advertising to its biggest competitor? Will it 

lead to higher advertising rates or will it work to advertisers’ benefit by giving them a bigger audience? Do other types of Internet 

advertising factor into this equation? 

The history of the development of the computer industry gives us 

reason to be cautious as we evaluate this deal. A decade ago, today’s witness Microsoft came dangerously close to quashing competition throughout the high-tech economy. We are pleased that 

Microsoft has reformed its business practices, but this experience 

teaches us the importance of acting and acting early to ensure that 

competition is preserved in this vital sector of the economy. 

[The prepared statement of Senator Kohl appears as a submission for the record.] 

I turn now to Senator Arlen Specter for any comments. 

STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 

THE STATE OF PENNSYLVANIA 

Senator SPECTER. Well, thank you, Mr. Chairman. This is a very 

important hearing. The Internet has come to be such a major factor 

in our communications, very, very important, and we are dealing 

here with some of the giants in the field. The agreement would give 

Yahoo! the option to display Google ads on its side of the search 

results, non-exclusive. And there are a lot of ramifications. As 

noted over the weekend, Microsoft, with the support of Yahoo!’s 

shareholder Carl Icahn, made yet another offer to acquire Yahoo! 

but Yahoo! declined. Now it is reported that Mr. Icahn will mount 

a proxy fight at the August 1st Yahoo! shareholders meeting in an 

effort to complete a deal with Microsoft. 

We are really in such a transitional age, it is hard to keep up 

with all of the technical advances. And it is a point of amazement 

to me to open up the Internet and put in the name of Senator Pat 

Leahy or Senator Herbert Kohl or my own name and see the splash 

of information that comes out. And high-tech and advertising have 

become the order of the day. And then when you have the entry 

into the field of people like Mr. Icahn, proxy fights, it is a little 

hard to understand all of what is going on. 

Let me particularly commend Senator Kohl. Among the four of 

us here, he is the only non-lawyer. That has come to be an advantage in the U.S. Senate. It clears the head. He looks at these issues 

from a little different perspective, not burdened with all the antitrust courses which Senator Leahy took at Georgetown and Senator 

3 

Schumer took at Harvard. And it is fortunate to have that kind of 

a perspective on this kind of an issue. So good work. 

Chairman KOHL. Thank you, Senator Specter. 

Senator Leahy, would you like to make a few comments? 

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR 

FROM THE STATE OF VERMONT 

Senator LEAHY. Well, I must admit when I see Senator Specter 

saying about clearing one’s head not being a lawyer, I recall once 

when scuba diving with my wife, and this 9-foot nurse shark, the 

largest one we had ever seen, usually harmless—that is the operative word, ‘‘usually.’’ It came shooting right at us. We kind of 

ducked. It went right over us and thought, That is great, it left. 

It turned around and it comes right back at us. I was sucking in 

so much air, I thought maybe the tanks would collapse. And we got 

back on the boat, and I said to my wife, who is a registered nurse, 

I said, ‘‘Well, don’t worry, dear. That shark gave you professional 

courtesy because a nurse shark, you are a nurse.’’ She said, ‘‘No, 

darling. You are a lawyer. The shark gave you professional courtesy.’’ 

[Laughter.] 

Senator LEAHY. But I do enjoy seeing the information, and once 

in a while it is accurate that you read about each other. And once 

in a while it is not. But I think the point that has been made by 

both Senator Kohl—and I compliment him for holding this hearing—and Senator Specter is that the Internet opens new means of 

communication, new ways to buy and sell products, all the things 

you all know better than anybody else. And that free and easily 

accessed content on the Internet, especially the free content, is 

being driven by a successful and competitive online advertising industry. We would not have it without that. 

The online advertising industry in the U.S. I understood sur- passed $21 billion last year. That is something everybody thought 

was an experiment just a few years ago, one of the fastest growing 

areas. And more and more people are using the Internet—business, 

schools, my 10-year-old grandson who goes on to check his school 

schedule and things like that. And more and more people are going 

to try to move their messages online. 

Now, the question for us here is whether these advertisers—and 

it could be Orvis or the Vermont Teddy Bear Company, thinking 

about companies in my own State, or it could be a major corporation like an auto company or something like that—will find options 

at competitive prices because the business there is dynamic. The 

antitrust laws, rooted as they are in the fundamentals of competition in innovation and pricing, are nimble enough to keep up with 

changing business models and technology. 

But we have this drama being played out in the courting of 

Yahoo! by both Microsoft and Google, and that is going to have 

lasting effects. The Google agreement with Yahoo! may relate only 

to text advertisements, but if it stifles competition in this market, 

that will quickly spill into emerging online ad markets such as delivery to mobile systems, telephones and others. 

The ability of a single company to dominate the online advertising marketplace also raises the specter that one company will acVerDate Aug 31 2005 11:55 Oct 31, 2008 Jkt 045092 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\45092.TXT SJUD1 PsN: CMORC
4 

cumulate vast amounts of personal viewing data. That worries me 

as much as any one item. It worries me whether it is private industry doing it or whether it is our Government doing it because of 

the privacy concerns. This is an issue I am going to remain focused 

on as the online advertising market continues to develop. 

Senator Specter and I held a hearing about the gathering of information within the data bases in the Federal Government on this 

and how the Antitrust Subcommittee has taken a leading role in 

looking at the competition issues. And I really want to thank Senator Kohl for staying vigilant on this. When he told me he was 

holding this timely and important hearing, I thought it was a great 

idea. 

I will hold off and listen to the witnesses, and thank you, Herb. 

[The prepared statement of Senator Leahy appears as a submission for the record.] 

Chairman KOHL. Thank you very much, Senator Leahy. 

Senator Hatch? 

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 

THE STATE OF UTAH 

Senator HATCH. Well, thank you, Mr. Chairman. I welcome all of 

you witnesses here today. This is a very important set of issues, 

as you know, and I could outline them, but I am sure everybody 

knows what we are talking about or at least has some idea. We 

want to take every consideration here that we can. These involve 

tremendous entities that do tremendous things in our society, and 

there are tremendous antitrust issues involved. 

So I just want you to know I take a great deal of interest in this, 

and as my colleagues will, and I hope that we can arrive at the 

right conclusions. But we are grateful to have all of you here to 

help enlighten us here today, and we look forward to hearing your 

testimony. 

Thank you, Mr. Chairman. 

Chairman KOHL. Thank you very much, Senator Hatch. 

Senator Schumer? 

STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR 

FROM THE STATE OF NEW YORK 

Senator SCHUMER. Well, thank you, Mr. Chairman, and first let 

me join my colleagues in just thanking you for being such a diligent and conscientious Chair of this Subcommittee, on which I am 

proud to serve, and making sure that there is an antitrust law here 

and it is vibrant and active and important. And I also want to 

thank all the witnesses for coming today to talk with the Subcommittee. I care a lot about this issue. You know, the Internet is 

developing every day, changes. It is exciting to be sort of at the beginning of laying a whole new way that people communicate and 

that changes all the time. And our job here, because changes now 

may affect things 20, 30, 50 years into the future, is to make sure 

it stays as competitive and as consumer friendly as possible. 

And second, of course, I have a parochial interest. Internet advertising is a large industry in New York and a growing industry 

in New York, and we in New York base some of our future on that 

industry. We cannot just rely on one industry. 

5 

And so for all those reasons, I am interested, and that is why I 

have followed developments in this industry closely over the last 

few years. I want to commend the companies testifying for maintaining a robust public debate on some of the most important 

issues in this critical sector. 

Yahoo! and Google have consistently moved the debate forward 

and have been fierce competitors. And for the most part, consumers 

have benefited as a result. And let me say this: Regardless of whatever happens with this deal, I am confident that Yahoo! and Google 

will wake up the next morning and prepare for the next battle. I 

am not concerned that this deal will spell the end of either company. But what I am concerned about is whether this deal is good 

for everyday Internet users. That is really what the Internet is all 

about: connecting each citizen on his or her own to information and 

commerce more efficiently than was ever possible before. And I feel 

confident, Mr. Chairman, that this arrangement could well result 

in Internet advertising that is more tailored to Internet users’ 

wants and needs. And I also appreciate the reassurances from 

Google and Yahoo! about what they will to protect consumer privacy, and, of course, we will be watching, I know, under Chairman 

Leahy’s watchful eye to make sure that those pledges are followed 

through. 

I am also sensitive to two of the antitrust concerns that have 

been raised. I hope this arrangement will not lead to a price floor 

or any unlawful price fixing for search advertising, as some have 

alleged. And I hope that this deal will not stifle Yahoo!’s development in the field. 

So I look forward to the testimony. I thank you for having the 

hearing, Mr. Chairman, and I know we will continue to follow this 

very important and really seminal issue. 

Chairman KOHL. Thank you very much, Senator Schumer. 

We would like now to introduce our panel of witnesses. Our first 

witness today will be Michael Callahan. Mr. Callahan is the General Counsel for Yahoo!, where he has worked since 1999. Prior to 

joining Yahoo!, Mr. Callahan held positions with Electronics for Imaging, Inc., and the law firm of Skadden Arps. 

Following him will be David Drummond. Mr. Drummond is the 

Senior Vice President for Corporate Development and Chief Legal 

Officer at Google. In this role, Mr. Drummond works with management teams at Google to evaluate new business opportunities, including alliances and mergers. 

Next we will be hearing from Brad Smith. Mr. Smith is the Senior Vice President and General Counsel for Microsoft. While at 

Microsoft, Mr. Smith has played a leading role in the company’s intellectual property, competition, and other public policy issues. He 

also served as Microsoft’s Chief Compliance Officer. 

