* Illustration: Oliver Jeffers * "I think you are going to see a repeat of Microsoft."

Christine Varney's blunt assessment sent a buzz through the audience at the National Press Club in Washington, DC. Varney, a partner at Hogan & Hartson and one of the country's foremost experts in online law, was speaking at the ninth annual conference of the American Antitrust Institute, a gathering of top monopoly attorneys and economists. Most of the day was filled with dry presentations like "Verticality Regains Relevance" and "The Future of Private Enforcement." But Varney, tall and professorial, did not hide her message behind legalese or euphemism. The technology industry, she said, was coming under the sway of a dominant behemoth, one that had the potential to stifle innovation and squash its competitors. The last time the government saw a threat like this—Microsoft in the 1990s—it launched an aggressive antitrust case. But by the time of this conference, mid-June 2008, a new offender had emerged. "For me, Microsoft is so last century," Varney said. "They are not the problem. I think we are going to continually see a problem, potentially, with Google."

Coming from Varney, it was a particularly damning comparison. As an attorney who represented Netscape in the late 1990s, she was instrumental in painting Bill Gates and company as overeager bullies. Now, Varney was suggesting that Google was repeating Microsoft's expansionist behavior. Instead of dominating the desktop, Varney said, Google was starting to colonize the emerging cloud-computing industry, amassing "enormous market power" and potentially creating an ecosystem that customers would be powerless to escape. She acknowledged that her remarks might ruffle some feathers at Google headquarters in Mountain View, California. "If any of my colleagues or friends from Google are here," she said, "I invite you to jump up and scream and yell at me."

Nobody took her up on that offer. But it is safe to assume that plenty of Googlers were jumping and screaming six months later when President Obama appointed Varney head of the Justice Department's antitrust division, making her the government's most powerful antimonopoly prosecutor. On May 11, during her first public speech on the job, Varney made it clear that her stance had not changed much since her presentation at the conference: She planned to take a forceful approach to applying the nation's antitrust laws. "In the past, the antitrust division was a leader in its enforcement efforts in technology industries, and I believe we will take this mantle again," she said. She did not mention Google by name, but there was little doubt to whom she was referring.

Ever since its founding 11 years ago, Google has seen itself as one of the Good Guys. Founders Larry Page and Sergey Brin conceived their company as a kind of public trust. "We believe a well-functioning society should have abundant, free, and unbiased access to high-quality information," they wrote in the run-up to Google's IPO five years ago, a goal that requires "a company that is trustworthy and interested in the public good." They created a touchy-feely work environment with perks like onsite laundry facilities and free food. Prospective hires were grilled on not just their technical expertise but also their ethics—whether they were "Googley." Google's self-image was pithily summed up in its famous founding credo: "Don't be evil."

For most of its history, investors, users, and tech gurus shared Google's view of itself. After all, the company's rise to prominence—on the back of search algorithms so powerful and elegant they changed the Internet forever—is a case study in heroic entrepreneurialism. Its long-tail business model gives even the smallest Web sites a chance to make money. It routinely creates and distributes great products for free, even when there is no obvious benefit to the company. Its spirit of openness and collaboration laid the groundwork for the mash-upable, user-generated modern Web.

But recently, Google's size and ambitions have begun to obscure its halo. Advertisers have watched nervously as the company's share of the search-advertising market has jumped to 75 percent from 50 percent over the past three years. In 2007, Google attracted a yearlong antitrust review from US and European regulators after it announced plans to acquire online ad firm DoubleClick. In 2008, the DOJ swatted down a search-ad deal Google had made with Yahoo, arguing that it "would have furthered [Google's] monopoly." The company is currently under investigation by the DOJ for its ambitious book-scanning project, which aims to make every book ever published searchable on Google. And the Federal Trade Commission is looking into whether the Apple board seats held by Google CEO Eric Schmidt and board member Arthur Levinson violate federal antitrust law.

