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Spreading Freedom: Google, Microsoft And The War For The Web

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ERIC SCHMIDT
On Wednesday, Google CEO Eric Schmidt testified before the Senate Judiciary Subcommitte on Antitrust, Competition Policy and Consumer Rights. | AP

WASHINGTON -- You can't swing a dead cat video in Washington lately without hitting a lobbyist, consultant, attorney or adviser on retainer to Google or one of its tech rivals. Google, whose top executives have long been a bottomless cup of campaign coffee for Democrats, is finally entering its bipartisan phase, theatrically hiring Republican operatives and broadcasting the news through insider Washington publications, pumping air into a K Street tech bubble.

The shift in political strategy comes as Google faces a serious antitrust threat, punctuated by a high-profile hearing on the company held Wednesday afternoon in the Senate. But Google's investment in the infrastructure of the conservative movement goes much deeper than what's been reported this summer.

The company known for its progressive politics is now giving money to the Heritage Foundation, the American Enterprise Institute, the Competitive Enterprise Institute, the Republican Governors Association, the GOP firm The David All Group, Crossroads Strategies, the Republican Attorneys General Association and the Republican State Leadership Committee, among others. On Thursday, Google and Fox News cosponsored a Republican presidential debate.

In the last nine months, Google has hired 18 lobbying shops -- not 18 lobbyists, but 18 firms, a dozen of them since July, a head-turning torrent of hiring that also includes consultants not required to register as lobbyists.

"I consider myself a public works project right here," Sen. Pat Leahy (D-Vt.), chairman of the committee leading the antitrust investigation, told HuffPost. "My colleagues call it the Leahy Full Employment Act."

The GOP effort hasn't quite sunk in: Republicans in the House and Senate reacted with pleasant surprise when told by HuffPost that Google had started donating to movement conservatives. "Are you saying they're finally becoming bipartisan? That's a good thing. Bipartisanship is a positive thing," said Sen. John Cornyn of Texas, the head of the Senate GOP's fundraising arm and one of three Republicans on the subcommittee holding the antitrust hearing. "I understand why people feel like they need to have people they can talk to on both sides."

Google certainly feels that need. In public and in private, Google officials complain that longtime rival Microsoft, with its more entrenched Washington operation, is more or less out to get them. Microsoft responds that it makes no secret of its lobbying or its efforts to rein Google in: Its complaint to the European Union, for instance, was made publicly, and it fully acknowledges its lead participation in a coalition, FairSearch.org, organized to lobby on behalf of antitrust action against Google. "Clearly Microsoft were the first people to start to blow the clarion call" on anti-trust issues, said one top Microsoft mercenary. "They had the resources to get people engaged in thinking about it, but I don't think they've had any trouble getting people to agree." Indeed, Google's public critics have been multiplying almost as quickly as their lobbying roster.

Google and Microsoft now dominate influence-peddling around Internet issues, each having spent $3.5 million on lobbying through the first half of 2011. Google's total lobbyist count is now up to 93, the highest number the company has ever had in Washington (roughly one for every six members of Congress). The biggest thrust of Google’s lobbying push involves antitrust, patents, copyright, trade and China.

Microsoft’s lobbying peaked in the mid-2000s, when Congress and antitrust investigators had their sights set on the software powerhouse. Currently, the company’s work in Washington is largely focused on setting and gaming the tax code, a pet issue for corporations seasoned in the ways of the capitol.

Still, Microsoft’s lobbyists also continue to work heavily on antitrust, patent, copyright, trade, and China issues. Sixty-four percent of the 76 lobbyists employed by Microsoft are registered on these issues. Eighty-one percent of those lobbyists have previous government experience, according to a HuffPost analysis of lobbying disclosure reports and data collected by the Center for Responsive Politics.

Microsoft continues to dominate Google when it comes to campaign and political action committee spending, outspending Google nearly tenfold in the first half of 2011. Microsoft reported contributing $580,000 to congressmen, candidates, political parties and leadership PACs, while Google reported $61,000 in donations over the same period.