Following him we will be hearing from Tim Carter. Mr. Carter 

is a master carpenter and plumber as well as syndicated columnist 

on building. He is the founder of AsktheBuilder.com, an online resource for building and home repair. 

And then we will be hearing from Matthew Crowley. Mr. Crowley is the Chief Marketing Officer for AT&T’s Yellowpages.com. 

Prior to his position with Yellowpages.com, Mr. Crowley worked at 

SBC’s SmartPages.com and Pacific Bell Smart Yellowpages. 

6 

We thank you all for appearing before this Subcommittee. I remind you all please to limit your opening testimony to 5 minutes. 

Now I ask all of you to stand and take the oath with your right 

hand raised. Do you affirm that the testimony you are about to 

give will be the truth, the whole truth, and nothing but the truth, 

so help you God? 

Mr. CALLAHAN. I do. 

Mr. DRUMMOND. I do. 

Mr. SMITH. I do. 

Mr. CARTER. I do. 

Mr. CROWLEY. I do. 

Chairman KOHL. Thank you so much. 

Mr. Callahan, we would be delighted to hear from you. 

STATEMENT OF MICHAEL J. CALLAHAN, EXECUTIVE VICE 

PRESIDENT AND GENERAL COUNSEL, YAHOO! INC., SUNNYVALE, CALIFORNIA 

Mr. CALLAHAN. Thank you, Chairman Kohl, Ranking Member 

Hatch, and members of the Subcommittee. My name is Michael 

Callahan, and I am Executive Vice President and General Counsel 

of Yahoo! Inc. I appreciate the opportunity to be here today to discuss the dynamic and growing Internet advertising space and the 

commercial agreement between Google and Yahoo!. 

Yahoo! welcomes this hearing, and we are confident that the 

more one learns about this agreement, the more clear it becomes 

that it is good for competition—good for consumers, good for advertisers, and yes, good for Yahoo!. 

The purpose of this commercial arrangement and the intent of 

Yahoo! moving forward is to help make our company an even 

stronger competitor to Google, to Microsoft, and to others in the dynamic and rapidly growing online advertising world. As I am sure 

you know, this has been an interesting time for our company, to 

say the least. 

While I don’t want to dwell on the very public proxy fight in 

which we are currently engaged, I do want to spend a brief moment 

on it because it will give you a flavor for how intensely competitive 

the search business has become. All of the companies at this table 

are laser focused on being significant players in search. With this 

business arrangement, Yahoo! will continue to execute on its longterm corporate strategy. Microsoft, on the other hand, has turned 

to activist shareholder Carl Icahn, in the apparent hope that this 

will force a fire sale of Yahoo!’s core strategic search business. 

Our priority at Yahoo! is to build value for our stockholders. That 

continues to be our core mission. What we will not do, however, is 

allow our business to be dismantled or sold off piecemeal on terms 

that would be disadvantageous to Yahoo! stockholders and to the 

market as a whole. I trust that this will give you context to understand the extraordinary value we all place in the paid search portion of the online advertising business and how very competitive it 

is and will remain, and why there are so many misconceptions— 

advanced by our competitors—about the agreement we have entered into with Google. 

Let’s start by reviewing what this agreement is not as well as 

what it is. 

7 

First, this is not a merger. Far from it. We will increasingly compete with Google and they with us. This is a commercial arrangement between two companies who will remain autonomous and 

compete aggressively-in search and display advertising, mobile, 

news, e-mail, finance—you name it. Yahoo! is here to stay, and we 

intend to compete across countless platforms, including search, for 

years to come. 

Second, Yahoo! is not exiting search, nor are we ceding any portion of that space to Google. This will not, as some claim, result in 

Google controlling 90 percent of the search business. To the contrary, we will continue to do everything we can to grow our share 

and also strengthen our competitiveness in search and search advertising. This deal is just one more important step along that 

path, and with all due respect to Google, we have every intention 

of fighting them and winning—in this and in other areas—for years 

to come. 

Furthermore, this agreement does not affect algorithmic search 

at all. When a user comes to Yahoo! and performs a search, the algorithmic results returned will still be entirely Yahoo!’s. Yahoo! 

serves close to a quarter of the searches that consumers make 

today, and we expect to be serving that or more after this deal is 

implemented. 

Third, this agreement is non-exclusive and gives Yahoo! complete 

discretion over how, where, and when we will choose to use Google 

advertising on our sites. There are no minimum requirements either, and Yahoo! is free to make similar deals with other companies. In other words, this gives Yahoo! the option to show Google 

ads, but does not tie our hands in any important respect. 

Fourth, the claim some have made that Yahoo! and Google are 

price-fixing is entirely false. Prices for search terms are set by open 

and fair market-based auctions, and advertisers only pay when 

consumers click on their ads. 

This agreement is truly win-win. It benefits consumers, advertisers, publishers, and Yahoo!. Consumers will now get more relevant advertising on Yahoo!’s site. Advertisers will reach more consumers, and Yahoo! will become an even stronger competitor in the 

broad advertising marketplace. 

To put this agreement in perspective, it is helpful to recall that 

until 2004 Yahoo! completely outsourced both its algorithmic and 

sponsored search to a variety of companies, including algorithmic 

search to Google. More recently, other companies had outsourced 

their search functions to Yahoo!. In fact, Microsoft outsourced its 

sponsored search to Yahoo! just a few years ago and still does in 

some places around the world. 

In 2004, Yahoo! made the strategic decision to bring algorithmic 

and sponsored search in-house, and that decision has not changed. 

Since then we have invested hundreds of millions of dollars to improve our search products and compete better in the marketplace. 

For example, just last week, we announced BOSS, an open platform build-your-own search service, which we believe will unleash 

a wave of innovation, and our efforts to create an open, robust exchange to bring publishers and advertisers together are also well 

on their way. These efforts are consistent with our complete commitment to continued growth in search and display advertising. 

8 

With the additional operating cash-flow from this agreement— anticipated to be between $250 million and $450 million in the first 

year—Yahoo! will accelerate our innovation and better compete 

against Google, Microsoft, and others in the online advertising marketplace. 

Over the coming weeks, Yahoo! will continue to work with our 

advertisers, our users, outside groups, and government authorities 

to explain this agreement and address any questions about the 

facts of the arrangement. We have kept the Department of Justice 

informed along the way and will continue to cooperate with them 

and this Subcommittee. We are confident that the more one knows 

about this agreement, the more it becomes clear that it will increase competition, stimulate creativity, and benefit consumers, advertisers, and the online advertising industry overall. 

Thank you again for inviting me to appear here today, and I look 

forward to answering any questions you may have. 

[The prepared statement of Mr. Callahan appears as a submission for the record.] 

Chairman KOHL. Thank you, Mr. Callahan. 

Now we will hear from the Google representative with us today, 

Mr. Drummond. 

STATEMENT OF DAVID DRUMMOND, SENIOR VICE PRESIDENT 

OF CORPORATE DEVELOPMENT, AND CHIEF LEGAL OFFICER, GOOGLE, MOUNTAIN VIEW, CALIFORNIA 

Mr. DRUMMOND. Thank you, Chairman Kohl, Senator Hatch, 

members of the Subcommittee. Thanks very much for inviting me 

here today. 

The Internet is a dynamic, competitive environment due to the 

openness that has always been its hallmark. Our non-exclusive 

commercial agreement with Yahoo! will maintain and expand that 

competition. It creates new efficiencies that will benefit consumers, 

advertisers, and publishers, while protecting privacy and spurring 

innovation. 

When Yahoo! chooses to use our technology, consumers will see 

more relevant ads that better connect them to the products and 

services they are interested in. Advertisers will benefit from better 

ad-matching capability, improving the way that they reach their 

customers. And web publishers who place Yahoo!’s ads on their 

sites will also see more revenue from better ad matching. That is 

why large and small advertisers, ad agencies, and publishers have 

expressed their support for this agreement, including such names 

as Publicis, Digitas, Overstock, and even Microsoft’s own in-house 

ad firm, Avenue A/Razorfish, who called it ‘‘good news for advertisers.’’ 

Now, the fundamental point I would like to make today is that 

this agreement promotes ongoing competition among advertising. 

Let there be no doubt about this point. Google and Yahoo! will remain fierce competitors—in search, in online advertising, and 

many other products and services. Yahoo! has said that it will reinvest revenue from this agreement into improving its search engine 

and its other services. This continued competition will help fuel innovation that is good for the Internet, good for Internet users, and 

good for the economy. 

9 

Now, the fact that this arrangement is made between competitors is not unusual. Commercial arrangements between competitors 

are commonplace online and in many other industries. Antitrust 

authorities have recognized that consumers can benefit from these 

arrangements, especially when one company has technical expertise that enables another one to improve their product quality. And 

we are also excited that as part of this agreement, Yahoo! will 

make its instant messaging network interoperable with Google’s. 

That is a big step forward, making instant messaging more like email, with users able to communicate across platforms more easily. 

Now, I would also like to clear up a few things about this agreement. 

First, unlike the other alternatives, such as Microsoft acquiring 

Yahoo!’s search assets or taking over all of Yahoo!, this agreement 

will not remove a player from the field, from the competitive field. 

Yahoo! will remain in the search advertising business and will continue to be a vigorous and aggressive competitor. 

