Yahoo’s ad alliance with Google seems like a great deal to Messrs. Brin, Page, and Yang. Now they just have to win over the Justice Department.

Google and Yahoo had hoped to have it all up and running by now. As you may recall, the two Internet giants announced an alliance last June in which Google would supply Yahoo with search ads to supplement Yahoo’s own. Google would get a big new customer for its ad-delivery service, while Yahoo would get a new source of revenue – and best of all, they’d keep Microsoft from swallowing Yahoo.

Then Washington got in the way. Due to pushback from antitrust regulators, in early October, Google (GOOG) and Yahoo (YHOO) put off the launch to give the Justice Department more time to chew on it. In September, Justice reportedly hired veteran antitrust litigator (and former Walt Disney vice chairman) Sandy Litvack to help review the deal, and soon thereafter Canadian authorities hired an outside lawyer too. The European Union is also taking a hard look.

What’s the hang-up? Well, there are three basic concerns about just what this alliance really amounts to. First, if it had been a merger between Google, with 70% share in the paid-search market, and Yahoo, with the next 20%, it would clearly violate antitrust laws by creating a monopoly. (Paid-search ads are the ones that show up near the top of a search-result screen or off to the side, under the rubric “sponsored links.”) Second, if Google were paying Yahoo to exit the paid-search arena, that would be an illegal agreement between competitors to allocate markets. Third, if Google and Yahoo were agreeing to set a price floor for the two companies’ paid-search offerings, that would be illegal price-fixing.

Yahoo’s ad alliance with Google seems like a great deal to Messrs. Brin, Page, and Yang. Now they just have to win over the Justice Department.

Google and Yahoo had hoped to have it all up and running by now. As you may recall, the two Internet giants announced an alliance last June in which Google would supply Yahoo with search ads to supplement Yahoo’s own. Google would get a big new customer for its ad-delivery service, while Yahoo would get a new source of revenue – and best of all, they’d keep Microsoft from swallowing Yahoo.

Then Washington got in the way. Due to pushback from antitrust regulators, in early October, Google (GOOG) and Yahoo (YHOO) put off the launch to give the Justice Department more time to chew on it. In September, Justice reportedly hired veteran antitrust litigator (and former Walt Disney vice chairman) Sandy Litvack to help review the deal, and soon thereafter Canadian authorities hired an outside lawyer too. The European Union is also taking a hard look.

What’s the hang-up? Well, there are three basic concerns about just what this alliance really amounts to. First, if it had been a merger between Google, with 70% share in the paid-search market, and Yahoo, with the next 20%, it would clearly violate antitrust laws by creating a monopoly. (Paid-search ads are the ones that show up near the top of a search-result screen or off to the side, under the rubric “sponsored links.”) Second, if Google were paying Yahoo to exit the paid-search arena, that would be an illegal agreement between competitors to allocate markets. Third, if Google and Yahoo were agreeing to set a price floor for the two companies’ paid-search offerings, that would be illegal price-fixing.

Last Friday, Apple (AAPL) was hit with a $1.2 billion class action for allegedly bricking — i.e., intentionally disabling — the iPhones of customers who had used unauthorized “unlocking” software on their phones (enabling them to use carriers other than AT&T) or unauthorized applications on their handsets (like non-Apple ringtone software). AT&T Mobility (T) is also named as a co-defendant.

The suit seeks $1.2 billion in damages, alleging violations of the federal antitrust laws, California unfair business practices laws, and the tort of “computer or chattel trespass.” It also claims that Apple’s customer warranty and license agreements, by forbidding customers from using third-party software on their phones, violate the Magnuson-Moss Warranty Act. (For the text of that act, see section (c) of the statute linked here.)

Both Apple and AT&T, through spokespersons, declined comment. Here is the complaint, and the suit’s official web site, set up by the plaintiffs lawyers, is here. (Don’t miss the picture of Steve Jobs in the iPhone screen looking suitably Satanic.)

The case stems from a series of unusual events that began with a carefully worded press release from Apple on September 24. (These events have been extensively covered in the blagosphere, but a good place to begin might be with my colleague Philip Elmer-DeWitt’s Apple 2.0 post, here.)

“Apple has discovered,” it said, “that many of the unauthorized iPhone unlocking programs available on the Internet cause irreparable damage to the iPhone’s software, which will likely result in the modified iPhone becoming permanently inoperable when a future Apple-supplied iPhone software update is installed.” It went on to warn that “unauthorized modifications” to the iPhone’s software violated the customer’s license agreement and voided the warranty.”

Four days later the company released version 1.1.1 of its iPhone operating system which did, indeed, cause problems, with many of the expensive phones being disabled — some permanently.

