By January 2008 the two companies were competing in cell-phone operating systems, wireless hardware and Web services, and half of Apple's board was Google insiders, a draw-dropping instance of Silicon Valley inbreeding that Apple nevertheless shrugged off. So what's changed? Google has since launched "Chrome OS," but it's doubtful Apple sees the unreleased Linux window manager as a real threat.

The real worry: Two federal agencies are now investigating ties between Apple and Google. Micrososft's high-powered flacks, experts in antitrust who have retained Schmidt's ex-girlfriend, may deny lobbying on the matter. But after effectively buying the future of Google neighbor Yahoo, the Redmond, Washington company must be thrilled to see its longtime detractors in Silicon Valley further splintered.

(Pic: Jobs and Schmidt at the iPhone introduction, Macworld, January 2007. AP.)

Google has a plan to extend its dominance in search and online advertising into every part of the information economy. It's no secret — it's in the company's mission statement. But antitrust cops look askance at efforts to use market power in one field to move into another.

When Obama appeared at the Googleplex in November 2007, his candidacy was far from preordained. Gullible techies hailed his platform as "Google-friendly." Sure, Google will be helped by support for faster broadband connections. And cofounders Larry Page and Sergey Brin share a cleantech obsession with Obama.

Schmidt was so lackadaisical about courting Obama that he only endorsed him in the waning days of the campaign, threw an inaugural ball, and got rewarded with a token appointment to a science council. For those obviously halfhearted gestures, he didn't get what he wanted: a free pass on antitrust issues.

When it comes to enforcing competition laws, the White House sees Google as just another big, overweening corporation. Assistant Attorney General Christine Varney, appointed last month, mused about Google as the next big antitrust target last summer.

And sure enough, Google is facing two antitrust cases already: one about book search, and another about its board's overlap with Apple. They come after antitrust cops unexpectedly shot down a search deal with Yahoo last year.

The investigation into Apple's board, half of whom are either Google board members or Google advisors, really has to do with the mobile-phone industry. Google makes an operating system for mobile phones, but it's free, so it's hard to argue that, say, T-Mobile's G1 Googlephone competes with Apple's iPhone. But that's a red herring.

The real problem is the potential for collusion in mobile search. Google used to brag about how much search traffic the iPhone generated for it — 50 times more than any other handset, Google executives said last year. One hasn't heard Google trotting out those kinds of statistics lately. Why make it easy for government antitrust prosecutors to see the connection between Apple's iPhone sales and Google's mobile search traffic?

Google executives seem deluded about the company's antitrust risks. In a video interview with BusinessWeek, Dana Wagner, Google's top antitrust lawyer, refuses to use the word "antitrust" to describe what he does. He calls himself a "competition counsel."

Who's going to get Google out of this mess? Not its outside lawyers, Wilson Sonsini. They prepared an analysis of the kind of board conflict Google faces with Apple, which concluded that there was a high risk of collusion. When John Paczkowzki of AllThingsD called to ask questions about it, the document got yanked off of Wilson's website, and deleted from Google's cache curiously fast. Conveniently, Microsoft, which has hired the lobbying firm where Eric Schmidt's ex-girlfriend works to stir up antitrust trouble for Google, still has a copy in its search engine's cache.

The FTC, which polices antitrust violations along with the Department of Justice, is investigating Apple and Google for a potential violation of a 1914 law against overlapping boards which may hinder competition.

People in Silicon Valley have long wondered at the close ties between Apple and Google. When Google CEO Eric Schmidt joined Apple's board in 2006, Apple had yet to launch the iPhone and Google wasn't a player in the cell-phone market. But the depth of ties seemed curious, even without that conflict. Genentech CEO Art Levinson already served on both boards, and two Apple board members, Bill Campbell and Al Gore, served as Google advisors. That's a block of four directors — half the board, able to stalemate any Google-unfriendly strategic move.