Now, some would also have you believe that the agreement will 

result in Google controlling nearly all of search advertising. The 

agreement does no such thing. Yahoo! will continue to operate its 

own search platforms, so adds to its longstanding and deep base of 

advertisers, and continue to operate its own ad auction. The agreement merely gives them the option to show Google ads in cases 

where Google ads are likely to generate more value. It is important 

to note also that this agreement is limited to the U.S. and Canada 

and excludes emerging fields such as mobile. 

Second, the agreement does not increase Google’s share of search 

traffic because Yahoo! will continue to run its own search engine. 

So, simply put, Yahoo! will have every incentive, as you heard from 

Mr. Callahan they have every intention, to continue to expand 

their search advertising business. 

Third, the agreement will not set an illegal price floor. Microsoft 

would have you believe that the additional revenue that Yahoo! 

and Google might make from the agreement will come solely as a 

result of increased advertising prices. Nothing could be further 

from the truth, and this reflects a fundamental misunderstanding 

of how search monetization actually works. The fact is we expect 

that the primary driver of additional revenue will be more relevant 

ads being delivered to more users, who will then click on those ads 

in greater numbers. In other words, we are not looking to sell ads 

at higher prices. We are looking to sell more ads. This is good for 

everyone. Users are going to see more relevant ads. Advertisers 

will connect with more interested users, and Yahoo! and its partners will sell more advertising space. 

Fourth, the agreement also upholds Google’s deeply held commitment to protecting user privacy. As Google supplies ads to Yahoo! 

and its partners, personally identifiable information of Internet 

users will not be shared between the companies. 

So let me conclude today with some frank talk about what is 

going on here. The most energetic critic of this agreement is Microsoft, who, of course, is a significant competitor of ours and not exactly a mom-and-pop shop. This is the same Microsoft whose CEO 

said he was going to ‘‘kill Google’’ along with a lot of other salty 

language I cannot repeat in this setting. And it is also the same 

10 

Microsoft that has a 90-percent share of operating systems, a 90- 

percent share of productivity software, and an 80-percent share of 

the browser market—a desktop monopoly that Microsoft could use 

to harm the next phase of the Internet, namely, cloud computing. 

Most importantly, this is the same Microsoft that is actively trying 

to buy or at least destabilize Yahoo!, thereby eliminating one of its 

biggest competitors. 

Now, if you think all of that gives Microsoft an incentive to oppose this agreement, you would be right. And let’s also remember 

that Microsoft came before this Committee 10 months ago with a 

host of extremely dramatic arguments about our acquisition of 

DoubleClick, even though they themselves had recently acquired 

DoubleClick’s largest competitor. The regulatory agencies were 

right to reject Microsoft’s arguments then, and they will be right 

to reject them again. 

So, in conclusion, openness, interoperability, and competition are 

central to Google’s culture, the vibrancy of the Internet, and the 

growth of free markets. Unlike with the desktop, competition on 

the Internet is always just a click away. 

Thanks, and I look forward to taking your questions. 

[The prepared statement of Mr. Drummond appears as a submission for the record.] 

Chairman KOHL. Thank you very much, Mr. Drummond. 

We will now hear from your good friend at Microsoft, Mr. Smith. 

[Laughter.] 

Senator LEAHY. He may differ. 

STATEMENT OF BRAD SMITH, SENIOR VICE PRESIDENT AND 

GENERAL COUNSEL, MICROSOFT, REDMOND, WASHINGTON 

Mr. SMITH. Thank you for the introduction by 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 principal 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 is what I would 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 are 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 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. 

11 

By 2011, it is 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 principal 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 four-fold. 

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 should not 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 are 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 has referred to the opportunity for ‘‘better 

monetization.’’ Mostly that is a fancy way of describing a price increase. When Yahoo! says it sees an $800 million opportunity to increase revenue, that is money that is 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 is 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 will 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 are 

all encouraged to work harder in order to succeed. We are 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. 

12 

[The prepared statement of Mr. Smith appears as a submission 

for the record.] 

Chairman KOHL. Thank you, Mr. Smith. 

Mr. Carter? 

STATEMENT OF TIM CARTER, PRESIDENT AND CHIEF EXECUTIVE OFFICER, ASKTHEBUILDER.COM, CINCINNATI, OHIO 

Mr. CARTER. Chairman Kohl, Ranking Member Hatch, and other 

members of the Subcommittee, I sincerely appreciate this to address you about this very important topic. 

The future of Internet advertising is brilliant. In fact, some 

might say it is possibly one of the fastest growing segments of our 

national economy. The proposed agreement between Google and 

Yahoo!, as seen from my eyes as a consumer and an Internet publisher, is a very good idea. There are many more winners who benefit from this business transaction than those who make claims 

about being harmed. 

People like you and me have problems each day. We seek out solutions to those problems, and with the advent of the Internet, it 

has never been easier or faster to discover precise and accurate solutions to those problems. 

In my opinion, one of the reasons for Google’s success stems from 

the fact they are an excellent matchmaker. They created a streamlined search engine that displays search results as well as contextual advertising that matches the exact search term typed by tens 

of millions of consumers each day, many of whom are your constituents. Google is not the sole search engine that does this. 

The advertising that is part of the search results is purchased by 

small and large companies alike. To the best of my knowledge, this 

method of displaying a highly targeted ad is quite possibly the key 

component to the paradigm shift that is happening right now in 

the advertising industry. Never before could companies be in front 

of so many consumers who needed their product or service at that 

exact instant in time. The old methods of advertising usually had 

some type of delay built in. 

Billions of dollars are being spent on Internet advertising, and 

the market is growing. It is growing because it is a win-win situation. Consumers who quickly solve their problems win. The company selling the solution to the consumer wins. The Internet company that sold the ad wins. And, finally, a website that displays 

a syndicated ad wins. 

Yahoo! has valuable real estate on their website pages that is 

seen by tens of millions of people each day. They can sell or lease 

that virtual real estate to whomever they please or even fill the 

space with things they create. I do the exact same thing at 

AsktheBuilder.com, filling my pages with my columns and videos, 

ads sold by others, and ads I sell myself. 

Yahoo! is a public corporation, and it is paramount that they do 

what is best for their stockholders. If they can lease space on their 

website to some other company and derive revenue for doing virtually nothing, why would you or anyone stop them? Who is getting 

harmed? Surely not the people who are clicking the ads! They willingly click them hoping to discover a solution to the problem they 

have. 

13 

Let’s take this one more step down the antitrust pathway. When 

and where will you stop sliding down this slippery slope? I had a 

discussion with a fellow Internet entrepreneur named Dan Gray. 

He said, ‘‘Tim, are you next? When you become the most visited 

home improvement website on the Internet, will the Government 

come in and tell you that you can’t display Google ads? If that were 

to happen, it would be the most un-American thing I could imagine.’’ Dan is right. 

If memory serves me right, antitrust actions were initiated when 

some company or a small group of companies enriched themselves 

at the expense of others who were harmed financially by the actions of the company or the company. That cannot be said about 

the proposed deal between Google and Yahoo!. The tens of millions 

of consumers each day who visit the Yahoo! website are going to 

see ads that solve their problems. Many will click those ads. Hundreds of thousands of businesses who sell the products and services 

to these consumers will increase their revenues when those ads are 

clicked. Those companies end up paying more taxes, and our economy grows. 

Who is harmed in this transaction? Perhaps some other company 

or companies that decided to follow a different pathway in the business jungle. My father-in-law taught me long ago that there is no 

substitute for brains. Furthermore, I have discovered that healthy 

competition is a great thing. 

This proposed deal has the potential to increase the revenues of 

Yahoo! by hundreds of millions of dollars each year. The ad revenue that Yahoo! receives from Google will flow into Yahoo! with 

virtually no expenses. If the management of Yahoo! is wise, they 

will reinvest this money back into their company to provide the 

healthy competition that we as consumers want and need. The deal 

may also force other companies in the Internet business world to 

work a little harder. My experience as a builder is that a little hard 

work never really hurt anyone. 

Thank you again for taking the time to consider my opinions in 

this very important issue. 

[The prepared statement of Mr. Carter appears as a submission 

for the record.] 

Chairman KOHL. Thanks for your statement, Mr. Carter. 

Mr. Crowley? 

STATEMENT OF MATTHEW CROWLEY, CHIEF MARKETING 

OFFICER, YELLOWPAGES.COM., GLENDALE, CALIFORNIA 

Mr. CROWLEY. Thank you, Chairman Kohl, Ranking Member 

Hatch, members of the Subcommittee. I appreciate the opportunity 

to speak to you today about the important issues raised by the proposed agreement between Google and Yahoo!. I am Chief Marketing Officer for Yellowpages.com—Yellowpages.com is a subsidiary of AT&T. We have an interest in this deal on several fronts. 

First off, AT&T is a large purchaser of search engine advertising. 

We spend millions of dollars a year advertising our products and 

services through search—, in particular, Google and Yahoo!. 

Second, we operate Yellowpages.com which essentially is the 

Internet extension of the print Yellow Pages. The print Yellow 

Pages is the means by which consumers and local businesses can 

14 

connect to each other—Yellowpages.com is essentially that extension. 

In addition to the Internet advertising solutions that we provide 

to small businesses, we also are a one-stop shop for small businesses for digital advertising. We offer several websites—search engine market, we place advertising—agency on Google and Yahoo!, 

helping them choose their key words and advertise online. So as 

you can see, we have an interest—our products and services, as 

well as for tens of thousands of businesses,—places search advertising for them, and particularly today relevant to Google and 

Yahoo!. 

The other meaningful aspect of this deal is that AT&T has had 

a longstanding business relationship with Yahoo!—Yahoo! continues to remain viable, a viable competitor in this space. 