The suit alleges that none of these problems were actually inadvertent or inevitable byproducts of necessary upgrades, but were, instead, intentionally engineered efforts to punish customers for using competitors’ applications or services instead of Apple’s and AT&T’s. It also asserts that Apple customer service personnel were instructed to refuse to help customers restore the damaged phones to service, even though inexpensive fixes were technically feasible.

In an email, lead plaintiffs counsel Max Folkenflik, of New York’s Folkenflik & McGerity, says that he is seeking certification of a class that would include all purchasers of iPhones, regardless of whether the phones were actually disabled by Apple’s release of version 1.1.1. “All purchasers have less choice and pay higher prices than they would in a competitive market,” he writes. “Freedom of choice is worth money in the same way that markets value liquid investments over illiquid investments. The fact that unlocked iPhones sold for more than locked iPhones provides evidence for that conclusion if any were needed.”

He then totes up the damages as follows. “Our actual damage estimate of $200 million is based on a 2 million member class,” which is based on the number of iPhone customers that are predicted by December. He then theorizes that each purchaser suffered about $100 in injury due to “higher voice and data costs, avoidable roaming charges, fees for termination of T-Mobile plans, and the reduction of value based on the locked up technology.”

The antitrust laws and the California statute allow trebling of damages, which would bring the figure up to $600 milion. Then he also seeks punitive damages under the tort count (chattel trespass) of an additional $600 million, pushing the total figure up to $1.2 billion.

Though the suit raises many thorny issues, one of the more eyebrow-raising claims accuses Apple of monopolistic practices on the theory that the iPhone is such a distinctive device that it constitutes its own market — i.e., no other cell phone manufacturer even rises to the level of being a competitor. Since Apple obviously enjoys a monopoly over the iPhone market, the suit claims it is now illegally trying to extend that monopoly into other areas, including phone service and handset software.

To support the claim that the iPhone should be deemed to constitute its own market, the plaintiffs allege: “For many users, including the Plaintiffs and the Class, there was no product available which offered anywhere near the same combination of services and ease of use.”

It seems that being sued for antitrust violations may be overtaking plagiarism as the sincerest form of flattery.

[See updates at bottom of post: law was, in fact, passed on August 30, 2008; copy of actual new law is linked in second update.] 

The long gestating Chinese antitrust law — awaited with trepidation by many Western lawyers — is expected to become law either this week or next, Chinese news sources are reporting.

Since June 2006, unofficial drafts of the Antimonopoly Law of the People’s Republic of China have been circulating among lawyers. The third and latest such draft, which came out just this month, is available here.

Western lawyers have expressed concern about the law not so much because of its content, which is likely to be generally consistent with U.S. and European competition law, but because of the potential for abusive enforcement by protectionist provincial judges or regulators.

In an interview last night, Peter J. Wang, a partner in Jones Day’s Shanghai office, sounded cautiously optimistic. “There may be some things in the law that are not the way you’d write them from a Western point of view,” he said, but “the law itself is not bad, and has all the basic points of a good broad antitrust law. The devil will be in the details of enforcement and the implementing regulations.” He continued: “We have every reason to believe it will be enforced in a fair, even-handed way,” at least by the central government authorities.

Because of their products’ large market shares in China, companies like Microsoft (MSFT), Intel (INTC), and Kodak (EK) are among those with obvious reason to be watching these developments closely.

Even upon passage, however, the law will most likely not take immediate effect. The most recent draft, for instance, lists August 1, 2008, as its effective date, which would allow the Antimonopoly Enforcement Authority — a new regulatory body that would be created by the law — time to draw up implementing regulations.

The law’s stated goals include some familiar concepts — promoting “market competition,” and “improving economic efficiency” — as well as some less familiar ones, like “promoting the healthy development of the socialist market economy.” It also provides that certain state-owned industries “shall be protected by the State,” and that the state “shall supervise and control the price of commodities and services provided by [these] . . . so as to protect the . . . the consumer and facilitate technical progress.”

The first substantive section (chapter II) of the 11-page, single-spaced draft prohibits “monopoly agreements,” which seem to correspond roughly to “combinations in restraint of trade” under U.S. law. Interestingly enough, these happen to include “restricting the minimum price for resale to a third party” — an act that our own Supreme Court just removed from the realm of per se prohibitions (after 96 years) this past term in Leegin Creative Leather Products v. PSKS.

The next section (chapter III) prohibits acts that constitute an “abuse of dominant market positions,” roughly corresponding to the monopolization prohibitions of Section 2 of our Sherman Act. The Chinese law specifically defines companies as being presumptively “dominant” if they have a 50% share of the relevant market. (It doesn’t prohibit holding a dominant share; it merely prohibits abuse of dominant position, much as European and U.S. law do.) Abuses can include “selling products at unfairly high prices or buying products at unfairly low prices.”