Google Executive Chairman Eric Schmidt, speaking to reporters after his sworn testimony Wednesday, said that Microsoft had been lobbying hard to pressure Congress to bring the antitrust hammer down on Google -- the blunt pain of which Microsoft knows all too well.

Schmidt's rivalry with Microsoft has deep roots, dating back to his days as an executive with Sun Microsystems in the 1980s, when Microsoft -- in the eyes of Silicon Valley start-ups and, ultimately, the U.S. Department of Justice -- threatened to lock down the digital free market in America. The top tech executives have been at each ever since. "Everything's personal for all those guys," said a consultant for Microsoft who knows both sides well. "They don't have to fight over money, they're all fucking rich. They have to fight over ego and dominance and control."

Schmidt's fixation on Microsoft came through in the opening of his testimony. "I want to start first by taking a step back," Schmidt began. "Twenty years ago, a large technology firm was setting the world on fire. Its software was on nearly every computer and its name was synonymous with innovation. But that company lost site of what mattered and Washington stepped in. I was an executive at Sun and later Novell at the time, and in the years since, many of us have absorbed the lessons of that era. So I'm here today carrying a long history."

Schmidt said that he had "a message from our company: We get it. By that, I mean, we get the lessons of our corporate predecessors."

The conflict between Google and Microsoft has also triggered an international war over the nature of intellectual property, as to how -- and whether -- knowledge should be owned.

Google is benefiting from the freedom-loving street cred it won by theatrically bailing from China -- or at least publicly proclaiming its independence -- to shield its drive to succeed where Microsoft failed a decade ago. Meanwhile, Microsoft is using its remaining influence to fight Google, allied with the American entertainment industry and a loose coalition of tech companies, from Facebook to Travelocity to Yelp.

Overseas, Microsoft has also joined forces with the Chinese search giant Baidu, as China's government seeks to fight Google's influence there, as well. For Baidu, it's a second go-around with an American giant. In 2005, Google invested $5 million in Baidu before it went public, later cashing out for $60 million.

Microsoft's stated concerns about freedom in the U.S. intellectual-property market are complicated by the company's actions in China. Baidu's data is stored on state-owned servers and Baidu, according to its annual financial disclosure, retains information on its users' activity and provides it to government minders. Even before its partnership with Baidu, Microsoft's search engine Bing filtered out results for users in China that the state found threatening, including political dissent.

Microsoft is all too happy to be in the audience for Google's hearing rather than on the witness stand as they were in 1998, facing antitrust investigations that would dog them for years. Today, Google's market power is being scrutinized by Wisconsin Democratic Sen. Herb Kohl's subcommittee, the U.S. Department of Justice, the Federal Trade Commission and the European Union.

Many of those prosecutors are lobbied heavily by Google's enemies, Microsoft among them. But they may be all that stands between Google, which now handles some 90 percent of all searches worldwide, and a monopoly on the market for knowledge.

FROM PRC TO K STREET

Google's antitrust hearing comes more than a year after the search giant burned its relationship with the Chinese government by removing its filters, proclaiming that China's level of censorship was too blatantly in conflict with Google's oft-repeated corporate ethos, "Don't Be Evil." But the censorship was merely outsourced, with the government itself blocking certain searches from Google's Hong Kong operation.

Microsoft sees China as Google's soft underbelly. This summer's partnership with Baidu, whereby Microsoft will run the company's English-language searches, allies Microsoft with the same kind of company that it -- and U.S. federal agencies -- routinely accuse of violating intellectual property laws. Baidu, which accounts for 80 percent of the web searches in the world's most populous nation, has spent years on the Office of the United States Trade Representative's "Notorious Markets" list. Though rarely mentioned in American media, the USTR's blacklist serves as a critical warning to a broad array of global corporations, and is a key tool in U.S. foreign policy. The list isn't concerned with Baidu's monitoring or censoring of political speech, however -- it takes issue with counterfeiting and piracy that U.S. interests find threatening.

