Google trying to avoid antitrust fight in Europe

BRUSSELS — At the annual World Economic Forum in Davos, Switzerland, the hottest ticket in recent years has invariably been an invitation to Google’s lavish private party, and 2011 was no exception.

Eric E. Schmidt, soon to leave the post of chief executive, was avidly working the crowd amid free-flowing liquor and pulsating dance music.

But in recent months, Google has been attracting a different kind of attention. As its ambitions have grown, stretching into businesses far beyond Internet search and advertising by the click, so has the scrutiny of antitrust agencies on both sides of the Atlantic.

So Google extended an even more exclusive invitation to another Davos attendee, Joaquin Almunia, the EU antitrust chief, asking him to meet face-to-face with Schmidt.

On the agenda: the investigation Almunia’s team had just begun into allegations from European companies that Google had abused its dominance in online search — by giving preferential placement to its own services and unfavorable treatment to those of competitors.

At the meeting, Schmidt asked Almunia to complete the inquiry as quickly as possible. And if the investigation turned up problems, Schmidt requested that Google be given a chance to offer solutions without incurring penalties, according to people with direct knowledge of their conversation.

Almunia told Schmidt he would try to do so, according to these people, who spoke on condition of anonymity because of the sensitivity of antitrust investigations.

The details of the investigation are not public, and Google has not disclosed its responses to the European Commission.

A Google spokesman, Al Verney, said recently that “there’s always going to be room for improvement” and that Google would “continue to work closely with” European regulators to address any concerns.

But antitrust investigations in the United States are piling up, including a Texas inquiry involving Google’s search dominance and federal scrutiny of Google’s proposed acquisition of ITA Software, a flight information company. And with complaints growing louder on issues like privacy, the last thing Google wants is to get bogged down in a lengthy antitrust battle in Brussels.

The case could also be costly for Google, and not just in tarnishing its “Don’t be evil” motto. If found in violation of European law, Google could be fined as much as 10 percent of its annual worldwide revenue, which topped $29 billion last year. It could also be required to adjust its business model as part of a remedy.

Google has some reason to be hopeful.

Almunia is portrayed by those who know him as more of a consensus-seeker than his immediate predecessors, who imposed huge fines on Microsoft and, in a separate case, the chip giant Intel, a ruling Intel is still appealing. And the commission was wary of rushing into another high-stakes battle with another U.S. corporate powerhouse.

But its members could not ignore the clamoring — from struggling startups, major newspaper publishers and telecommunications companies, among others — for them to look into Google’s ever-expanding operations.

On Nov. 30, Almunia’s office issued a news release saying it had opened a formal investigation of the company. Despite Google’s market share in Internet searches of more than 90 percent in parts of Europe, the evidence in hand was limited. The commission’s case team had formal complaints from only three companies, and each was a minnow in the technology world.

In addition, the commission’s old antagonist, Microsoft, was among those pushing hardest for an investigation; two of the three complainants had ties — one directly, the other indirectly — to the company.

Yet during the course of 2010, the case team received signals that if a formal investigation were started and official questionnaires sent industry-wide, they would get plenty more evidence.

During the preliminary inquiries, Google’s own actions were perceived in Brussels as naive, according to one senior EU official with direct knowledge of the investigation. There were also apparent inconsistencies between Google’s public and private statements regarding practices like “whitelisting,” or adjusting the results of Google’s algorithms to favor certain sites in search results.

That issue has relevance in the United States as well. In an antitrust investigation that strikes at the heart of Google’s search business, investigators in Texas are seeking evidence about the “manual overriding or altering of” search result rankings. That inquiry involves at least one of the websites in the European investigation, a British price-comparison service called Foundem.

The specifics of antitrust cases are typically kept private by regulators and the companies being investigated, but, unusually, Google chose in February 2010 to publicize which companies had filed complaints. They were Foundem; Ciao, another price-comparison site in Germany; and, a French legal advice site.

Google highlighted the fact that Ciao was owned by Microsoft and that Foundem had ties to a Microsoft-financed lobbying group in Brussels.

The company’s decision, however, was seen as “defensive and naive,” said one senior commission official, who spoke on condition of anonymity.