The third substantive section (chapter IV) requires that certain large-scale mergers obtain prior approval from the Antimonopoly Enforcement Authority, in a process analogous to our Hart-Scott-Rodino process. The authority can take into account “national security” concerns, in addition to market concentration concerns, when a foreign company tries to acquire a Chinese company, for instance. (Some lawyers suspect this is a bit of payback for the political outcry in this country when state-owned oil company CNOOC (CEO), put in a bid to acquire Unocal in 2005. It was ultimately outbid by Chevron (CVX).)

The next section (chapter V) prohibits administrative agencies from abusing their powers in ways that would restrict competition.

The powers of the enforcement authority are laid out in chapter VI. These include the right to raid companies doing business in China, to seize books and documents, and to “inquire after” their bank accounts. Alarmingly, the central enforcement authority seems to be authorized to delegate its powers to local authorities at the “provincial, autonomous region, and municipal level” (see Chapter I, Article 10).

The penalties authorized for violators under the law include confiscation of illegal gains and fines of up to “10% of the total sales volume of the relevant market from the previous year” (chapter VII, article 45).

Though it’s unclear if the law creates a private cause of action — i.e., the right of one business to go into court and directly sue another — a short provision in the latest draft might arguably do so. It says that businesses that violate the law and cause damage to others “shall bear civil liability” (chapter VI, article 49).

UPDATE (8/30/2007 at 9:18 am):  According to the AP, the statute was, in fact, passed into law earlier today, on August 30, and it will, in fact, go into effect on August 1, 2008. I’ll try to get and post a copy of the law as passed.

UPDATE (9/1/07 at 11:35): Here’s an unofficial English translation of the actual law, done by the Chinese law firm T&D Associates.

Last Thursday, when the European Commission preliminarily accused Intel (INTC) of having engaged in three categories of wrongdoing in violation of European competition law, the first two categories were old-hat, but the third was new.

The first two types of allegation were that (1) Intel used “loyalty rebates” to force computer makers to limit their use of Advanced Micro Devices (AMD) chips (see earlier post explaining those, here) and (2) that it dissuaded computer makers from promoting AMD’s product launches either through payments or threats. These allegations were familiar, as both had been leveled by AMD in its June 2005 federal antitrust suit against Intel in Delaware and the rebate allegation had also been made by the Japanese Fair Trade Commission in its March 2005 finding that Intel violated Japanese competition law.

The third type of allegation, however, was new, and sounded like a variety of predatory pricing. “In the context of bids against AMD-based products for strategic customers in the server segment of the market,” the commission press release said, “Intel has offered CPUs on average below cost.” (The document itself, known as a statement of objections, remains confidential, and has only been seen by Intel; but the EC released a press release Friday, available here, briefly summarizing its contents.)

In an interview yesterday, AMD executive vice president for legal affairs Tom McCoy told me that the third claim relates to Intel’s use of so-called “bid buckets” to enable a favored computer maker, who uses Intel chips, to win contracts for very large, prestigious, server computing projects. Basically, he claims, Intel would give a bucketful of money to one bidder so that it could easily underbid all rival bid participants, thereby ensuring that the showcase project would ultimately choose Intel-powered machines. AMD claims that Intel did this to mislead consumers. “You have a demanding, rigorous, end-user making a decision about technology,” McCoy says, “so the world wants to know what they choose. It says something about the technology.” McCoy claims that the practice, used between 2003 and 2006 when AMD’s Opteron server chip is widely acknowledged to have had a technological advantage over Intel’s offerings, infuriated all the bidders other than the annointed favorite. “It rigs the bid for everybody participating, even those using Intel technology.”

Intel spokesman Chuck Mulloy confirms that the EC’s third category of charge was something new, but he “won’t comment one way or another” on AMD’s characterization or any other specifics, saying the “statement of objections is a confidential document. I’m not going to violate those rules, which it sounds like AMD did.”

Of the general allegation that the EC did make public — that “Intel has offered CPUs on average below cost” — Mulloy said, “We think they’ve made some mistakes on their assumptions about our cost structure. They don’t have our data, view, or statement on that [yet] because we did not know that’s where they were going.” (Intel has until October 8, 2007, to supply a written response to the EC trying to allay its concerns.)

Asked for an example of a specific such project where a “bid bucket” might have been used, AMD’s McCoy refers to a previously reported 2005 incident, recounted in the British trade weekly MicroScope here, in which a CompuSys official complained to the EC about a bid Dell (DELL) made for a high-performance computing contract offered by the Manchester University Computer Centre. The university had £650,000 to spend and hoped to buy a minimum of 550 servers; Dell won the deal by offering to provide up to 1,000 units. Dell and the EC both declined to comment to MicroScope at the time.