For much of its history, Google has responded to most criticism with two words: Trust us. The company has repeatedly persuaded skeptics that its immensity is a mere byproduct of its altruistic mission and that the algorithms it uses to organize the Internet, while proprietary, are objective and benevolent. But in an economy destroyed by bad faith, secretive formulas, and complicated mathematics, trust is in short supply, and Google's assurances are losing their persuasive power. More than 15 years ago, federal regulators began making Microsoft the symbol of anticompetitive behavior in the tech industry. Now, a newly activist DOJ may try to do the same thing to Google.



The New Microsoft?

In 2004, as a nation waited for Google's initial public stock offering, we ran a series of stories about the company. We pondered whether the IPO would cause Google to lose its soul (nope!), pointed out that the search company was reinventing itself as an advertising juggernaut (correct!), and suggested that the IPO could "burn a hole in the zeitgeist" (???). We closed with a look at the Google-Microsoft death match. "For all their differences, the two companies have a lot in common," Kevin Kelleher wrote. "Microsoft looks at Google and sees its own past, full of promise. Google looks at Microsoft and sees the future—a swaggering company that dominates the tech landscape" (bingo!).

It is an ironic position for the search giant to find itself in. Schmidt not only campaigned enthusiastically for the very Obama administration that appointed Varney, but also was one of the most devoted opponents of Microsoft in the mid-'90s, eagerly helping the government build its case against the software firm. Today, he is facing some of the very arguments he once lobbed at Redmond. His old enemy has even gotten in on the act, conducting a high-powered lobbying campaign ostensibly promoting online competition—and, not incidentally, taking down Google along the way (see "The Plot to Kill Google," issue 17.02).

Schmidt seems unruffled by the attention. "We sort of expect it, and it's been coming for a long time," he recently told Wired. "It's natural, given the role we play." Google has begun reaching out to regulators, advertisers, and trade groups to allay their concerns. But some close to the company say that Google's leadership still has not grasped how much its image has changed. "Google has always been about taking risks, but I think they have been taking too many risks with their reputation in the past three years," one former executive says. "If they don't fix it at some point, that is going to get them in trouble."

As Varney's appointment suggests, that trouble may have already arrived. In her speech at the American Antitrust Institute, she described how the case against Microsoft began long before any judicial hearings took place. "Part of what you have to do when you're going to try to bring a [Sherman Antitrust] Section Two case is you have to create the political climate," she said. "The problem we had with Microsoft is we went in too late." In other words, even if an antitrust case is years away, the all-important political ground is being prepared right now. How Google responds will determine whether it can fend off years of intensive investigation and—maybe even more important to Brin, Page, and Schmidt—maintain its heroic reputation.

Eric Schmidt's hatred of Microsoft took root in the mid-'90s, when he was CTO of Sun Microsystems. Sun had produced Java, a programming language that allowed applications to run on any computer, regardless of operating system. The notion of powerful, cross-platform applications apparently threatened Microsoft; the company licensed Sun's technology and created a pared-down version for its Internet Explorer browser, essentially forcing developers to build weaker Java applications. Sun claimed Microsoft had crippled Java and settled for $20 million in a resulting lawsuit. Schmidt butted heads with Microsoft again in 1997 when he became CEO of Novell, which sold software that enabled corporate PCs to connect to one another in a network. In the early '90s, Microsoft had incorporated networking into its corporate version of Windows and began demolishing Novell's market share. Schmidt was brought on to stop the bleeding, but it was too late; by the time he left in 2001, the company's revenues had fallen 50 percent off their peak.

Those experiences made Schmidt the perfect fit when he joined Google as CEO in 2001. Page and Brin had conceived the company as a kind of Bizarro Microsoft, opposite in almost every way: Microsoft forced users to store data in proprietary formats; Google would let them take data anywhere. Microsoft pushed partners and competitors around; Google would bend over backward to play fair. Microsoft was obsessed with its bottom line; Google would focus on creating products before figuring out how to monetize them. Microsoft became drunk on its own power; Google would maintain a rigorous sobriety. (Schmidt once told me that he is wary of having magazines profile him because he has seen how those who cooperate "start to believe their own clips." In 2008, The New Yorker quoted him as saying, "What kills a company is not competition but arrogance.")