Officials also saw Google’s early responses as inadequate in addressing their central concern: whether Google had shut out competition. The filings in the case, some of which were made available to The New York Times, showed that Google frequently dwelt on what it saw as its prerogative to preserve the quality of its own service for consumers.

“Suggesting that Google is under an obligation to show search results of other search services is like suggesting that Mercedes is under an obligation to put Fiat motors in its cars,” the company’s lawyers wrote to the commission in a confidential response on May 3.

That was in response to charges by that Google had removed most of its pages from an online index. As a result, Ejustice said, clicks on its site dropped so sharply that it was effectively invisible on the Web.

Google said in its response that was violating guidelines set by Google about how to make the website findable in Google’s search engine. Google said that violation could result in users never finding a Web page with the answer to their question, just more pages of search results.

Google also said created pages with thousands of hyperlinks consisting only of search keywords, many with little or nothing to do with the law. “This is typical behavior of sites that seek artificially to increase their search result ranking without offering authentic content,” Google lawyers wrote.

At the same time, Google acknowledged that it had probably also removed some potentially useful Ejustice legal search terms.

A complaint by Adam and Shivaun Raff, the husband-and-wife team behind Foundem, was pivotal.

Foundem was a highly regarded price-comparison site in Britain. But for some time, the Raffs said, their site had become virtually invisible on Google’s search results, and in July 2009, the couple headed for Brussels to complain.

They contended that their site had been penalized by Google, starting in June 2006, even though its ranking remained competitive on other search engines like Bing and Yahoo.

They said that Google had then made it prohibitively expensive for them to make their site easier to find in a different way — through paid advertising that appears next to Google’s search results. And they made a third charge: that Google’s algorithms had the effect of favoring Google’s own price-comparison tool, originally called Froogle and since renamed Google Product Search.

Eventually the Raffs submitted a formal complaint, backed by written material that seemed at odds with some of Google’s public statements.

For example, Julia Holtz, Google’s chief lawyer in Europe, told reporters in February 2010 that “we don’t whitelist or blacklist” other websites.

Yet the company apparently has used whitelisting, at least in certain areas. One message to the Raffs from Google in September 2007, which focused on returning Foundem’s paid advertising rates to normal, was labeled “Update on Whitelisting.” Two weeks later, Google informed Foundem that it had successfully “facilitated a change” and remedied the problem.

But Foundem was still not satisfied with its search ranking, and the Raffs persisted.

By autumn 2009, Matt Cutts, the head of Google’s webspam team, which works on search quality, had begun a detailed dialogue with Foundem. Cutts advised Shivaun Raff in an e-mail dated Nov. 20, 2009, to do more to clean up garble on the site, and then “we should see some positive changes to Foundem’s relative ranking.” Cutts insisted that there was “no manual penalty affecting the ranking of Foundem pages.”

In its May 3 filing, Google said it had given Foundem “the benefit of the doubt and removed the demotion” after Foundem had fixed “the most egregious quality deficiencies.”

Foundem, however, charges that Google’s remedy took too long — three and a half years — and that the process was too difficult.

Foundem also charges that Google uses other algorithms to favor its own services, and it has produced color diagrams it says proves that point. Google did not respond to questions seeking specific comment on Foundem’s allegations.

Google, however, is accustomed to dealing with complaints about search placement. Last November, Google wrote on its European Public Policy Blog that its goal was serving users with “the best, most relevant” information, adding that “not every Web site can come out on top, or even appear on the first page of our results, so there will almost always be Web site owners who are unhappy about their rankings.”

A few days before the commission formally opened its case, Almunia telephoned David C. Drummond, Google’s chief lawyer, to alert him of the investigation. Drummond expressed his disappointment, but there were no attempts at negotiating by either party, according to people with knowledge of their conversation.

Asked about the Davos meeting between Schmidt and Mr. Almunia, Verney, the Google spokesman, said, “We frequently talk to regulators as a normal part of any investigation process.”

Amelia Torres, a spokeswoman for Almunia, said that the antitrust chief was “happy with Google’s cooperation.”

If the past is an indicator, the case will be alive for some time. The cases involving Microsoft and Intel lasted, through various stages, for about a decade.

Paul Geitner contributed reporting from Davos, Switzerland, and Claire Cain Miller contributed from San Francisco.