On Thursday, Treasury Secretary Timothy Geithner put the issue in blunt terms. "They, China, have made possible systematic stealing of intellectual property of American companies and have not been very aggressive to put in place the basic protections for property rights that every serious economy needs over time," Geithner told a forum in Washington. "We're seeing China continue to be very, very aggressive in a strategy they started several decades ago, which goes like this: You want to sell to our country, we want you to come produce here ... if you want to come produce here, you need to transfer your technology to us."

One of those companies on the receiving end of the Chinese invitation is Baidu's partner, Microsoft, which is now the most aggressive U.S. software company in the anti-piracy lobbying fight, forging a key alliance between the tech community and the entertainment industry. Yet in multiple "Notorious Markets" reports, USTR was particularly critical of Baidu's ability to direct search engine queries toward pirate entertainment sites. At home, Microsoft is demanding tough enforcement of software and entertainment piracy. Abroad, it's forging a relationship with a company USTR labeled a top offender of music piracy.

On Nov. 18, two weeks after the Republican sweep of the House, a team of lobbyists sat down with Victoria Espinel, a senior official in the White House's Office of Management and Budget, to try and soften Baidu's image. Espinel, an Obama appointee, is in regular contact with the USTR in her role as intellectual property enforcement coordinator, according to an administration official.

Espinel, through an administration spokesperson, said she remembers Victor Liang, Baidu's general counsel, and James Mendenhall, a Bush-era general counsel and assistant U.S. trade representative, at the November meeting. According to Baidu's lobbying disclosure forms, Yabo Lin and Lei Li, China-born lobbyists, also registered with Mendenhall as having lobbied the OMB on the "Notorious Markets" report. Mendenhall is the kind of post-partisan lobbyist that a foreign businessman like Liang needs to help navigate the governmental maze. Mendenhall, Lin and Li work for the lobby shop Sidley Austin. A Baidu official acknowledged to HuffPost that the company had engaged Sidley Austin but declined to comment specifically on the OMB meeting.

Lin is a Palo Alto-based partner and Li is in Beijing, where he represents the next phase of the revolving door -- he worked for eight years as a top official in the People's Republic of China's Ministry of Commerce. Sidley Austin's web lobbying is now run by Rick Boucher, a Democrat who lost his House seat in 2010. He chaired the subcommittee with oversight of the Internet and championed Internet privacy.

Reached in Palo Alto, Lin said, "That was long ago. I have no comment." He has not terminated his contract with Baidu, according to disclosure forms. Li and Mendenhall did not respond to requests for comment.

At the time of the report, Microsoft was already engaged with Baidu in the smartphone market. In July, the two companies would announce their search engine partnership. A few weeks after that, Baidu would ink a licensing deal with major U.S. record labels to distribute songs in China, prompting praise from USTR -- which still keeps Baidu on its notorious list. Baidu also keeps tabs with USTR-- a Baidu official told HuffPost that his company worked hard to ensure the agency was aware of the music licensing deal this summer.

The fight over the closely watched report is just one skirmish in Washington, but it's an illustration of the projection of U.S. power abroad on behalf of corporate interests, both foreign and domestic.

That's a lesson Google learned late. "I recommended to them earlier that it'd be a nice thing for them to stop by and testify voluntarily, also made it very clear where we stand -- I always prefer voluntarily -- this is a case where there would be bipartisan support for a subpoena," Judiciary Committee Chairman Leahy told HuffPost before Google Chairman Schmidt testified this week. Google, Leahy said, eschewed Washington representation for too long. "Sometimes a company should pay attention early on, not just when matters happen," he said. "But I can't tell them, nor would I, who they should hire or not."