When the European Commission sent its broad “statement of objections” to Intel (INTC) on Thursday — its preliminary finding that Intel has been competing illegally against Advanced Micro Devices (AMD) — it bestowed an unprecedented imprimatur of legitimacy upon AMD’s oft-voiced, but oft-rebuffed complaints about Intel. (Both companies compete in the market for x86 microprocessors, which Intel has long dominated.)

Though the statement of objections (SO) itself remains confidential, an EC spokesperson (see his press conference here) and an EC press release (see here) both maintain that after a “rigorous,” six-year investigation, the commission believes Intel has engaged in three categories of misconduct, each of which amounts “in its own right” to an “abuse of dominant position” (akin to illegal monopolization under Section 2 of the Sherman Antitrust Act in the U.S.), and which together reinforce one another as “part of a single overall anti-competitive strategy.” If ultimately found guilty, Intel could be subject to fines worth 100s of millions of euros.

To be sure, Intel is far from any such guilt finding even by the commission, let alone by the European courts to which it could appeal such a finding, should there ever be one. Intel has 10 weeks to submit a written response (i.e., until October 8, 2007) to the Commission and it has told the Wall Street Journal (see here) that the EC’s charges are based on unfounded “assumptions” and a “failure of logic.” In a statement, Intel’s senior vice president and general counsel D. Bruce Sewell said: “We are confident that the microprocessor market segment is functioning normally and that Intel’s conduct has been lawful, pro-competitive, and beneficial to consumers.”

Still, the issuance of the SO in itself robs Intel of an important talking point it has enlisted in its efforts to belittle AMD’s claims in the public eye. Last year, when I was working on a Fortune feature story (see here) about the 48-page federal antitrust complaint AMD filed against Intel in Delaware in June 2005, one of Intel’s key arguments was, in effect, that AMD was just recycling garbage, and this was all old news.

“If you look at the history of this,” Bruce Sewell told me then, “repeatedly we have had these clashes, and in essentially no case has there ever been a finding against Intel that we have in fact violated any antitrust laws other than this very narrow issue in Japan.” (He was referring to the “recommendation” of the Japanese Fair Trade Commission in March 2005, finding that Intel had violated Japanese competition law — a finding which Intel disputes, but which it chose not to contest, stating that it could comfortably live with the injunctive relief the JFTC was seeking.) “But when the E.U. has looked at this previously, when the U.S. authorities have looked at this previously, the conclusion has been that there is no support for these allegations.”

And in May 2006, when Sewell told me that, he had a solid basis for his claim. AMD’s Tom McCoy, it’s executive vice president for legal affairs, had taken a boatload of antitrust complaints to the U.S. Federal Trade Commission in the mid-1990s, but the FTC ignored almost all of them, choosing to act (in 1997) only on a narrow issue having to do with how Intel dealt with customers who tried to bring patent claims against it. (Even those claims were settled in 1999 with no admission of wrongdoing, and a federal appeals court actually exonerated Intel of that specific charge in a related civil case later that year.)

McCoy then shopped many of the same claims to the European Commission in 2000, but by 2002 the commission, too, appeared to have dismissed them. On February 5, 2002, the New York Times reported one commission spokesperson saying that the EC had “come to the preliminary conclusion that the accusations made against Intel are unfounded,” while a second told the paper “the decision has been made to drop the investigation.”

What happened then? Well, I don’t know what happened inside the EC but we all do know that in 2002 AMD began suffering sudden and dramatic losses in market share in Japan, where AMD’s unit share slid from 25% in mid-2002 to 9% in mid-2004, according to Gartner Dataquest. AMD’s share of Sony’s business, for instance, dropped from 23% in 2002 to zero by 2004, AMD later alleged in its federal antitrust lawsuit against Intel in Delaware. It’s consumer desktop business with NEC allegedly sank from 84% to almost nothing over the same period. These were the developments that prompted the Japan Fair Trade Commission to raid Intel’s offices in April 2004, and to issue its preliminary findings of violations of Japanese competiton law in March 2005.

The guts of the JFTC’s allegations, of AMD’s lawsuit against Intel in the U.S., of 80 related private consumer class actions, and, now, of the EC’s preliminary charges against Intel all revolve around Intel’s alleged use of so-called loyalty rebates. (The other two categories of wrongdoing the EC alleged in its public statements Friday were that Intel paid computer makers not to promote AMD product launches and that it sold server chips to computer makers at below cost.)

On July 27, Commission spokesperson Ton van Lierop said that the loyalty rebates were of “such a quantity and such an amount that an efficient competitor would be forced to price below cost.” He continued, “We think that would be bad for competition and bad for consumers who would be buying computers.”