It's an obvious thing to investigate. But why now, since it's been the case for years? Schmidt campaigned for Barack Obama, and was recently appointed as a science advisor to the president. Fat lot of good that's done him. This is the second antitrust case Google is facing, following one over a settlement with book publishers which critics say would limit competition in book search.

The Obama administration, despite its ties to Schmidt, has signaled that it will be more aggressive in antitrust enforcement (as Democratic administrations usually are). But what else do Google and Apple share, besides directors? A common enemy in Microsoft. And Microsoft has hired Burson-Marsteller, a PR and lobbying outfit which lists "position[ing] technology firms in antitrust cases" as one of its specialties. A Burson-Marsteller executive has denied lobbying against Google on Microsoft's behalf. So modest! At the same time, the firm, run by loathsome unterflack Mark Penn, went as far as to hire Eric Schmidt's ex-girlfriend to help out its tech practice. Revenge is a dish best served with a summons from the antitrust cops.

A tipster tells us that Simon is "running the somewhat secret Penn campaign for Microsoft trying to throw dust into Google's gears (like trumped-up antitrust issues, for instance, not to mention privacy complaints." Our source adds that the campaign "is heavily under wraps," with employees forbidden to discuss it, and goes under a cover name (possibly "iCom").

It's good timing for Penn to rev up the business. Barack Obama's incoming antitrust cop, Christine Varney, seems friendly to the notion that Google's dominance of Internet advertising could pose antitrust issues.

Which leaves Simon's pick as point person as the only curiosity about the campaign. Reached by phone at Burson Marsteller, Simon did not elaborate on why she joined the firm or left her recent gig at Thomson Reuters, but promised to call back. She hasn't done so yet. Update: But her boss, Josh Gottheimer, a former speechwriter for Bill Clinton, gave us a ring to deny "categorically" that Simon will have any involvement in any anti-Google efforts. He also says, "We are not lobbying for Microsoft against Google."

As it happens, Microsoft and Burson-Marsteller are the sole names of any note in a largely European initiative called Icomp (likely the "iCom" our tipster referred to) to promote "vigorous competition" in the "online marketplace" — which seems like a thinly veiled effort to lobby against Google's domination of Internet advertising.

Penn, the incompetent PR guy whose bad advice was widely credited with losing the presidency for Hillary Clinton, has taken on Microsoft chairman Bill Gates as a client before. But Simon rivals him in her access to the customer: It's widely believed that she and Gates carried on an affair when she last worked for Microsoft.

More recently, she took up with Google's Schmidt, picked up an engagement ring, and by the fall of 2007 had gotten a a job working on the launch of the Googlephone. That arrangement didn't last long, and soon afterwards, Schmidt and Simon split, with Schmidt (who's married) taking up with a new woman.

Simon has an acquaintance who also recently parted ways with Google: incoming AOL CEO Tim Armstrong. Armstrong is an investor in an online-publishing startup called Associated Content, which recently hired ex-Google Patrick Keane as its CEO, and we hear Simon might be taking him on as a client. She Twittered about his hire and emailed a press release listing her personal cell phone number and Hotmail address as a media contact.

Jennifer Graham, Burson's current head of tech PR, is said to be furious about the hire; Simon might replace her as head of Burson's global tech practice, according to one theory floating around. Gottheimer adds that Simon will be working for him on new business development and won't be involved in the technology practice. Which seems like a waste of her unique talents (and doesn't explain Simon's repping of Associated Content).

Given that, the antitrust assignment looks odd: Simon is not known for her political resume. She would seem to bring two unique qualifications to the job: Knowledge of the enemy, and a burning passsion for revenge. Hell hath no fury like a woman scorned.

Schmidt got a big scare when the Bush administration moved to block a deal to have Google sell search advertising for Yahoo, a move the companies made to fend off Microsoft. In the last weeks of the campaign, he loudly endorsed Barack Obama and signed up as an economic advisor. Schmidt and other Google executives shelled out for pricey tickets to Obama's inauguration, and Google threw its own inaugural ball. The White House even hired a Googler, Katie Stanton, to run its Web outreach efforts.