By all appearances, Google doesn't need to fear Microsoft any more; today, Microsoft is the one struggling to maintain relevance in a world that Google created and dominates. Since 2003, Microsoft has invested hundreds of millions on efforts to compete with Google's search engine and search-ad platform, none of which have slowed Google's ascendancy. The Firefox browser, thanks in part to a distribution deal with Google, has rapidly chewed up Internet Explorer's market share, which has gone from 95 percent in 2003 to 80 percent today. And Google's online applications like Docs and Spreadsheets have forced its rival to play catch-up; Microsoft won't have a full browser-based version of Office until 2010.

And yet, Schmidt maintains a kind of paranoia about Redmond. He repeatedly reminds his employees that Microsoft could crush Google at any moment. The company recently introduced its own browser, Chrome, largely as a check on Microsoft. ("Because Microsoft is a follower, there is a concern that it could use its Windows monopoly to restrict choices with respect to search," Schmidt says. "There is a long history of this.") And in 2008, when he learned that Microsoft was in talks to acquire Yahoo, Schmidt publicly worried that the deal "could break the Internet"—bringing Microsoft's closed, proprietary attitude to the online world.

Schmidt tried to block the acquisition by pursuing his own Yahoo deal. Google would serve some of the ads on Yahoo's pages in exchange for a cut of the resulting revenue. Some Google executives warned that such a deal would needlessly bring the scrutiny of antitrust regulators, but Schmidt—along with Page and Brin—disagreed. Microsoft's purchase would hurt competition by reducing the number of players in the online-advertising industry and potentially give it a dominant position in online applications and services; Google's deal would spark competition by preserving Yahoo's independence. How could anyone object?

Schmidt at a campaign event for Barack Obama in October.

Photo: Joe Raedie/Getty ImagesSchmidt either didn't recognize or didn't care how it looked to some outsiders. He and Google may have seen themselves as scrappy, idealistic upstarts battling an entrenched tyrant, but to most observers they had already unseated the incumbent and assumed the throne. Advertisers didn't see an effort to preserve competition and open standards on the Internet; they saw a bid to increase Google's already dominant share of the online-ad market.

This disconnect became particularly apparent in September when Schmidt met with Thomas Barnett, the DOJ's antitrust chief at the time, to defend the deal. Barnett was shocked when Schmidt made Google's character—its constitutional aversion to all things evil and its commitment to operating on a higher moral plane—a central part of his argument. The line of thinking resonated throughout the DOJ. Weeks later, in one of Barnett's final meetings with Google and Yahoo lawyers, he made it clear he had little patience for Google's "trust us" refrain. He ended one question by warning: "Please don't tell me the answer is, 'Because the parties wouldn't do anything wrong.'"

Ultimately, Barnett's DOJ threatened to sue Google unless it dropped the deal. (Varney, Barnett's successor, has said that she was "deeply troubled" by the proposal.) Schmidt says today that if he had it to do over again, he would; indeed, it probably kept Yahoo out of the hands of Microsoft, which dropped its own bid soon after. But it will also have a lasting effect on Google. Any future deals of comparable size will inevitably draw the same kind of scrutiny. Schmidt had been so focused on renouncing Microsoft's behavior that he had led his company to the same fate: Google was now branded as a top antitrust target.

Google is big. Very big. Its millions of servers process about 1 petabyte of user-generated data every hour. It conducts hundreds of millions of searches every day. This is no accident; bigness is the very point of Google. The company's great skill—its competitive advantage—is its ability to find meaning in massive sets of data. The larger the data sets, the more potential meaning can be derived and the better its search results become. The better Google's search results, the more people use its search engines and the more data the company collects. It is a virtuous feedback loop, harnessing the power of network effects to create a more useful product.