Both the EU law and the U.S. antitrust law governing loyalty rebates are very unsettled. In general, there is much less consensus among competition experts about how easily consumers are injured by hardball conduct by dominant companies than there is about the harm to consumers caused by collusive conduct among multiple companies (like, e.g., price-fixing). AMD brought its US case in Delaware because there are certain federal appellate precedents regarding loyalty rebates in the Third Circuit, which includes Delaware, that AMD considers favorable to its position. (Though both companies are headquartered in Silicon Valley–about a mile away from one another–both are incorporated in Delaware.)

Here are the key paragraphs from my earlier feature laying out AMD’s perspective on these loyalty rebates, and Intel’s rebuttal:

The rebates allegedly worked like this: Suppose XYZ computer maker needs 100 chips per quarter, and that during the last quarter it bought 90 from Intel and ten from AMD. Since AMD wants to grow, it might bid for 20 of XYZ’s 100 units in the new quarter. (It can’t realistically bid for all 100 units because it can’t increase its capacity that quickly and because XYZ will have some preexisting contracts that specify delivery of Intel-powered computers.)Here’s how Intel allegedly dashes AMD’s hopes for gradual growth. It tells XYZ that its price per processor is, say, $90, but that if XYZ ends up buying more than 80% of its processors from Intel that quarter, it will pay a rebate of $10 per processor, resulting in an $80 price.

Meanwhile, in January 2007, class-action impressario Bill (“Partner B“) Lerach cast the most dramatic rebate-related aspersions of all against Intel, albeit in a shareholder suit primarily targeting Dell (DELL). [SEE COMMENT FROM INTEL AND CORRECTION/ADDENDUM BELOW] There, he alleges that Intel paid Dell up to $1 billion per year not to use AMD chips. (See earlier post, here.) Lerach makes no antitrust claims but, rather, accuses Dell of misaccounting for the rebates, and failing to disclose them.) Dell and Intel have denied the charge.

Regardless of the true facts regarding all these accusations, Intel is not likely to sustain any adverse legal consequences soon. AMD’s U.S. suit, where lawyers are in the process of obtaining and reviewing millions of documents from computer makers, suppliers, and retailers, is not scheduled to go to trial until April 2009.

COMMENT FROM INTEL SPOKESMAN CHUCK MULLOY (7/29 at 1:26 pm) :
Two points: First, the Statement of Objection in no way changes the fact that AMD has been and continues to be the source of complaints about Intel’s business practices. There are no customers complaining, there are no consumers complaining. The microprocessor market is fiercly competitive and is functioning properly and consumers are benefiting.

Second, you might want to check some of the information you use for completeness, in particular those that come from AMD’s press releases. The Larach case against Dell and Intel was dropped in May of this year. You could have found that by checking court records in Austin instead of relying on AMD press releases and press statements.

CORRECTION/ADDENDUM (7/29 at 2:26 pm): Lerach and co-counsel asked that their suit against Dell be voluntarily dismissed without prejudice on April 24, 2007, explaining only that the investor group they represented “no longer intends to pursue the Complaint on behalf of the class.”

COMMENT FROM AMD SPOKESPERSON DREW PRAIRIE: (7/30 at 9:58 am): To Intel’s comment, the decision to investigate was made by the Competition Directorate of the European Union. AMD filed a complaint with the European Commission in October, 2000. Ultimately, however, the Commission’s action is based on the Commission’s review of the large volumes of evidence it seized from Intel offices and collected from computer makers during its thorough seven year investigation. At the heart of the issue isn’t AMD’s complaint, in the words of the EC spokesman it is about how “in the short, medium and long-term, we think that the actions of Intel are bad news for competition and consumers.”

This morning the U.S. Supreme Court threw out, by a 7-1 vote, an antitrust class action suit filed by investors against 10 leading investment banks, alleging collusive and manipulative IPO underwriting practices during the height of the dot-com boom. The justices did not condone the alleged practices, but merely ruled that the plaintiffs could not invoke the antitrust laws in this instance because those laws were precluded by the more nuanced and particularized regulatory scheme set up by the securities laws.

Justice Stephen Breyer, writing for a majority that crossed ideological lines, said that the sorts of fine distinctions that the case presented — like which forms of coordinated actions taken by members of underwriting syndicates are beneficial to securities markets and which may be harmful — are better drawn by securities experts at the Securities and Exchange Commission (SEC) than by lay juries all over the country.

He also noted that any other ruling might encourage plaintiffs to “dress what is essentially a securities complaint in antitrust clothing” in order to do an end-run around the special hurdles that Congress enacted in 1995 “to weed out unmeritorious securities law suits.”

The investment banks had been accused of acting together to take advantage of the extraordinary demand for IPO securities during the late 1990s by forcing buyers to commit to bidding up the price of a stock in the aftermarket (a practice called “laddering”), or to paying unreasonably high commissions to the brokers on other transactions (a practice that resembles commercial bribery), or to buying less valuable stocks as well (“tying”).