So that being said, we think that we have two issues, concerns 

with the proposed agreement. One is we do—and the second is— 

innovation decrease—not just with Yahoo! but across the Net. So 

I will start with pricing. 

Today Yahoo! and Google operate two independent marketplaces 

for—search advertising. Google is the dominant player in the market with 70 percent. Together, Yahoo! and Google make up 90 percent of the market. Even though Google is the dominant player at 

70 percent, Yahoo! is still a formidable alternative for advertisers 

to place their search engine marketing budget. We can compete 

and we can compare Google and Yahoo! to each other and select 

the best price. 

Under this proposed agreement, Yahoo! will offer over large portions of its inventory to Google. We expect that the agreement, it 

has been said, is worth $800 million. It is not insignificant. With 

Google, we have an opportunity to place advertising. With Yahoo!, 

we have an opportunity to place advertising. But in this case, inventory on Yahoo! will be diminished. We expect then with a decreased supply of inventory on Yahoo!, prices will go up. 

Google is not necessarily an alternative for that because their 

prices are higher. If you try to buy these ad words, these search 

terms through Google, Yahoo! is already replacing what they call 

‘‘lower-value advertising’’ with higher-value or more expensive advertising through Google, so the price is higher over there. 

So as we see it, there is decreased inventory available on Yahoo! 

and a more expensive channel to purchase our advertising through 

Google. And Google has been generally more expensive, and even 

today there was an article that came out in the New York Times 

blog suggesting that this could increase prices for Google paid ads 

on Yahoo! by 22 percent. 

Our other concern is around Yahoo!’s viability as a business and 

innovation within the Internet industry in general. So today Yahoo! 

has all the incentive in the world to compete aggressively with 

Google to earn its share of the market. Under this proposed agreement, Yahoo! will hand over or cede a significant portion of its advertising to Google and accept what we could call fast money from 

Google for this ad space. That decreases Yahoo!’s incentive to innovate and compete. It also decreases Yahoo!’s information by no 

longer processing these advertising transactions by which they can 

continue to increase their service and increase their offering. So we 

15 

see that this ultimately increases prices, decreases Yahoo! as a viable competitor, and is not good for the search advertising business 

and not good for the small businesses that we represent as their 

agency. 

Thank you. 

[The prepared statement of Mr. Crowley appears as a submission 

for the record.] 

Chairman KOHL. Thank you, Mr. Crowley. 

For you, Mr. Callahan, from Yahoo!, I have this question: Critics 

of this agreement have argued that Yahoo! is getting paid by its 

largest rival not to compete as vigorously. In fact, they argue that 

Yahoo!’s success will now be tied to how well Google performs. 

Don’t your critics have a point, Mr. Callahan? 

Mr. CALLAHAN. Mr. Chairman, as we reviewed this agreement 

and decided to enter into it, the approach for Yahoo! is that we believe we will reinvest the proceeds from this transaction, from the 

agreement as it goes forward, to invest in our current search business, our search and display advertising business, and indeed continue to vigorously compete with Google. We are not ceding any 

part of our algorithmic search business, which we built from 

scratch about 4 years ago, and I think the history of competition 

on the Internet from our perspective supports that. 

From 2000 to 2004, Google supplied all of Yahoo!’s web search, 

algorithmic search. In 2004, through a series of acquisitions and internal product development, we went from zero in web search to 

approximately 20 percent to 25 percent, depending on whose data 

you use. 

If you move that history forward the last 4 years, if you will forgive me a prop, in Thursday’s Wall Street Journal, ‘‘Yahoo! wields 

new tool to battle Google,’’ and it is our BOSS product, which is 

an open platform web search initiative to continue our ability and, 

we believe, fund our ability with this agreement to continue to aggressively compete with Google. 

Chairman KOHL. Thank you. 

Mr. Smith, from Microsoft, your competitors seem to suggest that 

this collaboration is just a normal part of doing business. If the 

agreement is put into practice, what do you think the search advertising business will look like in a year or two? 

Mr. SMITH. I think we are going to see a market that is less competitive than exists today. I think that is the reality, and I think 

virtually all of us in this industry know that is the reality. We have 

had lots of conversations, certainly in our company and with other 

companies, even with Yahoo!. On June 8th, we met with Yahoo! in 

San Jose, and Jerry Yang, the CEO of Yahoo! looked across the 

table, looked us in the eye, and said, ‘‘Look, the market, the search 

market today is basically a bipolar market.’’ He said, ‘‘On one pole 

there is Google, and on the other pole there are Yahoo! and Microsoft, both competing with Google.’’ He said, ‘‘If we do this deal with 

Google, Yahoo! will become part of Google’s pole. And Microsoft,’’ 

he said, ‘‘would not be strong enough in this market to remain a 

pole of its own.’’ 

Mr. Chairman, you asked the question when the hearing started, 

would this agreement turn Yahoo! into a satellite in Google’s orbit? 

I think everybody knows the answer is yes. 

16 

Chairman KOHL. Well, now, that is a pretty strong comment that 

you just made, Mr. Smith, and, of course, you are under oath and 

you do recollect quite accurately, I am sure you will state exactly 

what Mr. Yang said? 

Mr. SMITH. I just stated exactly what Mr. Yang said, and it made 

such a strong impression on us that a few minutes later, when we 

broke, the four of us from Microsoft walked down the hall to a separate conference room, and we sat down and we said, ‘‘I can’t believe that Jerry just said those things.’’ And Steve Ballmer turned 

to me and said, ‘‘Think about that. He said, ‘There is only going 

to be one pole in the market.’ I guess that would be a mono-pole, 

wouldn’t it?’’ It made a very strong impression. 

Mr. CALLAHAN. Mr. Chairman— 

Chairman KOHL. Well, Mr. Callahan, do you have some answers 

to provide us this morning? 

Mr. CALLAHAN. I am sorry to interrupt. I did want to, without 

addressing Mr. Smith’s comments directly, I was a participant in 

that meeting as well, so I can add to the drama a little bit at the 

San Jose airport on June 8th. And while I am not going to address 

Mr. Smith’s characterization of Mr. Yang’s statement, I will say 

this: Our board of directors, as part of the evaluation of our strategic alternatives, has made a conscious decision to stay and 

search, to compete against Google and against Microsoft, and this 

agreement will enable us to continue to do that. How the market 

turns in the future will depend upon how successful we are in continuing to compete. And with the initiatives that we have had underway for years and the initiatives that we see in the convergence 

of search and display advertising going forward—which I think is 

an important point that I would like to make to the Subcommittee—the current discussion here is about search-based advertising. Yahoo! believes that as the future of this market evolves, 

advertisers are interested in purchasing a combined search and 

display. 

And if you would forgive me for a moment, I have a prop; I could 

show sort of what is the difference between the search and display 

advertisement. But we believe that advertisers look for a combined 

purchase online. We have a compelling strategy, different than 

Google, and perhaps different than Microsoft, to build that in the 

future. 

So as you look here, if you will forgive me one moment, this is 

the current typical Yahoo! search page today, which is—it says 

‘‘Yahoo!-sponsored search’’ on the top. And if you could imagine, 

there is a space here for a banner button, which we call display advertising, which is not search based. Then there is web results, 

which are from Yahoo!. And here is ‘‘Yahoo!-sponsored search,’’ 

which we show depending upon how the page is put together. 

Following implementation of the agreement, this is a possible 

Yahoo! search page. This would be continued Yahoo! search listings 

here; continued Yahoo! web search, a product that we built from 

scratch 4 years ago through acquisition; continued Yahoo!-sponsored search listings here; and perhaps, if we decide to find a better-quality ad than Google, sponsored search listings along here. 

Chairman KOHL. Yes, I appreciate what you are saying. Clearly 

what you are saying contradicts what your boss said. And, you 

17 

know, that is pretty explosive stuff, and we will have to consider 

that. 

Now we turn to Mr. Hatch. 

Senator HATCH. Well, thank you, Mr. Chairman. 

Mr. Callahan, in the information that Yahoo! provided the Subcommittee, your company argues that Yahoo! and Google will ‘‘compete aggressively against one another in search and display advertising.’’ Now, I have to ask: How can that be? Does not this agreement give advertisers the incentive to bypass Yahoo! entirely and 

only bid with Google since the agreement creates the strong possibility that an ad will be placed on both Yahoo! and Google’s search 

result pages? Simply put, why bother bidding on Yahoo!’s site when 

it can go to Google and get two for one? 

Mr. CALLAHAN. Thank you for the question, Senator. I believe 

that advertisers will benefit from this agreement on both the 

Yahoo! system and on the Google system. As you know, on the 

Google system they have the opportunity, although not the guarantee, for increased distribution and the reason that is is Yahoo! 

maintains complete flexibility if and when to source certain ads 

from Google or backfill certain ads from the Google system. But if 

an advertiser wants to reach the Yahoo! system—and I think Mr. 

Carter’s testimony about the desire to advertise on both—then they 

need to go through the Yahoo! system to be guaranteed to reach 

that. Google will not know when Yahoo! is going to pull certain ads, 

and Yahoo! is going to do that in a strategic way where we can find 

a quality ad for us to replace an ad that perhaps for Yahoo! would 

not be—or does not exist if no one has bid. 

Senator HATCH. Let me put it this way: Will Google ads only be 

in the lower right-hand corner? 

Mr. CALLAHAN. No. I am sorry. That was merely an illustration. 

Senator HATCH. OK. 

Mr. CALLAHAN. The agreement maintains—and it is an important part—Yahoo! complete flexibility to implement this transaction and the way the ads are shown on our site. 