In and of itself, Google's size is not a legal problem. Varney herself has pointed out that, while Google may enjoy a monopoly in the search-ad business, the company acquired it legally by building better search products that competitors were simply unable to match. Lawyers and economists say that things get complicated, though, when Google moves beyond search and into Web services like online spreadsheets and video sites. Because its search and advertising algorithms are secret, there is no way for competitors or partners to know whether Google tweaks results to direct traffic to its own properties over theirs. Enter a street address into Google's search engine, for instance, and Google Maps tops the results. Type in "Britney Spears" and Google News comes up before People magazine or TMZ .com. (Google-owned YouTube tops the video results, above MTV and MySpace.) If Google is using its search position to promote its other businesses, that could leave it open to charges of illegal bundling and leveraging—the same charges that Microsoft faced for packaging its browser onto the Windows desktop. And even if Google is behaving honorably now, it is creating a system full of temptations should the company ever come under financial pressure. "When things get tight," one advertising partner says, "whose bottom line will get sacrificed first? The answer is self-evident."

Google's revolutionary business model itself could also raise regulators' ire. One of the company's great innovations has been its willingness to provide free services in exchange for data. It launches a free automated 411 service and uses its callers' requests to hone its voice-recognition software. It gives away Gmail but gains access to users' online address books. Many customers may consider this inoffensive; indeed, Google's services-for-data trade-off has become a foundation of the Web 2.0 era.

But to antitrust watchdogs, customer convenience is often less important than preserving a competitive landscape. Google can use the surplus cash from its search business to subsidize the development of new, free products and services. That's a frightening prospect for would-be competitors without such a robust revenue stream—potentially scary enough to discourage them from entering the market. The possible result: less innovation overall. Some antitrust experts argue that the natural business cycle will take care of this problem without government intervention, but Varney's three top economists have all said that they favor a hands-on approach.

Google's largest problem isn't what the company is today; it's what it plans to become. Google aims to create a world in which Web services replace desktop software. That vision seems to terrify regulators like Varney, who fear that Google could grow too powerful in such an environment. Whatever the company's stated intentions, Varney says, it could still become a de facto standard, locking businesses into using its services.

Google's many champions in Silicon Valley dismiss these arguments as unnecessary governmental meddling that punishes an innovative company that has appropriately profited from its own genius and hard work. They also argue that the market will likely take care of itself. "The problem for antitrust in high tech is that the environment changes so rapidly," says Eric Goldman, a law professor at Santa Clara University. "Someone who looks strong today won't necessarily be strong tomorrow." And Schmidt says that Google could never take undue advantage of its position in the search market—not just for vague ethical reasons but as a matter of self-interest. Such a practice, he says, would destroy the trust that Google has built with its users—and ultimately Google's entire business. "We operate under great competitive worry," he says. "If you become dissatisfied with Google, it's very easy to move to a competitor." (Indeed, plenty of rivals are ready to snap up Google's user base at the first sign of weakness. In May, Microsoft announced Bing, its latest attempt to wrest search share away from Google. And companies like Facebook and Twitter are creating new ways of navigating the Web that pose a real threat to Google's dominance.)

It is a powerful argument. So powerful, in fact, that Bill Gates made a similar case when his own company faced antitrust charges. Microsoft was accused of using Windows—by far the dominant operating system in the personal-computer industry—to promote its browser unfairly. But Gates said that the DOJ did not realize the peculiar intricacies of the software industry, where constant innovation created competitive chaos. In 1999, Gates told Wired that he didn't think it was possible to have a monopoly in the software industry. After all, he pointed out, anybody who didn't like Internet Explorer could just install another browser. "It's overwhelmingly true that the case is misguided," he said. "Understand, anybody can give any piece of software away for free. That's just a fact."

Based on everything Schmidt has ever said or done, he would likely find any comparisons of his own company to Microsoft downright insulting. Microsoft made its software a necessary component of every PC; Schmidt says anyone can use the Internet without going through Google—a conscious strategy. "Because of Microsoft's misdeeds 10 years ago, we all understand what not to do," he says.