The case had caused a split within the government, with the SEC favoring preemption and the Department of Justice Antitrust Division opposing, but the Court did not appear to find the case very difficult.

The case is called Credit Suisse Securities v. Billing, and the defendants included units of Credit Suisse (CS); Bear Stearns (BSC); Citigroup (C); Deutsche Bank (DB); Goldman, Sachs (GS); Lehman Brothers (LEH); Merrill Lynch (MER); Morgan Stanley (MS); and Bank of America (BAC).

The sole dissenter was Justice Clarence Thomas, who wrote that a broad “savings” clause in the securities statutes — saying that the securities laws were not intended to eliminate other legal remedies investors might resort to — meant that the antitrust laws and securities laws should both apply notwithstanding potential conflicts and confusion. Justice Anthony Kennedy did not participate.

Meanwhile, the Court has still not yet ruled on what is expected to be the main event of the term, as far as securities class actions go: Tellabs v. Makor Issues & Rights. That case involves interpretation of one of the critical hurdles enacted by Congress in 1995 to, as the Court said today, “weed out” frivolous cases — the requirement that the plaintiffs plead facts creating a “strong inference” that company officials acted with fraudulent intent.

Since Google (GOOG) announced its proposed $3.1 billion acquisition of DoubleClick earlier this month, Microsoft (MSFT) general counsel Brad Smith has been one of the most outspoken in urging antitrust regulators to closely scrutinize it. AT&T (T) has also publicly expressed concern, and the deal is also understood to be of great interest to Time Warner (TWX), (the parent company of Fortune’s publisher), Yahoo (YHOO), and nearly every big web publisher and advertising agency.

Obviously, the role of antitrust enforcement watchdog is a new one for Smith and for Microsoft, but such ironies won’t blunt the impact of any meritorious argument they might raise. I interviewed him last week about his perspectives on the deal. Below are excerpts. (I’ve edited my questions to make them sound more articulate than they really were. Also, I wasn’t taping, so Smith’s answers are just captured here as best I could using pen-and-paper notetaking.)

Q. For the time being, no one is asking outright that the deal be blocked. Instead, they’re just urging antitrust regulators to make a “second request.” [A second request for information indicates that the antitrust authority--either the Department of Justice or Federal Trade commission--has decided to initiate a full-bore, analysis that will probably take six to nine months to complete. The second request will come, if it comes, in mid-May.] Are people just being conservative?

A. Mostly, they’re probably being conservative. These questions are very novel. Before anybody tries to come to a conclusion, it would make sense to learn a lot more, in terms of having a data-driven analysis. It may well be, after learning more, we’ll be saying it should be blocked.

Q. I’ve heard people say that there’s no problem here, because Google and DoubleClick aren’t direct competitors. [Google's biggest business is in the market for paid-search ads, which are the text ads that show up alongside search results. According to eMarketer, Google held 75.6% of the U.S. paid-search market as of February 2007. Google also posts contextual ads on third-party sites, where the ad is targeted to relate to the content running near the ad space. DoubleClick, on the other hand, is the leader in providing Web services that advertisers and publishers use to post and manage display ads, including rich media and video. Compared to Google's contextual ads, these are typically higher-end ads, running on higher-end sites, touting higher-end brands.]

A. The law is opposed to two companies coming together if it’s going to acquire market power that would enable them to raise prices. So a big part of this question is, are they part of the same market and, if so, will they be in a position to raise prices?

Companies typically defend in a merger analysis by saying either, “No, we’re in two different markets,” or “Yes, we’re in the same market, but we don’t have a significant share of it.”

So the threshold question is: What is the market? To answer that you ask: Are two products substitutable for each other. If you raise the price on product A, will they shift to product B. If so, they’re substitutable, and are in the same market. I think [the argument that display ads, which DoubleClick brokers, and contextual ads, which Google handles, are in different markets] is very unlikely to sway regulators.

The thing that differentiates the two is the way they’re generated. A contextual ad scans the context of a page, and then chooses and serves up an ad related to that context. If it sees that the content is about Ford Motor earnings, it might serve an automobile ad.

With a display ad, they look at it through cookies generated when someone goes to other pages. You may be writing this article about Google, but the reader thirty minutes ago went to a Ford automobile page, so it might serve up an ad for a competing automobile.

Web sites rely on both. Are display ads and contextual ads substitutes for each other? They look the same, and they serve the same purpose.

Q. Do they look the same though? I thought contextual ads were typically much simpler than display ads.

A. Nothing in the technology requires that they be simpler. . . . Are they in the same market? It’s a very objective question. If the price of one goes up, will publishers switch to the other? We think the answer’s yes. If these two companies come together, they’ll have 85% of this market place. They’re the two principal competitors. One has the lion’s share of contextual; the other has the lion’s share of display.