Senator HATCH. Mr. Smith, welcome back to the Committee as 

well, all of you. You have been here before. 

Mr. SMITH. Recently, yes. 

Senator HATCH. Well, we always enjoy having all of you here. 

Microsoft used Overture, which is owned by Yahoo!, to place 

most of the ads displayed by MSN search engine until 2006. MSN 

received a portion of the fees for displaying Yahoo!’s ads. Was not 

that agreement similar to the one being proposed by Yahoo! and 

Google? And if the Microsoft-Overture contract did not amount to 

price-fixing, how can you argue now that the Google-Yahoo! agreement amounts to per se price-fixing? 

Mr. SMITH. Well, there was—very good question, Senator. But 

there was one critical difference— 

Senator HATCH. It needs to be asked. That is why I am asking 

it. 

Mr. SMITH. There was a critical difference. We were not in the 

market for search advertising at that time, so we were relying on 

Yahoo! or, in that case, Overture to provide that service to us. We 

are now in this market. All three of us are in this market. So any 

agreement between any of us is in a different category because we 

18 

are competitors. And if you look at the pages that Mr. Callahan 

showed, they really drive home this point. 

The first page, as he said, is a Yahoo! page today. Actually, if you 

look at it carefully, it is what displays when somebody types in the 

word ‘‘flowers,’’ and you get a lot of ads from people who sell flowers. And in the second page, the page that will exist in the future, 

someone types in ‘‘flowers,’’ and, in fact, the three ads that he 

showed being provided by Google, it is the exact same three ads as 

were there before. It is from the exact same three companies. It is 

in the exact same place on the Yahoo! search page. The only difference is now those three companies cannot buy their ad from 

Yahoo!. They have to buy the ad from Google, and they are going 

to pay more money. 

I just think it is inescapable that those three companies are 

going to pay more money. And because they are direct competitors 

in the same market, in a way that we were not when we were relying on Overture, it is a very different situation. 

Senator HATCH. Thank you. 

Let me ask Mr. Carter or Mr. Crowley, won’t you be tempted to 

just use Google? Wouldn’t that be more convenient for both of you? 

Mr. CARTER. Senator Hatch, that is a great question. I think I 

can—I first have to say it is kind of interesting to be in this room 

with these titans of industry, and here I am, I am actually one of 

their customers, because I buy ads from all three of these gentlemen next to me. And would it surprise you sitting at the dais to 

know that on either one of their websites right now, when they talk 

about these expensive ads, what if I told you I can buy ads on their 

websites right now for pennies a click—not nickels, not dimes, not 

dollars. Pennies. And every business that is out in America right 

now can do the same thing. 

So I do not want to hear all this belly aching about this is expensive. If you want to buy the big, highly targeted key words, sure, 

there is a lot of competition for those. But way out on a long tail 

where a lot of consumers are actually typing these very long key 

word phrases, you can actually buy ads for very little money. 

But to make a long story short, I am not worried about it at all. 

My business depends entirely upon free search. The way that people come to my AsktheBuilder.com website is through search. I absolutely want Yahoo! and Microsoft to both be viable against 

Google. The reason that Google is so powerful in search right now 

is only one reason. I happen to be a previously elected government 

official. I just resigned about 4 months ago because I got a big 

project going on. But the reason that you are here today, Senators, 

is because you were elected to come here. Well, your constituents 

and all the other consumers in America are voting right now which 

search engine is solving their problems more quickly. And at this 

instant in time, it just happens to be Google. Yahoo! or Microsoft 

or some other two young kids who are in a garage right now might 

supplant all three of these guys. That is possible. Look at what has 

happened. Look how quickly we had these giant industries develop. 

Never in the history of America has that happened, ever. And it 

can still happen. 

So if I were these three gentlemen and their companies and their 

board of directors, I would be worried each day. But to answer your 

19 

question, Senator Hatch, I am not worried at all because I am convinced that all three companies are working as hard as they can, 

maybe some harder than others, and as a result, they are getting 

more consumers who like the services that they provide. 

Mr. CROWLEY. So if I may, if there is time, Senator, I will also 

respond. As an advertiser, I do have concerns. Today, whether it 

is pennies or dollars, when you add this up, it is a multi-billiondollar industry. And if prices go up by 5 percent, 10 percent, 20 

percent, those prices are borne by the small and medium businesses that need to carry that freight, by the large businesses that 

carry that freight. We are the ones that are actually paying for the 

free Internet. And ultimately that translates into prices that consumers have to pay for goods and services. So it is quite meaningful. 

The other thing that is concerning is, as Mr. Carter stated, 

Google is the dominant play in search today. And by doing this 

type of deal now, it weakens Yahoo! in terms of their ability to 

compete. It provides a safety net for them not to innovate. And advertisers like me and advertisers like Crete Truck Sales in Wisconsin or Countertops of Utah in Sandy, Utah, those who come to 

us to place their search engine advertising will have less choice, 

higher prices. That is not good for them, and that is not good for 

the future of this industry. And when I look at the page over there, 

what I see is not additional choice. Today I can go to Yahoo!. Today 

I can go to Google. I have that option. I can buy them at competitive rates from two independent marketplaces. In the future, for 

both AT&T and for our businesses, we would have to pay higher 

rates to compete for less inventory on Yahoo! and at higher rates 

in the Google marketplace. 

Thank you. 

Chairman KOHL. Thank you. 

Senator Specter, go ahead. 

Senator SPECTER. Thank you, Mr. Chairman. 

Mr. Callahan, the arguments made by Mr. Crowley seem to me 

pretty impressive, especially when backed up with a 90-percent 

share, which Google and Yahoo! would have. That is a very dominant factor. This hearing has been very both interesting and illuminating, and we are going to have to followup with staffs because 

we cannot possibly get into all the details here. But it seems hard 

on the surface to accept the argument that if you have a combination which gives a market share of 90 percent that it is not anticompetitive. We are going to followup because this is something I 

want to pursue. But give me a 30-second answer to how 90 percent 

just does not dominate so decisively as to hurt consumers? 

Mr. CALLAHAN. Thank you, Senator. The 90-percent figure would 

be accurate if Yahoo! was exiting the business. Yahoo! is not going 

to exit this business. We will continue to sell sponsored search advertising, we will continue to be in web search, and we will continue to aggressively compete with Google in all aspects of advertising. There will be no change in how we execute going forward, 

other than additional resources for us to invest. 

Senator SPECTER. You are talking about Yahoo!, what Yahoo! is 

going to do? 

Mr. CALLAHAN. Yes, sir. 

20 

Senator SPECTER. But you are representing Google. How do you 

know what Yahoo! is going to do—oh, vice versa? Well, Mr. Drummond, the question is to you. How will you maintain that kind of 

vigorous competition? 

Mr. DRUMMOND. Apologies. I thought it had been directed to Mr. 

Callahan. I think he made—that was a very good answer and similar to the one I would have given myself. Again, this agreement 

gives Yahoo! complete flexibility about what to do. It is not consolidation. There is no merger. We are not— 

Senator SPECTER. It has flexibility, but still, if you exercise it, 

you are 90-percent plus. That is what the consumer has to be concerned with, what your power is. 

Mr. DRUMMOND. If they exercise it. 

Senator SPECTER. Well, but you have the power to exercise it. Let 

me move to Mr. Smith for just a minute. Now you have Carl Icahn 

entering the picture, and Carl Icahn wants Microsoft to acquire 

Yahoo!. Apparently Yahoo! is worth more money in Microsoft’s 

hands than it is in Yahoo!’s hands, or else they would not want to 

have a proxy fight about it. That adds another dimension to an already extremely complicated picture. Microsoft is trying to buy 

Yahoo!, and now you have a collaborator inside of Yahoo! to help 

you. 

What are the machinations of that kind of an acquisition to add 

complexity to what this Subcommittee already has to consider? 

Mr. SMITH. Well, it obviously reflects a fluid situation, Senator, 

and we appreciate that. There is a proxy contest going forward, 

and that is governed by the regulations of the Securities— 

Senator SPECTER. Never mind fluid. It is Yahoo! is more valuable 

in Microsoft’s hands than Yahoo! is in Yahoo!’s hands. 

Mr. SMITH. I do not know that— 

Senator SPECTER. Doesn’t Carl Icahn think that? 

Mr. SMITH. Mr. Icahn has spoken for himself. Let me describe 

what Microsoft did and the position that we took. 

Senator SPECTER. Carl Icahn has spoken for himself, but aren’t 

you working hand in glove? 

Mr. SMITH. No. Microsoft made a proposal last week for a search 

deal with Yahoo!, and we provided that to Yahoo!. It was conveyed 

to them, and they turned down that proposal. 

Senator SPECTER. They turned it down, but if Icahn wins, doesn’t 

Microsoft get Yahoo!? 

Mr. SMITH. Not necessarily. I mean, first of all, we have all recognized that, regardless of who wins the proxy contest, no one can 

guarantee the outcome. There will be a new board. The board will 

have to do its fiduciary duty. You know, we— 

Senator SPECTER. If Icahn wins the proxy fight, you can pretty 

much tell he will have control of Yahoo!, won’t he? 

Mr. SMITH. If his slate— 

Senator SPECTER. Microsoft will buy Yahoo!. 

Mr. SMITH. If the nine directors that he has put forward win, the 

nine directors will govern the board of Yahoo!. 

Senator SPECTER. We may have to have another hearing, Mr. 

Chairman. I have one question for Mr. Callahan, and I will wrap 

up immediately. I saw the yellow light. 