But another hire has caused consternation in the Googleplex. Christine Varney, the lawyer Obama nominated to run antitrust enforcement, said last year that "Microsoft is so last century" and the new, more compelling problem in antitrust was Google's "monopoly in Internet online advertising."

So much for Schmidt's cozying up to the administration.

Varney is a bright, respected lawyer, and may well prove a formidable opponent for the brainiacs of the Googleplex. But it doesn't take a brilliant mind to notice Google's outsized profit margins, which fund lush perks for employees and wasteful spending on pet projects sponsored by its quirky founders, Larry Page and Sergey Brin. Analysts believe that just by taking a scalpel to that waste, Google will prove able to ride out the recession with ease.

But that ease is coming at someone else's expense: Namely, anyone who advertises on the Internet, where Google is an inescapable force, especially since its acquisition of banner-ad broker DoubleClick. The rates they pay are ultimately reflected in the prices they charge, which is where consumers feel the pain.

So it seems like a hubris-filled Schmidt is tempting the gods when he calls for other companies to be broken up into smaller, manageable pieces. When will his own turn come? The government was ready to sue over the Yahoo deal before a chastened Google hastily abandoned it. A Google antitrust suit seems like a matter not of if, but when. A notion Schmidt might entertain: spending less time opinionating on other people's businesses, and more with his lawyers.

Here's the rest of his BBC interview:

Google's mistake: Creating a PowerPoint presentation and posting it to a site with the search-engine-optimized name "Facts about the Yahoo-Google advertising agreement." In the presentation, which we've embedded below, Google explained that the deal is not a merger and that Ford uses Toyota engines in some of its cars. It also misquoted Swisher, making her really mad.

The presentation cites Swisher as saying:

There’s not a whole lot for the Justice Department to hang a case on, in contrast to its case against Microsoft, which landed in court because of bullying behavior that actually took place before the case was waged.

What Google's presentation doesn't say is how Swisher prefaced the post from which that quote was taken:

I and many others–advertisers, publishers and state and federal regulators–are a bit nervous about further concentration of market power in one set of hands, even if they are such Googley hands. But in the interest of fairness and because I like to argue with myself here is a counterpoint with three key reasons why Google and Yahoo might hold firm in launching the partnership.

"I feel like one of those misquoted movie critics in newspaper ads!" Swisher writes in a post today:

("Go…see…it…quick!!!," when the entire quote was "Go home before you see even a second of it or you will be sick quick!!!”)

(Photo by Joi)

It's not clear how widespread the price hikes are. (If you've seen raises in your Google bids, please let us know.) But even if the price changes are narrowly targeted, they're alarming in their size and suddenness. The effect of hiking the bids, and then dropping them, says our tipster, is that many of the keyword campaigns were canceled for not meeting the temporarily raised minimums, as he says this screenshot shows:

Google will likely defend the move as an effort to improve the quality of ads, arguing that more expensive ads are more likely to prove of interest to Web searchers. But the net effect is to shut out mom-and-pop shops aiming to advertise in small niches — the market on which Google built its advertising machine.

At Google's Zeitgeist conference today, sales chief Tim Armstrong said, "We have one of the most transparent, accountable models in the digital landscape," True in the sense that Google's pay-per-click advertising can easily be tracked to see its benefit. But when the cost is set by Google, in an utterly opaque manner, how can anyone make rational plans around its advertising? All the cost-benefit analyses in the world won't help an advertiser whom Google decides to disadvantage, for its own obscure reasons.

AdWords, the system Google uses to take bids for ads and place them, has long been called a "black box"; its operations are mysterious, and Google does not explain the changes it makes to its algorithms — in part, it says, because it changes them so frequently. But regulators would be wise to demand more clarity for Google. It's a simple quid pro quo: If Google is to expand its reach with the Yahoo deal, why not give customers a bit more clarity on how it charges them? It doesn't seem like much to ask.