Two other questions then need to be considered. How broadly should the market be defined. The narrowest would be by segment: display is one market, contextual is one market. At the other extreme, there’s [what Google CEO Eric Schmidt was reported as saying at the Web 2.0 Expo conference on April 17, which is that advertising is a trillion dollar business and that a post-acquisition Google would only have about one percent of it.] He wants to include all advertising on the planet. That would be the first time regulators have ever defined a trillion-dollar market, except maybe in the oil industry. Is a Web site publisher going to use newspaper ads [as a substitute for display ads]? I don’t see how that would work. [At the conference, eWeek.com also quoted Schmidt as having said: "This is an emergent business with lots of choices: customers have lots of choices, end users have choices and advertisers have choices. These are people [Microsoft and AT&T] who were involved in acquisition reviews as best I can tell and who lost.” -RP]

The last step, once you define the market and figure out the market shares, is you ask, what are the barriers to entry [by new competitors]? Even if the merged company has 85% of the market, if the barriers to entry are low, the regulators might say, we’re not going to worry [because new entrants to the market will prevent the merged company from raising prices to anticompetitive levels]. This is something the regulators need to study. This is a a market where there are very strong network effects with significant barriers to entry.

Q. What are the network effects here? ["Network effects" were famously a factor in the Justice Department's monopolization suit against Microsoft in the late 1990s. The argument there was that it would have been extremely difficult for a new competitor to enter the market for operating systems when so many thousands of existing applications had already been written to work only on Windows. Few people would want a new operating system, because few applications would exist to run on it.]

A. Everyone [gauges their success in this business] by measuring revenue per something. Revenues per ad impression. Revenues per search. Revenues per click-through. RP-something. What you see today is, Google’s revenue per search or revenue per ad are way higher than its competitors’. They’re double Yahoo’s, and even more compared to Microsoft’s. The reason? It’s how much personal information their sites collect and use. . . . It’s based on how much information you have on users. That’s attractive to advertisers. They keep aggregating [data on] all the searches you do, all the web sites you visit, and use all that data to serve up an ad. That generates more revenue per search. That makes it harder for other people to break into the market. Whereas in the 1990s, people focused on the applications barrier to entry, this is basically the privacy barrier to entry, or the advertising barrier to entry, or something. Within the next six months, I guarantee you a new term will emerge for how difficult it is to enter when you have somebody with economies of scale from owning so much of the personal information on the Internet.

If the kinds of factors I’ve described are real, what you’ll probably see with consolidation is the profitability of the company that serves the ad will continue to go up at the expense of the the Web site publishers on the one hand and the ad agencies on the other. The company in the middle will own all the personal information and derive all benefits. Talk to ad agencies, publishers, content creators. This is why they’re worried.

Well, readers? Do you find Smith’s arguments convincing?

When Google (GOOG) announced its $3.1 billion proposed acquisition of DoubleClick on April 13, recovering monopolists Microsoft (MSFT) and AT&T (T) were the most vociferous complainants urging regulators to scrutinize the deal.

Alluding to the irony, I asked Microsoft general counsel Brad Smith last week if he’d be hiring David Boies, of Boies Schiller & Flexner, to counsel his company on the antitrust issues. It was Boies, of course, who had sliced and very nearly diced Microsoft seven years ago as lead trial attorney for the government in its monopolization case against Microsoft.

“Honestly, it hadn’t occurred to me,” Smith said, but he sounded intrigued, and asked me to have Boies call him if he seemed interested after I spoke to him.

Alas, I’ll be getting no referral fee. By the time I finally got through to Boies today, his partner Donald Flexner had already been retained by long-time client AT&T for the same purpose. Flexner could not immediately be reached for comment.

For now, regulators are doing their initial 30-day inquiry. In mid-May they will decide whether to make a “second request,” which is what would trigger a deep dive analysis that might last six to nine months. During that stage the regulators-who could be either at the Department of Justice or Federal Trade Commission-would typically seek information and submissions from interested parties, like AT&T. Finally, if the regulators ultimately approve the deal, private parties like AT&T have the right to file their own suits to try to block the merger, though you don’t see that tried very often.

Potentially devastating antitrust accusations against Intel (INTC) were buried inside a recently filed shareholder suit against Dell Inc. (DELL). Though the Wall Street Journal did write about the suit here, the allegations do not seem to have attracted much attention. Maybe the suit got overlooked because it was filed the same day Dell CEO Kevin Rollins quit, and founder/chairman Michael Dell retook the company’s reins. Or maybe people are just understandably skeptical of naked accusations contained in shareholder suits brought by class-action impresario Bill Lerach. (See earlier feature or post on Lerach.)

