DealBook: Google’s Effort to Skirt Regulation May Invite More Scrutiny

Harry Campbell

Google’s motto is “don’t be evil.” But its recent acquisition of Waze, reportedly for $1 billion in cash, shows that just because you’re not evil, it doesn’t mean you can’t be aggressive in pushing the boundaries of the law.

The question now is whether the United States government pushes back and forces Google to give back its new toy.

Waze is yet another one of those blockbuster deals for a technology company with little or no revenue that makes you jealous. Five-year-old Waze has just 110 employees, so Google appears to be paying almost $10 million per employee. As for profits, Waze’s chief executive, Noam Bardin, has said, “This is Silicon Valley. We don’t talk about those things here.” Right.

Google is paying top dollar for Waze because it is at the intersection of two hot fields: map search and social media. Users download Waze’s app to their phone and then supply information about locations, routes and traffic, making the maps more intelligent. And Waze has the usual phenomenal growth in users, with 50 million worldwide. This is a field where there is believed to be oodles of money to be made in related advertising.

From this vantage point, the deal has a number of “must” business justifications for Google. Google is the top dog, dominating the “turn-by-turn” market for mobile maps on smartphones, and Waze makes Google a bigger dog.

Perhaps more important, buying Waze keeps the technology out of the hands of Facebook, which had reportedly bid about $1 billion for the company, and Microsoft and Apple, which also reportedly bid $400 million for the company earlier this year.

A billion dollars not only cements Google’s lead in map search, it does so in a big way. Google has paid large sums to have cars drive around the world to give its maps information content. But Waze is doing the same thing on the cheap by having its own users do the work.

Both types of systems are difficult and hard to build, meaning new entrants are unlikely to come. Just witness the difficulties Apple faced with the controversy over the accuracy of its own map app. If Apple can’t do this easily with its built-in user base of some 400 million iPhone users, not many others can.

So one might think that there would be significant antitrust issues with the acquisition. Google, already the dominant player, is buying what looks like a rising competitor, and it is doing so in a way that deprives other big players an easier way to compete.

It’s here where Google is pushing as hard as it can on the law.

Normally, to acquire a company in the United States, a buyer is required to supply the Justice Department or the Federal Trade Commission with what is known as a Hart-Scott-Rodino filing. This notifies the agencies of the transaction so either can review it for compliance with the antitrust laws.

The filing also prompts a waiting period during which the government can delay the acquisition to begin an in-depth investigation to determine if there is an antitrust problem. This is one reason that public takeovers are completed months after they are announced: the companies involved are waiting to clear antitrust review in the United States or another country.

This is the normal process. Yet Google’s only announcement of the deal appears to say that the companies signed and closed the deal that day, leaving Google the proud owner of Waze.

According to a person close to Google, the company skipped the Hart-Scott-Rodino filing by relying on an exemption. This filing is not required if the acquisition is of a foreign company that has sales and assets in the United States of less than $70.9 million. Waze is an Israeli company with headquarters in Silicon Valley, so it comes under this test.

Waze probably doesn’t have $50 million in revenue worldwide, yet the test also looks at assets. Given that Waze is worth $1 billion, it is hard to see that the value of its intellectual property in the United States business doesn’t meet the test. And the F.T.C. has previously indicated that companies should include this type of intellectual property in informal guidance.

Nonetheless, Google appears to have taken this aggressive position and is forgoing any antitrust review, instead plunging ahead with the acquisition.

So why did Google do this?

A representative from Google declined to comment.

Google may be playing hardball with the government here. Psychologically, it may be harder for the government to undo something that is done. And once Google acquires this company, it will become harder to force it to undo any integration it may have done with its own services. (For now, Google has said it will keep Waze separate.)

Not only that, but the Waze owners may have wanted to sell precisely on this basis, avoiding this huge possibility that the United States government would reject the deal, a risk that Google may have been willing to take with Facebook and Apple hovering.

But given the publicity over the acquisition, the government will almost certainly step in to review. Consumer groups are circling, and the Consumer Watchdog Group has written the government to ask for an in-depth review. That group has noted that Google’s purchase of Doubleclick and AdMob led it to a 93 percent market share in mobile advertising.

As with previous deals, the government can force Google to sell Waze, or put other restrictions in place, if there is a problem.

The standard was set forth in a piece of legislation passed a century ago: Will the acquisition “substantially lessen competition”? In part, this will come from how the market is defined — if it is just maps, well, you have to include companies like Rand McNally.