The company seems to be trying to make up for lost time. All year, Google has been papering Washington with lobbying contracts and ad buys the likes of which haven't been seen since the fight between Wall Street and big box retail stores over swipe fee rates.

Google's lobbying armada knows its way around Washington. Ninety-one percent of them spun through the revolving door between government and K Street, according to a HuffPost analysis of lobbying disclosure reports and data collected by the Center for Responsive Politics. Two of the new Google lobbyists, Louis Dupart of The Normandy Group and Gary Slaiman of Bingham McCutchen, served on the Senate antitrust subcommittee itself. They'll join the committee's former chief intellectual property counsel, also a Google lobbyist.

Leahy said the lobbying binge won't give Google an advantage. "They can hire all they want," he said. "They" -- the lobbyists -- "are not the ones that testify. They're not the ones asked the questions."

The hiring spree isn’t limited to registered lobbyists. Another key form of influence comes from well-connected lawyers and lobbyists who do not register to lobby. Google, like many other companies, takes advantage of a lobbying disclosure loophole allowing lobbyists to skip registering if they spend less than 20 percent of their time contacting officials. This loophole is often used by former lawmakers who can’t register to lobby according to revolving door rules or who don’t want to show up on official registrations.

Google employs three firms that boast four former members of Congress on staff, including former House Majority Leader Dick Gephardt, former House Appropriations Committee Chair David Obey, Blue Dog Democrat John Tanner and Texas Republican Henry Bonilla. Gephardt’s name appears on the registration form for his firm’s representations of Google, but he is not listed on their quarterly filings. Neither Obey, Tanner nor Bonilla are listed on lobbying disclosure firms for Google, but all are top principals at firms retained by the company. Whether they pick up the phone or not, their association with Google becomes part of the political dynamic.

The company is also well known to have close friends at the highest levels of the White House. Earlier this year, when Google inked a $500 million settlement with the Justice Department for illegally steering consumers toward companies advertising Canadian prescription drugs, a snap press conference was held in Rhode Island in August, with little heads up to the media. Even the Wall Street Journal's Thomas Catan, who broke the news of the criminal probe and followed it relentlessly, was caught flat-footed, three people familiar with the matter said. Catan got the press conference details nine minutes before it started, with no call-in line or web feed, nor could he get a tape or transcript. That may have been as much to shield the administration as Google. Late last year, Google organized a summit at the White House billed as addressing online pharmaceutical piracy. “As the administration has made clear, no one company can solve this problem," a top Google attorney said at the time, reflecting the company's hope that the issue would be seen as industry-wide rather than specific to Google. Victoria Espinel's praise of Google at the summit became an embarrassment when it became clear Google was under investigation at the time it convened the gathering.

At Wednesday's hearing, Schmidt made news by admitting that he was aware of what Google had been doing regarding the drugs.

Google didn't always flex such muscle. Just five years ago, the search giant spent just $800,000, employing 31 lobbyists, putting them nowhere near Microsoft, which spent $9 million and had more than 120 lobbyists on call that year. By 2010, however, Google ranked as the third-highest lobbying spender in the tech industry, behind Microsoft and Hewlett-Packard. This year, Google is running even with Microsoft, on pace to spend millions more on lobbying than the search giant has in any previous year.

Microsoft’s contributions have found a home at the Senate Judiciary Committee, where committee members have received $251,500 from Microsoft’s PAC since 2006. Google, meanwhile, is spreading its money around to Washington institutions and media, recently sponsoring everything from the local NPR station, WAMU, to a widely read morning email, Politico's Playbook -- an ad buy that retails at $30,000 at week, a person familiar with it said. Its sponsored ads have been extremely tactical, highlighting how Google has helped particular small businesses in particular states. But not just any states. The first ad highlighted a cheesemaker in Wisconsin, home to Herb Kohl, the antitrust Senate subcommittee chair and, conveniently for Google, Rep. Jim Sensenbrenner, the chair of the House subcommittee on Intellectual Property, Competition, and the Internet.

