Don't Laugh: Google Monopoly Issue Centers on Whether Hotmail Is a "Low Quality" Site

It's shaping up to be Google (GOOG) chairman Eric Schmidt's worst day ever: Just as he's due to testify to Congress on whether the search giant is an illegal monopoly, Bloomberg reports that the FTC is investigating the company to see whether it charged Microsoft (MSFT) ad rates 50 times higher than other customers.

None of this is a coincidence, of course. Although the story is based on an anonymous "person familiar with the matter," Microsoft confirmed that it had complained about exactly that issue. Given the timing, and the fact that Microsoft would just love it if Google were subjected to the antitrust treatment it received in the 1990s, it's hard to imagine this information came out without Microsoft's cooperation.

The complaint is that, beginning in September 2007, Google raised the price of a Microsoft ad from 10 cents to $5 per click. Google allegedly defended the rate by saying that the ad's landing page was a low-quality web site -- the home page for Windows Live and Hotmail.

It's hilarious, but the principle at stake in the question of whether Hotmail is a low-quality web site or not is the central issue the FTC must prove in order to decide whether Google is a monopoly that violates antitrust laws. As Rupert Murdoch's News Corp. (NWS) recently found out, when it paid $656 million in settlement of allegations that it did in the grocery coupon business what Google does in the search ad business: Used its dominance in the category to charge unfair prices that discriminated against some customers, particularly if those customers were associated with competitors.

It is a monopoly, duh
The problem is that Google is a de facto monopoly -- it dominates search and some other categories -- but that is not illegal if its dominance has come about because it is simply better than everyone else. As Salon notes, Google is mostly a monopoly because it's free, not because it's evil.

The second problem is whether it discriminates between customers. The answer is obviously yes: The whole point of a search engine is to help users discriminate between material, and to discriminate between the ads triggered by those searches so that only the most relevant -- or most expensive -- ones are served. That, too, is probably not illegal because it is unintentional discrimination based on Google natural dominance.

The third problem is whether any of Google's discrimination is intentional, as Microsoft alleges. If there is straightforward evidence of that -- emails saying "jack their rates up!" -- for instance, then Google is screwed. But I suspect that the evidence will be more complicated than that, and revolve around how Google's fabulously complicated search algorithm is constructed.

Expect that debate to be very murky indeed.

Related:

• Google's Senate Hammer-Fest (and Why It Won't Matter)
• Google Gets Its Tea Party On: Argues Antitrust Subpoena Is Big Government Threat
• Google Is a Monopoly -- That's Why Its CEO Dares Not Testify to Congress
• 7 Reasons Google Looks Like a Monopoly