Still, the charges Lerach leveled in federal court in Austin on January 31 are hard to ignore. For one thing, they are tantalizingly detailed–describing, for instance, the goings on at “weekly server group staff meetings” and “quarterly server group town hall meetings” at Dell–suggesting that a Dell insider might be cooperating with Lerach. In any case, if the claims turn out to be true, the Olympian reputations of Intel founder Andy Grove and Dell founder Dell could be due for some unflattering makeovers–like those endured by sluggers Mark McGwire and Barry Bonds after the BALCO steroid inquiry.

Lerach’s suit alleges, among other things, that from at least 2003 to 2006 Dell received massive, undisclosed, end-of-quarter rebate payments from Intel in exchange for Dell’s agreement not to ship any computers using microprocessors made by Advanced Micro Devices (AMD). The payments were allegedly never less than $100 million per quarter and, in at least one year, totaled about $1 billion. (During this period Dell represented about 20% of the worldwide market for the x86 processors both Intel and AMD made.) Intel forbade Dell from disclosing the payments, the complaint says, so as not to draw scrutiny from antitrust regulators. The payments were allegedly known to only about 15 top Dell officers, and were negotiated with personal involvement by Grove, Michael Dell, and Rollins. Since 1999, according to the complaint, Dell Computer would secretly design AMD-powered computers every year, but it would never ship them “due to the large sums of money the Company would lose from Intel for breaching the exclusive Dell/Intel processor relationship.” These payments were allegedly in addition to, and nearly an order of magnitude larger than, the “market development funds” that Intel was known to be paying Dell and other customers under co-branding programs like “Intel Inside.” Lerach’s suit, which is brought on behalf of several institutional Dell shareholders, alleges only securities law violations, not antitrust claims, and names Intel and PriceWaterhouseCoopers (Dell’s accountants) as co-defendants.

A Dell spokesperson declined comment on the suit. In a telephone interview, Intel spokesman Chuck Mulloy was extremely dismissive of it. “Our preliminary review suggests that much of it is largely made up,” he says. “We plan to move very quickly to defend ourselves.” He also stresses that neither the SEC nor Justice Department investigators have ever approached Intel in connection with their on-going probe of accounting issues at Dell, which started, according to Dell’s disclosures, in August 2005. That SEC probe is thought to focus on possible earnings manipulation relating to the way Dell accounted for warranty revenue and expenses.

Still, Lerach’s allegations have a ring of plausibility about them, in that nearly everyone in the industry has wondered why it took Dell until late 2006 to begin offering AMD-powered computers, when AMD’s microprocessors were widely seen as having attained technological superiority over Intel’s by early 2003. The complaint’s accusations also raise eyebrows because they dovetail so explosively with allegations AMD made in a mammoth antitrust suit it filed against Intel in Delaware federal court in June 2005. (See “Intel’s Worst Nightmare,” here, about that case.) (About 80 antitrust class actions have subsequently been filed against Intel on behalf of consumers seeking treble damages from Intel for allegedly having paid inflated computer prices.)

The centerpiece of AMD’s suit was the claim that Intel was paying so-called loyalty rebates to numerous major computer makers in exchange for varying degrees of exclusivity–80%, 90%, and, in some cases, 100%. In March 2005 the Japan Fair Trade Commission had found that Intel was, indeed, paying such rebates to five major Japanese computer makers (presumably Sony, Toshiba, NEC, Hitachi, and Fujitsu, though the companies are unnamed in the public version of the JFTC order) and that the rebates violated Japanese competition law. (Intel settled the JFTC matter shortly thereafter without admitting wrongdoing.) In its suit AMD alleges that Intel has been paying manufacturers so-called first-dollar rebates, meaning that at the end of the quarter, if the customer has achieved the level of exclusivity Intel seeks, it will get a retroactive discount on every Intel processor it purchased that quarter; if, on the other hand, it falls short, it gets nothing. Unlike conventional volume discounts–from which consumers can only benefit–many competition authorities believe loyalty rebates can become illegally coercive and exclusionary when offered by a dominant industry supplier. (Intel supplies about 80% of the worldwide market for x86 processors.)

Intel has so far insisted–notwithstanding the JFTC ruling–that it does not use such rebates. “We don’t buy exclusivity,” Intel general counsel Bruce Sewell told Fortune last fall, staking out the position his company still stands by. “We offer a discount program,” he said then, “which is stepped at basically 20%, 40%, 60%, 80%. So if you buy below 20%, you get no discount. If you buy 20% to 40%, you get a discount, but it applies only to the units between 20% to 40%. . . . You don’t have this dramatic incentive, where you get nothing below 90%, and everything above 90%. In our view, this is a very traditional discount that scales with volume.”

CORRECTION: Earlier version incorrectly referred to Bobby Bonds, when I meant his son, Barry. Thanks to “Bob in St. Louis” for noticing.