If it is turn-by-turn maps on smartphones, then according to Berg Insight, Telenav has a 33 percent market share while Google and Waze’s combined North American market share would be 28 percent. But Telenav’s business is stagnant and Google’s grew 30 percent last year, while Waze’s business grew 100 percent, according to Berg.

It may all come down to how easy it would be for another company to replicate what Waze is doing — it built an enormous user base that made it worth a billion dollars.

Even if Google can show that this deal does not decrease competition, the acquisition can be unwound if Waze is found to meet Justice Department guidelines as a “firm that plays a disruptive role in the market to the benefit of customers.” André Malm, a senior analyst at Berg, told me, “There is nothing like Waze.” He noted that the company was shaking up the market, so the authorities will pursue this line of investigation.

Either way, the comments of Mr. Bardin are not going to help, but they do serve as a reminder to other start-up chiefs looking to sell to their competitor not to say they that are the only game in town.

At the least, this all means that the Waze acquisition is likely to get a thorough review by the government. The battle will now begin. That Google will keep Waze without restrictions is no certainty. But the government faces a challenge. If it does decide to try to unwind this acquisition, Google is going to push the bounds of the law as hard as it can. The future of map search is at stake, and Google may not be evil, but this is business.

This post has been revised to reflect the following correction:

Correction: June 19, 2013

An earlier version of this column misstated the threshold that would require a buyer of a foreign company to supply the Justice Department or the Federal Trade Commission with what is known as a Hart-Scott-Rodino filing, which notifies the agencies of the transaction so either can review it for compliance with antitrust laws. It is $70.9 million in sales and assets in the United States for the foreign company, not $60.9 million.

Today's Economist: Casey B. Mulligan: A Budget for Regulation

Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

As Democrats and Republicans haggle over federal taxes and spending, another important policy tool gets less attention: regulation.

Perspectives from expert contributors.

Government has a variety of ways it can achieve its objectives, including subsidies, taxes and regulation. For example, the government might attempt to help disabled people by subsidizing handicapped-accessible buildings. Or it could levy an extra tax on buildings that are not handicapped-accessible. Or it could simply refuse to permit structures to be built, or used in various situations, without being handicapped-accessible.

All three strategies are likely to affect building activity, increase the prevalence of handicapped-accessible buildings and in so doing help people with disabilities, as intended. The first strategy is ordinarily called government spending; the second, taxation; and the third, regulation.

Private-sector activities to comply with regulation do not appear in the government budget, whereas private-sector interactions with tax and spending programs do, in terms of the amount of money they pay or receive. (Regulation does need a government budget for enforcement, but so do taxes and spending, and enforcement is distinct from the private sector’s compliance activities.)

Politicians have devised various budgetary gimmicks to help disguise what they tax and spend, and the sunset provision that led to next month’s fiscal cliff is one of them. Nevertheless, experts and even the voting public get an idea of the importance of taxes and spending in the economy by looking at budget totals and perhaps a few of the largest line items.

The same cannot be said for regulation, which lacks any official budget. Attempts have been made to quantify regulation by the number of pages of law or pages of agency rules: President Ronald Reagan once bragged that his administration reduced one area of regulation to 31 pages from 905.

However, pages can be misleading, because some words, sentences and paragraphs have more impact than others. For example, some laws, like those requiring children to attend school, have little impact because a vast majority of American families would send their children to school even if the law did not require it. Other laws, like many curfews, take up space on the books but are not enforced.

Because regulations have so far been poorly quantified, it is interesting to see a recent study of workplace regulation by complianceandsafety.com. It attempts to measure the aggregate of importance of workplace regulation by the dollar amount of fines collected by the Occupational Safety and Health Administration. Its chart, reproduced below, looks at the fines in reverse chronological order, and colors years according to the political party of the president in power.

complianceandsafety.com

OSHA fines have increased sharply since 2009. Perhaps more surprising is that the largest fine increases previously were under a Republican president (the first President George Bush) and the largest reductions were under President Bill Clinton.

As with taxes and spending, we cannot necessarily conclude that more regulation is “bad” or “good,” but it would be helpful for experts and voters alike to see a rigorous accounting for government regulation.

Stevens Takes Aim At Congress Over Gun Regulation

The presidential candidates may be reluctant to talk about gun regulation in the wake of recent tragedies such as the shooting in the Aurora, Colorado, movie theater, but not retired Justice John Paul Stevens.