The second ad spotlighted a music store owner in Connecticut, represented by Senate antitrust subcommittee member Richard Blumenthal, a Democrat who was one of the lead state attorneys general involved in the Microsoft suit. "The key questions of concern are the magnitude of their power and what responsibilities come with that," Blumenthal said before Wednesday's hearing, adding that lobbying had been done on both sides.

Next up was a cupcake shop in Brooklyn, not far from the subcommittee's second-ranking Democrat, Chuck Schumer. Later that week, Google came back to Kohl, celebrating a Green Bay Packers sports shop.

Google had done its homework. For people he doesn't know well, Kohl, owner of the Milwaukee Bucks, is virtually impossible to engage in conversation on anything other than sports. ("I didn't know about it," Kohl said of the attempt to capture his heart through his cheesehead.)

The newsletter also brought real Google news, announcing the company's hiring of former Bush aide Rob Saliterman, who was brought on "to run its sales and outreach efforts to Republican campaigns." Google went on to hit a New York business again, then a nonprofit that makes care packages for troops in Texas, the backyard of Senate antitrust subcommittee member John Cornyn of Texas and House antitrust subcommittee chairman Rep. Lamar Smith.

LEARNING CHINESE

When Chinese leader Hu Jintao flew to the United States for his first official visit in 2006, he had an important date to make along the way: Dinner with Bill Gates, reportedly brokered by Washington Gov. Gary Locke, the first Chinese American governor in the United States and later President Obama's commerce secretary. He's now the U.S. ambassador to China.

Microsoft's long dance with China has continued even after Gates ceded control of day-to-day operations in 2008 -- when Hu returned to America this year for a state dinner, current Microsoft CEO Steve Ballmer flew to meet him.

A top goal for Microsoft is to sell its software to hundreds of millions of Chinese consumers who've grown accustomed to getting programs for free. While Lei Li was lobbying the White House, a high-level "Special Campaign" was underway in China, led by top officials and run out of Li's former haunt, the Ministry of Commerce. In May, Ballmer met with the campaign's leader, Vice Premier Wang Qishan, who promised to continue cracking down on bogus software. In late November, shortly after the White House meeting, the State Council announced that from now on government offices would purchase software -- and promised only to buy the good stuff.

That could mean billions in the world's most populous country, where the government is the dominant buyer. Through the early 2000s, Gates and Ballmer repeatedly visited China, forging a partnership with Shanghai Alliance, a company worth doing business with: It was run by a son of former Chinese President Jiang Zemin. The Los Angeles Times reported in 2005 that Microsoft, as part of its lobbying campaign to cement the deal, donated software to the state-run China Telecom, China's State Economic and Trade Commission, and any government official in Beijing for three years. It pledged "$10 million to be invested in or donated to China's primary education system," the paper reported, in a story that was lifted and republished in full by The Standard, a Chinese business paper.

Microsoft also brought jobs to China, announcing in 2008 that it would spend a billion dollars on research and development there. This year, in addition to the Bing-Baidu deal, it announced partnerships with Renren, a social-networking site, and signed a cloud agreement with state-owned China Standard Software Company, which works closely with the Red Army -- subjecting its stored data to state oversight.

Those types of ties to Chinese firms require intimate relationships with the country's leadership, which both Ballmer and Gates have spent years developing. (Though Gates resigned as CEO of Microsoft in 2008, he remains its chairman and controls roughly 500 million shares of Microsoft stock, just under 6 percent of the company.) In 2007, the Gates Foundation opened a Beijing office. That year, according to tax documents, its investment arm owned roughly $700 million worth of stock in Chinese firms, many of them state-run enterprises. Its latest returns show roughly $500 million in such investments. Gates and his good friend Warren Buffett share a tailor with Hu Jintao.