On paper, the two pieces of legislation that define antitrust law are pretty straightforward. Section Two of the Sherman Act, passed in 1890, made it a felony to "monopolize, or attempt to monopolize"; 1914's Clayton Act added price discrimination and other activities that reduced competition. But for most of the past century, lawyers and regulators have battled over how to apply those terms in new industries where the rules are unclear.

The government's case against IBM helped define antitrust in the PC era, arguing that its practice of offering discounts to universities could be seen as predatory pricing, and that its vertical integration—the company owned hardware, software, and support divisions—could be interpreted as monopolistic expansion. Telecom antitrust was defined by AT&T, which was broken up after federal regulators decided that its proprietary hardware, as well as its control of the local, long-distance, and service industries, was anticompetitive. In software, Microsoft got into trouble for bundling its Internet browser with its operating system; the company saw it as useful integration and healthy competitive behavior, but the government saw it as an attempt to extend its desktop monopoly to the Internet. These cases may seem obvious in retrospect, but at the time they weren't at all; they were long, expensive, and heated ordeals to redefine the rules for modern business. A case against Google could update antitrust law for the Internet age.

If the DOJ does launch a case against Google, it likely will not come for at least five years. It takes time to build the political will to go after a beloved company. And for all the time, energy, and money spent on big trust-busting lawsuits, they are frequently useless by the time the adjudication has been completed. (When the Microsoft case finally concluded, for instance, Netscape was already irrelevant.)

But even if Google never faces antitrust charges, the threat of them may change how it does business. To date, Google has been a fast-acting, dealmaking machine. In 2002, it took just weeks to negotiate a complicated advertising revenue-sharing agreement with AOL. The company cobbled together its 2006 purchase of YouTube over a weekend. Google has taken a similarly aggressive approach to signing up advertising partners for its AdWords and AdSense programs—doing whatever it takes financially, even if it loses money in the short term. A company under threat of antitrust investigation—when any significant action might invite scrutiny—cannot operate this way.

Unfortunately for Google, there aren't many models for it to emulate. After the government initiated its case against IBM, the company spent two decades scrupulously avoiding even the appearance of impropriety. By the time the suit was dropped in the early 1980s, company lawyers were weighing in on practically every meeting and scrutinizing every innovation, guarding against anything that could be seen as anticompetitive behavior. A decade later, innovation at Big Blue had all but ceased, and it had no choice but to shrink its mainframe business. (It has since reinvented itself as a services company.)

Microsoft took the opposite approach. Gates and company were defiant, to the point of stonewalling regulators and refusing to take the charges seriously. "Once we accept even self-imposed regulation, the culture of the company will change in bad ways," one former Microsoft executive told Wired at the time. "It would crush our competitive spirit." Gates put it even more directly: "The minute we start worrying too much about antitrust, we become IBM." Microsoft's hostility to the very idea of regulation resulted in several avoidable missteps—including remarkably antagonistic deposition testimony from Gates—that ultimately helped the DOJ rally support for its ongoing antitrust suit against the company. Although Microsoft ultimately settled, the public beating appears to have taken a toll on the company, which has been unable to maintain its reputation for innovation and industry leadership.

Google is playing nice so far. Its public policy blog soothingly acknowledges regulators' concerns. "As Google has grown," it reads, "the company has naturally faced more scrutiny about our business principles and practices. We believe that Google promotes competition and openness online, but we haven't always done a good job telling our story." Schmidt is a regular presence in Washington; he served as a member of Obama's transition team and now sits on his technology advisory council. And publicly, Schmidt welcomes the oversight. "We understand the role here," he says. "We are not judge and jury."

But that doesn't mean Google will neuter itself to please the government. Just like Gates before him, Schmidt says he has no plans to change his company's trajectory in the face of regulatory challenges. Microsoft's belligerence was a function of its will to power, a refusal to believe that the government had the authority or intelligence to take it down. Google still thinks it can get regulators to see it as it sees itself: not as a mere company but as a force for good.

Contributing editor Fred Vogelstein (fred_vogelstein@wired.com) wrote about Facebook in issue 17.07.

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