21 

This is very interesting testimony from Mr. Smith on only one 

pole if this deal goes through. You were at the meeting. I did not 

hear you contradict that. 

Mr. CALLAHAN. I disagree with how Mr. Smith characterized 

what Mr. Yang thinks about the market. 

Senator SPECTER. Never mind the characterization. What was 

said? 

Mr. CALLAHAN. I don’t recall that Mr. Yang said what Mr. Smith 

had indicated. But I will say this— 

Senator SPECTER. You don’t recall? 

Mr. CALLAHAN. I am sorry— 

Senator SPECTER. Does that mean Mr. Smith could be right? 

Mr. CALLAHAN. I don’t think it would be appropriate for me to 

comment on Mr. Smith’s accuracy or not about how he relayed the 

conversation. 

Senator SPECTER. Well, wait a minute. You were at the meeting. 

You are a witness. 

Mr. CALLAHAN. Yes, sir. It was a long— 

Senator SPECTER. What do you say, Mr. Witness? 

Mr. CALLAHAN. What I believe is that Yahoo! sees a competitive 

future with this agreement in place, and— 

Senator SPECTER. Was there a comment made about only one 

pole? 

Mr. CALLAHAN. I don’t recall that comment, sir. 

Senator SPECTER. Are you standing by your testimony, Mr. 

Smith? 

Mr. SMITH. Absolutely. Absolutely. 

Senator SPECTER. I have not heard the Chairman talk about the 

oath being administered, and I have known Senator Kohl since he 

was elected in 1988. That is pretty tough talk coming from a nonlawyer. 

Chairman KOHL. Excellent. Thank you. 

[Laughter.] 

Chairman KOHL. We are getting into serious business here, folks. 

We will have to recess for 10 minutes. There is an ongoing vote. 

[Recess from 11:35 a.m. to 11:52 a.m.] 

Chairman KOHL. We will startup again, and we will ask Senator 

Hatch to resume his questioning. 

Senator HATCH. Well, first of all, this has been an extremely interesting hearing to me, and we never get a real chance to ask all 

the questions we want to ask. But, Mr. Callahan, how will you decide if it is in Yahoo!’s best interest to place a Google ad on 

Yahoo!’s search result pages? 

Mr. CALLAHAN. What Yahoo! plans to do, once the agreement is 

through regulatory review, is to implement sending some search 

terms to Google to backfill ads where Yahoo! does not have the 

same quality ad that could be returned by Google and one that 

would have increased relevance, generate a click. And we believe 

that benefits consumers to the point that Mr. Carter had made, 

that consumers come to the Internet to look for solutions to problems. That would create a more relevant ad and a better-quality 

ad. And we think it is good for advertisers as well. 

Senator HATCH. Let me ask you and Mr. Drummond this question: Mr. Smith in his written testimony argues that under this 

22 

agreement, ‘‘Yahoo! will never have an incentive to sell an advertisement for less than Google is offering.’’ Specifically, a price floor 

will be created and that this is per se price-fixing—that has already come up—based under the Supreme Court’s decision United 

States v. Socony-Vacuum. I would like you to respond to that argument, because it is an 

interesting argument and it has been raised by a lot of people. 

Mr. CALLAHAN. Yes, I can speak first and then turn to Mr. 

Drummond. 

Senator HATCH. I would be happy to have you—well, both of you 

should respond, and then I would be happy to have Brad Smith respond. 

Mr. CALLAHAN. OK. There is no pricing coordination between the 

companies as part of this deal. Key word prices—so that price, as 

Mr. Carter indicated, for cents or whatever it may be—that get bid 

will be conducted on a separate Yahoo! auction and a separate 

Google auction. And when Yahoo! has an ad that is drawn from the 

Google system, that ad will be priced at whatever the price was on 

the Google system. 

Senator HATCH. That sounds good, but as a practical matter, 

wouldn’t it really basically come down to— 

Mr. CALLAHAN. I don’t think we know that, sir. The bid price for 

the ad would depend upon whatever the auction is. It would depend on how many advertisers are in that system, what the particular key word is, and then, in fact, whether or not there is a 

click generated, because advertisers only pay when there is a click. 

There is no payment from the advertiser is the ad is shown, only 

if it is clicked, which comes back to our argument why we believe 

this will, long term, benefit consumers with a more relevant ad in 

the cases where Yahoo! may decide to draw that ad from Google. 

Senator HATCH. OK. Mr. Drummond? 

Mr. DRUMMOND. Sure. Let me just add to that. I think there is 

a fundamental misconception that is being sort of put out here 

about search monetization, and there is this notion that Google just 

has high prices and— 

Senator HATCH. That is what I have— 

Mr. DRUMMOND.—that is the reason—that is the reason why 

Google is successful. So it is amazing that people could possibly be 

successful if all we did was take the same old ads that everybody 

else has and we price them higher. Does anybody think that is a 

successful business strategy? It is not. 

It turns out that what this—this is not, as in the Socony-Vacuum 

case, a market about a commodity that different purveyors might 

sell in a spot market. This is a very complicated—it is about as far 

from a commodity as you can imagine. It is a very complicated— 

in terms of the outcome, whether an advertiser is going to generate 

leads and then ultimately sales from an ad is a very complicated 

process. And it turns out it is very hard to do, and it depends on 

search traffic, it depends on the types of advertisers, and, most importantly, it depends on the quality of the ad and how good it is. 

And it turns out when you get it right, when you start figuring out 

how to do that, what you do is you create more clicks, you create 

more ads that are relevant, that advertisers want to see. It is the 

absolute opposite of what was going on in Socony, which was reducVerDate Aug 31 2005 11:55 Oct 31, 2008 Jkt 045092 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\45092.TXT SJUD1 PsN: CMORC
23 

ing output. It is the opposite. It is increasing output because now 

you are going to have—because you have done a better job with the 

targeting, you now have more matches, that is, more consumers 

are put in touch with advertisers, and that is good for everyone. 

So the fundamental misconception here is that the incremental 

revenue that Yahoo! and Google might make in this deal has to do 

with just a price increase. What is going on here, as I said in my 

oral testimony and in my written testimony, what is going on here 

is that there are more ads being seen, there are more ads being 

clicked on, there are more relevant ads. And, ultimately, what is 

important to the advertiser is that they get leads from this and 

that they get ultimately sales from this. 

Now, you could have—you know, the dynamics of each auction 

are going to be very, very different. There are different players in 

them. There are different search traffic behind it. And there could 

be cases where the price ultimately is higher, and Google could be 

higher on Yahoo!. But what is important to understand ultimately 

is the value that is being created, so what we have here is an increasing pie that Yahoo! and Google will share in, and that is good. 

It is more output. It is more supply into the market. 

Senator HATCH. Mr. Smith, you can take some time to answer 

that if you would like, but it just brings to mind if this agreement 

is non-exclusive and Yahoo! is free to make deals with other companies, does not this undercut your argument that the agreement 

creates a per se price floor? For instance, Microsoft just purchased 

Aquantive for $6 billion. Does that not mean that others will be interested in this market and eager to form agreements with Yahoo!? 

I think it is a relevant question, but you can answer to their comments as well. 

Mr. SMITH. First, price-fixing agreements are never exclusive. 

They all tend to be non-exclusive, and they are usually done with 

a spirit of ‘‘the more, the merrier.’’ That is why the Government 

takes such a hard line against them. And while lots of things in 

this industry are complicated, I don’t think that the issue that is 

before this Committee is anything but straightforward. 

If this agreement goes into effect, then if Google makes more 

money, then Yahoo! will make more money. If Google raises prices, 

Yahoo! is going to earn more revenue. That is not the way the marketplace is supposed to work. And I think Mr. Callahan’s own use 

of his props showed it very clearly. He was showing the exact same 

ads, not better-quality ads, not new ads that are not existing today, 

but the exact same ads from the exact same advertisers showing 

up in exactly the same place. It is just that they go through Google 

and they cost more money. That is not complicated. 

Senator HATCH. Mr. Chairman, could I ask another question? 

Chairman KOHL. Go ahead. 

Senator HATCH. I don’t mean to— 

Chairman KOHL. Go ahead. 

Senator HATCH. OK. Well, Mr. Drummond, in your testimony you 

state that Google does not control the prices charged to an advertiser. How can you say that when Google does not determine the 

winner of its auctions based solely on the amount the advertiser is 

willing to pay? Do you not take into account ‘‘quality scores’’? Can 

24 

you explain what ‘‘quality scores’’ are and how they affect who is 

declared the winner of your auctions? 

Mr. DRUMMOND. Sure. Actually, we are actually quite glad that 

we pioneered this concept of quality scores in auctions for search, 

and it has actually been a big part of our success, which has now, 

I should add, been copied by Yahoo! and Microsoft, who both use 

them, as well as minimum bids in the auction. 

The point of these are to set neutral auction rules that apply to 

everyone who is in the auction, and think of it this way: Is it a better experience for a—is it a better overall experience to have an advertiser for a camera go in and say, ‘‘I will pay $50 for an ad on 

vacation,’’ when it could well be that that is not a particularly relevant—in other words, when people go on vacation, they want 

places and so forth, right? So by attaching, by saying it is not just 

by how much you bid but also the quality of your ad, how relevant 

it is likely to be—and we have a variety of things that we have 

done over the years to try to figure out those signals and try to 

make them better, if you factor that into the auction, it turns out 

that you get better ads, you have more people clicking on them, 

and advertisers are then going to come up—going to actually compete with each other, not only just on price but to make sure that 

the ads are very relevant. That is good for them, and ultimately it 

generates more value overall and more revenue. 