So far, though, promises to crack down on software piracy haven't led to much, according to the USTR. This year, the U.S. office wrote that "the software industry reports no discernible increase in legitimate software sales to date, and no significant changes in software-related enforcement activity. This is despite China’s assertion in its Special Campaign plans that software legalization is a high priority."

"For this sector, it appears that this latest campaign is not yet having a positive effect," the USTR report added. "One company noted that most of the Chinese government’s efforts to purchase legal software have been focused on low-end and pirated domestic software."

Success in China means, of course, working with the Chinese government, which can sometimes put American companies in a strange spot. A May 2010 issue of the South China Post, for instance, carried news that "[b]osses from 42 internet media companies, including the mainland's most popular websites such as Sina, Sohu, Netease and Baidu as well as MSN China, Yahoo China and Tom.com, gathered in Chongqing this week at the invitation of the party chief and pledged to extol 'revolutionary spirit' and pass on 'red culture' on their websites." The group "waved red flags and sang classic songs from the revolutionary era." In June, when eight CEOs of Chinese Internet firms came out for a patriotic celebration, two were Microsoft partners.

There's more involved than just singing along. According to Baidu's most recent financial disclosure document, the company retains information on user web habits and IP addresses, sharing that information with the Chinese government. And even if they didn't, the government hosts Baidu's servers. China has regularly been accused by the U.S. government of hacking into government email and websites to steal sensitive information.

None of this seems to have given Microsoft pause. "We have done business in China for more than 20 years and we intend to stay engaged, which means our business must respect the laws of China," Ballmer said last year.

"Different countries have different rules about censorship, you know, pornography," Gates told a BBC interviewer last year. "Germany, if you make certain statements about being in the Nazi party, that's censored. In this country, that would be subject to free speech. And so you've got to decide, do you want to obey the laws of the countries you're in or not. If not, you, you may not end up doing business there. You know, fortunately, the trend towards openness and, and sharing ideas has, has been fostered in an incredible way."

RIGHTEOUS EXIT

China, of course, now looms large in the American political and corporate psyche -- a fact not lost on Google. When the company's executives talk about intellectual property disputes, the company routinely invokes the spectres of totalitarian control and governments crushing market competition along with free speech, frequently mentioning China by name. It's a convenient message for a company embroiled in antitrust disputes about whether or not it rigs the market for knowledge.

Intellectual property law dictates the ways knowledge is distributed, determines how it can be profitable, and protects original, creative ideas, products and services from simply being pick-pocketed. But strict intellectual property laws can also lock-out large populations from accessing useful ideas and life-saving products.

Google is an unusual entity on the corporate landscape: It gives its and sometimes other companies’ stuff away for free. Those on the receiving end love it. Google's technology is new, but its business model dates back to the early days of radio and then television, which offered a free product to the masses and then made money charging for ads on their platforms that were targeted at the masses.

And “free” puts lots of downward pressure on everybody else’s prices and profits -- leading critics to complain that Google can devalue the offerings of less well-entrenched competitors.

Microsoft, meanwhile, makes money selling software that is tethered, for the most part, to personal computers. In an era of mobility and cloud-computing however, Microsoft’s hold on consumer and corporate computer users seems much less certain. It has tried to compete with Google as an ad-generating search engine operating in the less restrictive confines of cyberspace, but so far it has failed.

So have many others. Search for “Los Angeles hotels,” or the name of a local restaurant, and you’re likely to see results from Google’s own listing service, Google Places, ahead of links from competitors like Yelp, TripAdvisor and Expedia, which have all been outspoken critics of Google’s search practices. Online travel companies even have their own coordinated lobbying enterprise: Fairsearch.org, featuring TripAdvisor, Expedia, Travelocity and others. Their only non-travel-industry partner: Microsoft. (A Microsoft spokesperson says that Bing Travel accounts for the company's membership in the group.)