(Photo by Steve Jurvetson)

Simple: It needs to bulk up to contend with the might of Apple, one of the largest buyers of flash memory.
Samsung has supplied the memory chips for Apple's iPhone since its launch last year. Before then, Samsung sold Apple memory for its iPod line, and continues to do so today. Apple is a huge customer for Samsung — so huge that it can command deep discounts, and tie up an enormous amount of Samsung's manufacturing capability. When Apple first launched its flash-memory iPod Nano, it locked up enough production to keep rivals off the market for months. (Even Samsung and SanDisk tried to launch me-too clones of the Nano, to no effect.)

Regulators may block Samsung's SanDisk bid. But they ought to keep an eye on Apple, too. Antitrust cops tend to spend all their time watching for monopolies — sellers who wield undue influence over a market. They should crack open their investment glossaries and look up "monopsony" — the condition that exists when a buyer dominates a market.

(Illustration via Apple Insider)

1. Professor Varian, you wrote:
   

   The SearchIgnite report claims that for any given keyword, Yahoo will have the ability to see whose ads are priced higher — Yahoo's or Google's — and then decide which ads to serve. Yahoo won't.

   It makes us wonder: If the arrangement doesn't include some way for Yahoo to choose Google ads when they're more lucrative than its own, how does it benefit Yahoo?

2. Another point also confused me. You wrote:
   

   The report assumes that Yahoo will serve Google ads for as many of its search queries as possible. Yahoo also has economic incentive to keep serving as many of their own ads as possible. They get to keep all of the revenue from those ads.

   Your argument seems to be that Yahoo won't use Google ads much because they won't help Yahoo's revenues as much as Yahoo ads. But I thought the whole point of the deal was to increase Yahoo's revenues with Google's ads. We're not that good at math here, but it seems possible that some of a large number can sometimes be worth more than all of a small number.

3. One last question: Your two points may help Google — your employer — in an antitrust case. But they also undercut the entire basis for doing the deal. Is there some other rationale behind it? Like, say, getting back at Microsoft?

Agencies and advertisers are bit players in this. Microsoft has been lobbying reporters to write about this stuff. They have a huge lobbying apparatus in place from the antitrust battles of the '90s. Some very high up people at [media] holding companies don't even think it's worth their time to get involved because it's a lobbying battle. And for agencies, they know they're being used, but they think Google need to get its snout hit.

(Photo by AP/Sarbach)

(Yang) said 'If we do this deal with Google, Yahoo will become part of Google's pole and Microsoft,' he said, 'would not be strong enough in this market to remain a pole of its own.

Yahoo general counsel Michael Callahan disputed Smith's retelling of the meeting. Google's top lawyer, David Drummond, told lawmakers that "Google and Yahoo will remain fierce competitors. This agreement will not remove a competitor from the field."

Advertisers disagree with Drummond. Ad buyers have told us that the Yahoo-Google deal will likely drive the prices they pay for search ads up by 25 percent. Yesterday, Matthew Crowley, the chief marketing officer of AT&T subsidiary Yellowpages.com, echoed the sentiment.

If [the Google Yahoo search deal] is allowed to happen, it seems obvious that some advertisers will have a diminishing ability to play Google and Yahoo against one another in a competitive marketplace. The result would be less choice and higher prices for advertisers — especially smaller-scale advertisers that do not have the heft or resources to ensure the best deal possible. The agreement poses a significant danger not only to competition for internet search advertising and to the broader internet economy, but to Yahoo's continued viability as a strong independent competitor.

BoomTown's Kara Swisher caught up with each company's legal man in D.C. in the video embedded up top. Our favorite part: Googler David Drummond's slick-as-Vaseline false modesty over Google's prospects in the brand advertising market, around the 1:30 mark.