These are neutral rules that apply to the ad auction. They are 

the same—we have some differences between the companies, but 

all three companies use these, both of these rules. And we are not 

behind the scenes manually manipulating them any more than we 

are manipulating the algorithms that drive our search results. It 

is an article of faith really at Google that, you know, we build this 

auction, we build our search results, and we use computers—we 

really like computers—to make these decisions and to make these 

calculations and to drive these outcomes. 

So we have never done any of this manipulation of quality scores 

or bid prices to affect the outcomes of auctions, and we never will. 

Senator HATCH. Mr. Carter, when you are marketing your own 

products, do you believe that you have ever been unfairly-well, 

have you ever unfairly lost a bidding competition because of these 

so-called quality scores? 

Mr. CARTER. Not at all. And, Senator, that is a great question. 

I would like to explain very quickly exactly how all this works from 

a layman’s standpoint and one who is actually buying the ads from 

these three gentlemen to my right. Here is what is so amazing 

about this process. 

What happens is I can actually-if I am extremely creative in my 

ad writing and it is compelling text and it really solves the consumer’s problem, I actually may be paying very, very—a much 

smaller amount for my ad than a competitor that is paying three, 

four, or five times the amount. He is willing because, remember, 

it is a free auction. In other words, I am going in and saying—for 

my crown molding e-book, I may say, ‘‘I will pay you 25 cents a 

click.’’ I may have competitors who say, ‘‘I will pay you $1 a click, 

Google.’’ So here is a competitor who is willing to pay more. But 

you know what? If my ad is better written and more people click 

it, say 100 people a day click my ad for 25 cents, Google gets $25 

25 

or Yahoo! gets $25, or Microsoft, whatever is collecting the money. 

But that person who is willing to spend a dollar for a click, four 

times more than me, and his ad is only clicked, say, five times, 

Yahoo!, Microsoft, or Google only gets $5. 

So they have created technology that recognizes that that is happening dynamically in the auction, and if you were either of these 

three companies, what would you do? You would force that ad, my 

ad, which is getting more clicks, higher up in the stack. So these 

three companies are not controlling the pricing of the auction. It is 

we as consumers, all of us businesses out there that are buying 

these ads, we are competing against each other. All that they are 

doing is matching us up. They are just matching up the people who 

are coming to search with those of us who create these ads, you 

know, and those of us who can write the right ad, the really compelling ad. 

So, no, I have not been ever treated unfairly. In fact, I wish I 

could give more money each day to these companies. 

Senator HATCH. Well, I have to leave. That is a very unique comment there, is all I can say. 

[Laughter.] 

Senator HATCH. We love that form of generosity in the Federal 

Government. 

I have got to leave, but, Mr. Smith, do you have anything to add 

on this, on this quality score issue, or anything else, for that matter? 

Mr. SMITH. Well, I think the important thing to focus on here is 

this is not about Google’s overall business, this is not about the 

model in and of itself for the way auctions take place. That does 

have an important impact because prices are, in fact, set in what 

is in truth, I think, a combination of bidding by advertisers and the 

minimum prices that are set. In fact, our understanding is that 

Google sets a different minimum price for each advertiser and different quality scores as well. 

Those are important, but that is really not the heart of the issue. 

The heart of the issue is the agreement, and the heart of the issue 

is whether two competitors that account for this kind of market 

share should be able to come together and enter into this type of 

agreement. 

Senator HATCH. Well, thank you all. This has been very interesting to me. I want to thank the Chairman for allowing me to go 

on here. I have a lot of other questions, but these hearings are— 

you folks are among the most intelligent people who appear before 

the Judiciary Committee. That may not be saying much, but we 

still think— 

[Laughter.] 

Senator HATCH. We always enjoy having you. It is wonderful. 

Mr. CARTER. Thank you, Senator. 

Mr. SMITH. Thank you. 

Chairman KOHL. Thank you very much, Senator Hatch, for your 

excellent questioning. 

Mr. Drummond and Mr. Callahan, as part of this agreement, the 

parties have agreed to allow the Justice Department a hundred 

days to review the agreement. Clearly, Justice would not have 

26 

taken this unusual step unless they believed that there were legitimate questions about this agreement that need to be addressed. 

Mr. Drummond and Mr. Callahan, if the Justice Department 

says it has problems with the agreement, then are you prepared to 

either abandon or change the agreement? Mr. Drummond? 

Mr. DRUMMOND. Well, let me just first say that we actually voluntarily called the Justice Department and kind of gave them the 

opportunity to look at it. We just felt that although we believe it 

absolutely is pro-competitive, you know, in terms of all the attention in the space and the size of two companies, it made sense to 

have them review it. We are cooperating with them on a day-today basis, giving them all the information they need and explaining the agreement to them. We are confident that they are going 

to, once they understand it and go through all of the facts, they will 

see it the same way. If they have any issues with it, we will work 

through those issues with them, most certainly. 

Chairman KOHL. Mr. Callahan? 

Mr. CALLAHAN. Yes, sir, I would echo Mr. Drummond’s comment 

and also add that, given the attention that had been on the Yahoo! 

situation from the time of Microsoft’s unsolicited proposal through 

this weekend’s coordinated—what at least we see as a coordinated 

approach to Yahoo! between Microsoft and Carl Icahn and the disruption of a proxy fight, the annual meeting that is coming, we did 

reach out to the Department of Justice, as Mr. Drummond indicated, and I think I would echo his comments that we would look 

forward to working through any issues. 

Chairman KOHL. Mr. Crowley, we have spoken a lot today about 

the strength of Google in search advertising, yet there are, as we 

know, other forms of Internet advertising, such as display. Google 

has a very small share of these types of ads. Doesn’t the fact that 

advertisers do have other ways to advertise on the Internet make 

it unlikely that this deal will cause ad prices to rise? And if prices 

were to rise for search ads, as you suggest, wouldn’t advertisers 

just switch to display ads? 

Mr. CROWLEY. Thank you for the question. No, we don’t believe 

and I don’t believe that display ads are an adequate alternative to 

search marketing. Display ads are generally brand advertisers. 

They are generally wrapped around the page. There is a phenomenon called ‘‘banner blindness’’ where Internet users have been 

trained not to look at the display banners but to look into the 

search results. 

So there is a place for display advertising on the web, no doubt. 

It is a different type of advertising than sponsored search. And 

from the small businesses that we sell our advertising solutions to, 

we do not see that as a viable alternative. There was, in fact, a 

point in time where we did sell display banner advertising to small 

businesses, and we got out of that business and replaced it with 

the search engine marketing solution that we offer today because 

that is where the demand was and that is where the value was at 

the time we made that decision. 

Chairman KOHL. Mr. Callahan, as we have discussed this morning, Yahoo! estimates that it will eventually earn $800 million 

more annually with this outsourcing arrangement. According to industry estimates, this is an increase of more than 50 percent from 

27 

what Yahoo! currently earns. If that is the case, why would Yahoo! 

ever terminate this arrangement? In fact, if Google does a much 

better job of making Yahoo! money, will there not be every incentive in the long run for Yahoo! to outsource all of its Internet advertising to Google? 

Mr. CALLAHAN. In the analyst conference call around June 12th, 

we did note that we saw this as a potential revenue opportunity 

of $800 million on an annual basis, but that we expected in the 

first year following implementation approximately $250 million to 

$450 million of operating cash flow. And our incentive under this 

agreement reflects how the agreement is structured, that we have 

the option to use the ads where we think it helps on the quality 

and obviously helps Yahoo! generate this additional cash-flow. Our 

incentive is to sell as many Yahoo! ads as possible. We keep all of 

the revenue from those ads. Our incentive as we go forward is to 

maintain a robust marketplace in search advertising, and that depends upon advertisers like Mr. Carter but also user traffic. And 

creating user traffic and drawing user traffic is based upon a relevant page, which is the overall relevance that is helped by betterquality ads, and some of those may come from Google. 

Chairman KOHL. Well, Mr. Smith, wouldn’t you agree with the 

premise of my question? 

Mr. SMITH. I absolutely would agree with the premise of your 

question, Senator, because to the extent that prices on Google continue to rise, then it is clear that Yahoo! will have every incentive 

to send more ads to Google. 

Now, it is certainly true as well, as Mr. Callahan suggests, that 

in some cases their prices may already be as high as they are on 

Google and they will not send those. But where they are lower, 

every incentive is to send ads. When you put that together, it really 

does constitute an effective floor on prices. Yahoo!’s prices may 

never be lower than Google’s prices because whenever they are, 

Google will set the price and Yahoo! will send them the ads. 

It is bad news for advertisers. 

Mr. CROWLEY. Chairman Kohl, if I may comment on that? 

Chairman KOHL. Yes, Mr. Crowley. 

Mr. CROWLEY. Mr. Drummond did mention that this is hard, it 

is complicated, and I think that is the point: that it is difficult, it 

is not easy to do, and we want to see Yahoo! competing vigorously, 

fairly in the market to bring their services up to par, to be an adequate alternative to Google. And by renting out their real estate to 

Google and accepting the money from Google and decreasing that 

incentive to innovate and compete, we think it is bad for the market and bad for the future. 

Chairman KOHL. Mr. Smith, let’s be as frank as we can in this 

hearing this morning. Is it not true that your opposition to this 

agreement between Yahoo! and Google is highly motivated by the 

fact that Microsoft wants to acquire Yahoo! yourself? And wouldn’t 

such an acquisition be just as anticompetitive as the deal we are 

talking about this morning? 

Mr. SMITH. A fair question, certainly, Senator, and let me say a 

few things in response. 

