Mr. Schmidt Goes to Washington

Advertisers should be watching Google chairman's testimony to Senate subcommittee

Washington, D.C., may have celebrities—of a sort—of its own, but the presence of a real big name from outside of the political arena always sets the city abuzz. And so Wednesday will be a big day on Capitol Hill. Eric Schmidt, the former CEO and current chairman of Google, is scheduled to testify before the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy, and Consumer Rights.

Schmidt, who reluctantly agreed to appear under threat of a subpoena, has a lot of explaining to do. Over the last few years, complaints and controversy over Google's business practices have mounted in Washington. The company's strategic acquisitions, and its dominance, have led lawmakers, regulators, and competitors on both sides of the Atlantic to question Google on numerous issues, asking if it's taking online privacy for granted, for example, or abusing its near-monopoly position.

In March, Google settled with the FTC over privacy concerns with Google Buzz, only to be called before the Judiciary Committee in May to testify about its mobile privacy policy for location services. And all that may only be the tip of the proverbial iceberg. The Federal Trade Commission is currently investigating Google for potential antitrust violations, and the company's bid to acquire Motorola Mobility is under review by the Department of Justice

While most of Wednesday's hearing will likely center on whether consumers are harmed by Google's search dominance (a question key to proving antitrust violations), advertisers should care too about what's said there. Maybe, in fact, they should care most of all.

Nearly all of the $29.3 billion Google took in last year came from advertising. And no wonder: The company now commands 70 percent of the search advertising market (essentially everything except Facebook, Microsoft, and Yahoo) and a 40 percent share of all online ad spending, which is expected to increase to 45 percent next year, according to eMarketer.

Those numbers add up to a must-buy for advertisers. Yet they've remained on the sidelines, speaking up last in order to help block Google's purchase of Yahoo in 2008.

According to Google's critics, advertisers aren't being silent because they aren't concerned but because they fear that Google will penalize them in the placement of ad campaigns. Google critics claim that advertisers can't specify where ads run or verify that they did run and have to rely on Google's own measurements to ensure they got what they paid for—something that would never happen in traditional media.

"Advertisers have become complacent. They've gotten use to the terrible [contract] terms and high prices. It's crept up on them," said Ben Edelman, an assistant professor at Harvard Business School who's written about market concentration in search. (He's also done consulting work for Microsoft, among others.) "Google is providing the ad service, the tools for buying, and the tools for measuring the campaign. That presents a real conflict."

"We can't buy around them," agreed one agency executive, who requested anonymity in order to speak freely.

Google doesn't mince words to dismiss its critics and is well prepared with an 18-page point-by-point refutation that gets, well, complicated. "Our systems are complicated," admitted a spokesman, though he added, "If advertisers weren't happy, they wouldn't be advertising."

Though advertisers have been quiet so far, that may be about to change. This week, at least one of the nation's largest digital ad shops was called in for a talk with the Federal Trade Commission.