Federal Trade Commission prepares antitrust case against Google

The Federal Trade Commission is raising the ante in its antitrust confrontation with  Google  with the commission staff preparing a recommendation that the government sue the search giant.

The government's escalating pursuit of Google is the most far-reaching antitrust investigation of a corporation since the landmark federal case against Microsoft in the late 1990s. The agency's central focus is whether Google manipulates search results to favor its own products, and makes it harder for competitors and their products to appear prominently on a results page.

The staff recommendation is in a detailed draft memo of more than 100 pages that is being shared with the five FTC commissioners, said two people briefed on the inquiry.

The memo is still being edited and changes could be made, but these are mostly fine-tuning and will not alter the broad conclusions reached after an inquiry that began more than a year ago, said these people, who spoke on the condition that they not be identified.

Google said in a statement Friday, "We are happy to answer any questions that regulators have about our business." In the past it has said many times that "competition is a click away."

The commission is also building a team to take Google to court, if it comes to that. Last spring, it hired a seasoned litigator to help with the case, Beth A. Wilkinson, a partner in the firm Paul, Weiss in Washington. In a further sign that it means business, last week it brought on a well-known economist as a consultant: Richard Gilbert of the University of California, Berkeley.

The FTC staff memo does not mean that the government will sue Google for antitrust violations. Next, the vote of three of the five FTC commissioners would be required. And each step is a further prod for Google to make concessions to reach a settlement, before going to court. Last month, Jon Leibowitz, chairman of the FTC, said a final decision on whether to sue Google would be made before the end of this year.

The Google investigation echoes the Microsoft case in a basic way. Google, like Microsoft in the personal computer industry, has drawn complaints from rivals and antitrust regulators as it has expanded its business beyond its dominant product, search, and search advertising. Google has aggressively built off this main business to fields including online commerce and smartphone software.

As it expands its empire, Google takes on new competitors and brings formidable resources. Rivals may suffer, Google says, but the company is improving its products and services, benefiting consumers and the economy.

The US inquiry is moving in tandem with a major antitrust investigation in Europe. The European authorities are pressing ahead and seeking changes in Google's behavior.

 Speaking in New York last month, Joaquin Almunia, the European Union's competition commissioner, pointed to antitrust regulators' concerns that Google is "using its dominance in online search to foreclose rival specialized search engines and search advertisers."

Google is also being investigated by the attorneys general of six states: Texas, Ohio, New York, California, Oklahoma and Mississippi.

Given the momentum of the investigations, antitrust experts say, the FTC staff recommendation was to some extent expected.

The FTC investigators have looked at a wide range of Google's business practices, according to companies that have been questioned and received subpoenas from the agency. The areas of inquiry include accusations of manipulating the search results it displays to favor Google commerce services it has developed like Google Shopping for buying goods and Google Places for advertising local restaurants and businesses. In the civilian subpoenas, the FTC calls this "preferencing."

The investigators are also looking into whether Google's automated advertising marketplace, AdWords, discriminates against advertisers from competing online commerce services like comparison shopping sites and consumer review websites.

The government is also investigating Google's practices in the smartphone industry, inquiring if its contracts with handset makers and carriers prevent them from removing or modifying Google products, like its Android operating system or Google search. In addition, it is looking into Google's use of smartphone patents.

But the critical antitrust issue involves how Google proceeds as it expands.

One company that has been questioned by the FTC is NexTag, a comparison shopping service that since June is known as Wize Commerce.

As Google built up its shopping offerings in the last two years, NexTag executives say the traffic to its site from Google's search engine has fallen, suggesting that Google is manipulating its search results to harm a commerce competitor. In the last year, the online traffic to NexTag from Google search has fallen by half, the company says.

But NexTag has taken steps to adjust. In the last year, it has acquired two other sites and invested heavily in its underlying technology to help websites attract online visitors, especially ones most likely to purchase their goods.

 The NexTag site has also become more aggressive with Google - doubling the amount it spends on Google paid ads in the last five months. The move hurts profits, but 60 per cent of NexTag's traffic comes from Google search and Google paid ads.

"We need to be competitive when they own the show," said Jeffrey G. Katz, chief executive of Wize Commerce.

The company's adaptive strategy, Katz said, includes expanding its partnerships with other Web businesses including Facebook, Microsoft's Bing, Yahoo and Twitter, though none loom as large as Google.

The company, based in San Mateo, Calif., is still profitable and growing with 450 employees.

The most probable outcome of the antitrust investigations of Google, antitrust experts say, is a settlement. The broad principle, they say, would be an agreement not to discriminate in favor of its products over smaller competitors.

In Europe, Google has proposed more clearly labeling when its own offering like Google Shopping appears in a search result, according to a person briefed on the proposal.

But regulators, antitrust experts say, will likely push for more sweeping commitments on Google's corporate conduct in the future to try to ensure that the company will not use its powerful position in Internet search to give it an unfair advantage in other businesses and stifle competition, which antitrust prohibits.

Just how governments might try to enforce a principle of nondiscrimination in fields as fast-moving as Internet search, online commerce and smartphones will be challenging.

The American Antitrust Institute, an organization based in Washington that typically leans toward aggressive antitrust enforcement, opposed a couple of Google's acquisitions on antitrust grounds.

"But this is a tough one," Albert A. Foer, president of the antitrust institute, said of the broad antitrust pursuit of Google. "That's why we haven't taken a position yet."

"Still, there is a shadow effect to public and government scrutiny that has an impact in and of itself," Foer added. "And in a dynamic industry that might not be so bad."