First, yes, Microsoft has obviously been strongly interested in 

coming to some kind of important transaction with Yahoo!. Now, 

28 

there have been different terms, different forms that have been discussed over the last 6 or 7 months, but we clearly have that interest, and that is unquestionable. 

But, second, we would have serious concerns about this agreement regardless of whether there was any possible transaction 

with Yahoo!, and there may not be a possible transaction with 

Yahoo!. It has not worked very well so far, as everybody has seen. 

So independent of whether there is ever an opportunity for Microsoft to do anything with Yahoo!, we do have concerns about this 

kind of arrangement. 

But then, third, it is also a fair question: What would the world 

look like, what would this market look like, if Yahoo! and Microsoft 

were to come together in some way around search and search advertising? We believe that would create a more competitive market 

because this is a very scale-based business. It does require very 

substantial capital investments. One needs to have a critical mass 

of market share in order to ensure an ongoing and sustainable 

level of competition. And if Microsoft and Yahoo! were to team up 

in some way, you know, we would bring together 20 to 30 percent 

of the market. We would have a critical mass, and the market 

would be more competitive. 

So our view is that if you put a small number 2 and an even 

smaller number 3 together to balance this gigantic number 1, that 

is going to lead to a more competitive balance and more competition that is sustainable. 

Mr. DRUMMOND. Senator, do you mind if I just respond to that? 

Chairman KOHL. Yes, Mr. Drummond. 

Mr. DRUMMOND. Let me just say that there really are two alternative scenarios here, and I guess when you start thinking—you 

have got to think about which one is better. You have an independent Yahoo! that makes an arrangement with Google that is 

going to lead to better ads for consumers, so they get better information than they had before because of Google’s ad technology. Advertisers are going to get more leads than they had before. The pie 

of advertiser value grows incremental from what we have today. 

And Yahoo! actually is able to generate additional—you know, gets 

a share of that, the lion’s share of that, I should say, and reinvests 

that into the rest of their businesses and stays as an independent 

competitor in this market. 

Or you can have a situation where Yahoo! is gobbled up by 

Microsoft, eliminating them from the competitive playing field, and 

Mr. Smith wants you to believe that the only business that our 

three companies are engaged in is search. Well, it turns out that 

is Google’s primary business, but it turns out also that both Microsoft and Yahoo! have very large display advertising businesses. 

Yahoo! is number 1. Microsoft is number 2. They have hundreds of 

millions of e-mail customers between them. They are two of the 

leading instant messaging companies, and on and on and on. 

So this is not about search entirely. It is about the Internet in 

general. I think there would be significant concerns about a combination of those two companies. 

Chairman KOHL. Mr. Carter? 

Mr. CARTER. Senator Kohl, I can tell you that from my standpoint as a publisher and as a consumer, I want all three of these 

29 

companies to survive. I do not want anybody to be gobbled up by 

anybody because as a buyer of ads and as a business that can actually take that same advertising, please understand, I am currently 

doing the exact same deal with Google, and I was approached by 

Yahoo! several years ago to do what we are here talking about 

today, meaning I display Google ads on AsktheBuilder.com. It took 

me 5 or 10 minutes to put the code on my website to do that. Then, 

instead of me out there trying to sell my own ads, I am able to go 

back and write more columns or write more content or make more 

videos so that I can have more ads. 

So I want all three of these companies to survive and to thrive, 

and I can tell you that the marketplace is making that happen 

now. And once again, I will just reiterate, the reason that I feel 

that Google is so powerful in the search marketing area is because 

they did such a good job early on in being able to match those ads 

with the search term that people were searching for. And that is 

really what the crux of the matter is, in my opinion. And we absolutely want to see Yahoo! improve their search algorithms. I want 

to see Microsoft work 24 hours a day to improve theirs. And I want 

to see who the number 4 player is. I don’t know who that is. Maybe 

Dogpile is going to come back to life. Maybe AltaVista is really 

going to get juiced up again. But the point is there are other search 

engines that are out there, and I am telling you, history will prove 

it right, and we may all be dead in this room when it happens. But 

I am telling you that there will be a company that is going to crush 

all three of these people. 

[Laughter.] 

Mr. CARTER. It will happen. They don’t want to hear that, but 

history has shown that to us. And we have got a rich history in 

this country. 

And remember, once again, all I want to add is that if you block 

this deal, if you go down that pathway, am I going to get a letter 

from you 1 day? I mean, that is a question I will ask you, because 

I am on my way to becoming the most popular home improvement 

website, Yahoo! is the most popular, most visited website right 

now. So are you going to then say, ‘‘Tim, sorry, you cannot do 

Google ads anymore’’? Come on. That is un-American. 

Chairman KOHL. OK. Mr. Callahan? 

Mr. CALLAHAN. Yes, Mr. Chairman, I thought I should comment. 

There has been some discussion about Yahoo!’s future, and I 

thought it would be appropriate for me to say that, consistent with 

what we have said from the beginning, Microsoft had made an unsolicited proposal and then subsequently withdrew it. They made 

a joint proposal to acquire a search business and restructure the 

company with Mr. Icahn over the weekend, and we rejected that. 

Consistent throughout that process has been Yahoo!’s board’s focus 

on stockholder value, and I would like to reassure Mr. Crowley and 

Mr. Carter and others that we will continue to innovate with this 

agreement in place, continue to compete, and continue to build a 

stronger Yahoo! for the future, however that path may take us. 

Mr. CROWLEY. Senator Kohl, if I may? Like Mr. Carter, I agree. 

I want three viable, four viable, five viable alternatives in the 

search market. Mr. Carter also stated that it is working today. My 

concern is that I don’t know that there is just two options, as Mr. 

30 

Drummond has suggested. I don’t know that there are not other alternatives for Yahoo! to get funding or to continue to innovate. And 

in this situation, we see it as a concern because you have got 

Yahoo!, who is wanting to innovate, we are wanting to compete, 

getting out of a large part of their business, ceding it to their largest rival. 

If you take a comparison, let’s just look at an auto deal. What 

if the by far No. 2 auto dealer gave up a significant amount of its 

floor space to the dominant auto dealer in the market, but then 

said that they were going to use the proceeds from those sales to 

come back and compete with that same auto dealer? It just—it does 

not seem to make a whole lot of sense, and I think there are better 

ways for Yahoo! to compete, and I think there are better ways for 

us to have a better search marketing ecosystem. 

Chairman KOHL. All right. One last question, folks. Generally, 

bid prices for search advertising are lower on Yahoo! than on 

Google. If Google’s higher prices are now used to sell ads on 

Yahoo!, does not this deal eliminate the choice for small advertisers 

who would rather allocate their marketing budget to Yahoo!? Mr. 

Smith. 

Mr. SMITH. Well, that is precisely one of our concerns, and while 

Mr. Callahan talks about Yahoo! taking the proceeds and reinvesting, the reality is that advertisers who find that their ads are 

no longer being winnable at Yahoo! are going to have a lot of incentive to just shift their business to Google. And the Yahoo! folks 

have talked about various ways they would like to avoid that, but 

I think that result is, in fact, unavoidable the way this agreement 

has been set up. 

The reality is when Google’s prices rise, Yahoo! makes more 

money. That is not the way the number 1 and two players in a 

market are supposed to interact. 

Chairman KOHL. Yes, Mr. Carter? 

Mr. CARTER. Senator Kohl, I think the reason for the facts of why 

those prices are lower is because there are fewer people in that 

auction at Yahoo!, and with no disrespect to Mr. Smith, the same 

is happening at Microsoft, meaning when I buy ads on both of 

those search engines, I can get clicks for less money. But that being 

said, if I can get—from my standpoint as a businessman, I make 

more money than when I am buying from Yahoo! and Microsoft. So, 

in other words, that is why I want all three of them—and just like 

Mr. Crowley said, I want a fourth and a fifth search engine to come 

into the marketplace because I want there to be even more competition than there is. 

So I can tell you that the marketplace is controlling these prices, 

and don’t forget, sir, that each of these websites—Microsoft, even 

Google, even Yahoo!—they have other real estate on their pages 

that they can devote to revenue. And one of the points that Mr. 

Callahan said earlier is really, really important. Please understand 

that when a person at Yahoo! clicks a Yahoo! ad, Yahoo! keeps all 

the money, just like at my website. When I sell ad space of my 

own, I get all of the revenue. I do not have to split it with Google 

or anyone else. So that is really, really key here. Remember, you 

are only talking about a small slice, potentially, of the real estate 

on these pages. And if Yahoo! discovers that all of a sudden they 

31 

are making more money by selling these particular ads, they are 

going to either turn off the Google ads, like I do—I turn off Google 

ads on my own pages. They probably don’t like to hear that, but 

I get more money from certain advertisers. Too bad. You know, 

maybe they need to do a better job and get better prices in the auction. 

So it is a very dynamic thing, and you have to go very, very slowly here, because you may end up hurting somebody like me 5 years 

from now, and I will not be real happy about that. 

Chairman KOHL. All right. Gentlemen, that will conclude testimony at the hearing. We will leave the record open for a week. I 

would like to thank all of our witnesses for being here. 

Today’s hearing demonstrates the importance of this market and 

that this deal does raise significant competition concerns. So we 

will continue to examine this transaction closely in the days and 

weeks ahead. We will also be following the news regarding the possibility of future consolidation in this market and its impact on 

competition. 

We thank you all for being here. The hearing is adjourned. 

[Whereupon, at 12:24 p.m., the Subcommittee was adjourned.] 

[Questions and answers and submissions for the record follow.] 

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