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Pressure Grows on Google’s Schmidt To Leave Apple Board

Despite the threat of Google Chrome OS as another competitive front versus Apple, Google CEO Eric Schmidt refuses to step down from Apple’s board of directors.

The digital ink barely dried on Google’s blog post to announce the coming of Chrome operating system 7 July, when journalists and bloggers ran stories suggesting Google CEO Eric Schmidt should remove himself from Apple’s board of directors for violating U.S. antitrust rules.

The argument renewed a debate that began in earnest in May when The New York Times said the Federal Trade Commission was looking into whether Schmidt’s place on Apple’s board violates Clayton Antitrust Act of 1914.

Specifically, Section 8 of the act prohibits “interlocking directorates,” or an individual’s presence on the board of two rival companies when it would reduce competition between those two companies.

Apple has been a stalwart in computers for two decades and an undeniable force in the smartphone sector for the last two years. But Google’s quest to organise the world’s information online has driven it into greater competition with Apple.

In the last two years, Google has developed the Android mobile operating system, a platform for manufacturers to build smartphones that compete with Apple’s iPhone, the Chrome Web browser, which competes with Apple’s own Safari browser; and now Chrome OS, which Google hopes becomes a speedier, more friendly OS than Apple’s Mac OS X and Microsoft’s Windows operating system.

Throw in competing Web services in productivity and Google and Apple look more like competitors than cohorts against common enemy Microsoft, whose desktop software domination is notorious. So why is Schmidt still on Apple’s board, when the consensus is that the companies have become too competitive for him to be bosom board buddies with Apple?

Gary Reback, of counsel in the litigation practice group of Carr & Ferrell, said he doesn’t understand why Schmidt remains on Apple’s board considering the scrutiny. Reback, credited with spearheading the efforts leading to the Justice Department’s prosecution of Microsoft, knows a little bit about what constitutes antitrust violations.

Reback did say that section 8 of the Clayton Act is intended as a prophylactic provision intended to keep people from getting in a situation where they’d be tempted to do something wrong, or where it might look bad. “The antitrust law puts up a wall, and you kind of observe the wall and that’s the end of it.”

The hardest thing for me to understand is why there is resistance on Eric’s part. This is a real law, it has a very sound purpose, it’s been on the books for a long time. I never heard of anybody fight over it. I’m kind of amazed by the resistance, to just acknowledge it, resign and move on. Why would you fight them, why would you push on that? If the government goes so far as to say they’re investigating it, you’d normally expect an executive to say, ‘I’m not doing anything wrong’ but why let anybody raise the issue?

Reback noted that under the Clayton Act, interlocking directorates are not considered an issue if the sales from products over which the companies compete is less than 2 percent of either company’s total sales. “[Google’s] point was that their product was given away free, so it doesn’t come over the 2 percent threshold as it applies” to the companies’ sales,” Reback said.

Apple makes the bulk of its money selling $1,000 desktop computers and also sells millions of iPhones for $200 a pop. Google offers Android and Chrome free under an open-source license, and Chrome OS will be open source when Google releases it to market. Google makes the bulk of its cash from online advertising tied to search and other content. In short, Schmidt and Apple CEO Steve Jobs may believe differences in how their companies make money should clear them of antitrust concerns.

However, that might not even be enough protection; Reback noted that Section 5 of the Federal Trade Commission Act could also be invoked to prevent unfair competition. This act does not have percentage thresholds that would protect Google and Apple.

Common sense dictates that Schmidt and Jobs are well aware of the sensitivity and soberness with which Schmidt’s position on Apple’s board must be treated. The track records of Schmidt and Jobs stand up to almost all scrutiny; surely these leaders, who have navigated their companies through rough waters many times, warrant some trust in their actions and rationale.

Maybe the media and other pundits should give them a break and trust them to handle any conflicts of interest or steer the companies away from potential antitrust violations?

Eric Goldman associate professor, Santa Clara University School of Law and director of the High Tech Law Institute, said he agreed that board directors should be able to manage their own conflicts. However, he told eWEEK via e-mail: “Interlocking directors can have anti-competitive effects if the companies–as directed from the top–start coordinating their actions. The coordination can be express, like the 2 companies agreeing to carve up markets (“you go into mobile operating systems and we’ll stay out of it”). The coordination can also be subtle, like a director’s suggestion to focus on one area knowing that will tie up from the company from moving in a different direction.”

Even if the competitive overlap doesn’t increase, at this point I can’t understand why Schmidt doesn’t step off the Apple board. The DOJ is watching Google like a hawk, so the last thing Google needs is any extra areas of concern. In other words, I can’t understand how the benefit of Schmidt sitting on Apple’s board is greater than the potential costs of exacerbating the DOJ’s scrutiny.

eWEEK asked Google three questions to get more insight into Schmidt’s reason for remaining on Apple’s board.: 1) What market areas does Google see itself competing in with Apple, and how does “Google’s free” model play into this? 2) 1) What is Google’s defense on why Schmidt shouldn’t step down? 3) What value does Google get from Schmidt being on the board?

Answers leading to greater insight were not forthcoming. Google spokesperson Jane Penner told eWEEK 14 July: “Eric has made it clear that he currently recuses himself from iPhone discussions on the Apple board and that he’ll discuss this matter further with Apple, as appropriate. At the moment, there’s no change.”

Industry analyst Rob Enderle, who follows the moves of Google, Apple and Microsoft, also suggested Schmidt simply enjoys the limelight of being both Google’s CEO and an Apple board member:

“[Schmidt] shouldn’t be on the board, way too many conflicts. Phone, browser and now OS. He doesn’t appear to be doing that much to run Google, and like a lot of folks before him, seems to be enjoying the celebrity of being a high profile CEO way too much. One of the dangers of the job, I’m afraid.”