These players, and others, accuse Google of using backhanded tactics to crush competitors by taking traffic from their sites. FairSearch.org was organized to oppose Google’s acquisition of ITA Software and to "prevent dominant companies from engaging in anticompetitive behavior and to protect investment and choice across the Internet ecosystem." The FairSearch.org website offers users the chance to "Learn more about how Google threatens competition and consumer choice" and showcases illustrations of Google executives paired with quotes the group says offer damning evidence that Google shouldn't be trusted. Google, on the other hand, counters that its policy is to do "what's best for the user" and that anyone who takes issue with its results can use another search engine that's "only one click away."

But Microsoft alleges that though it’s pouring billions into making Bing a credible threat to Google, Google is unfairly keeping its rivals from improving their search engines by denying them access to key content.

“Google has built its business on indexing and displaying snippets of other organizations’ Web content. It understands as well as anyone that search engines depend upon the openness of the Web in order to function properly, and it’s quick to complain when others undermine this. Unfortunately, Google has engaged in a broadening pattern of walling off access to content and data that competitors need to provide search results to consumers and to attract advertisers,” Microsoft’s general counsel Brad Smith wrote in a recent blog post that added the software giant’s support to the EU’s antitrust investigation of Google.

Microsoft, itself no stranger to bullying rivals when it sees fit, argued that Google has been "impeding competition" by keeping Bing from having full access to videos on YouTube, a Google-owned site, angling to keep Bing from searching certain online books, and restricting how YouTube functions on Microsoft’s smartphone operating system, among other practices.

At Wednesday's hearing, Yelp CEO Jeremy Stoppelman accused Google of scrubbing its content without permission and then threatening that it wouldn't appear on search results if it didn't play ball with Google Places. He said that 75 percent of Yelp's traffic comes through Google.

Competitors accuse Google of gaming its search results to favor Google products. Schmidt told the panel that he "didn't believe" that Google did so, an answer Minnesota Democrat Al Franken pounced on.

After the hearing, HuffPost asked Schmidt if Google favors Google products in it ten-link search rankings. "Again, I get that question and it's hard to explain, so let me try again. What happens with the answers we get is we've learned to generate a couple of different kinds of answers -- the internal term is called universal search. So, for example, after a few links we'll get -- we'll show a summary result of something. So that's not favoring a result, it's sort of adding value to the result. So the answer is no to the favoring, but yes to the using-every-part-of-our-computational-capability-to-produce-sophisticated answers," he said. Why does a search for email return Gmail as the first answer?

"I can assure you there's no preference for Gmail in that situation," he said.

With Bing hemorrhaging $2 billion a year and Google making tremendous inroads into the smartphone market, Microsoft has regrouped, teaming up with other corporate content kingpins on Capitol Hill to push for an extremely restrictive set of patent and copyright legislation -- an intra-business battle being fought on ideological and political grounds.

For companies like Google that make their money by conveying information -- whether they own the rights to it or not -- to consumers rather than producing it, flexible or even anarchistic intellectual property laws are ideal. No search engine wants to be held legally liable for informing Internet users about websites dedicated to illegal movie downloads, scanned books, pirated software, counterfeit handbags or generic drugs that ignore an American patent.

And Google's sheer dominance in the search engine market makes it a critical target for big film studios and major record labels that have had trouble adjusting to the digital age. For many people looking for free movies or music, a Google search is the first step in the download process.

The more severe the piracy penalties, after all, the bigger the profits for Sony, Fox and Warner Brothers. And while many Silicon Valley tech giants have frowned on government Internet restrictions, Microsoft has led the charge in allying software firms with old school content creators.

Nowhere is this more evident than the PROTECT IP Act, authored by Sen. Leahy. Loathed by open source activists, the bill would force Google to censor websites the federal government deems intellectual property abusers from its search results, and grant the Department of Justice the power to unilaterally shutdown piracy websites without judicial review -- giving the U.S. government the same power over commercial speech that the Chinese government has over political speech.

For Google, this is an English-language rerun of its four-year China nightmare. Again a powerful government wants the company to be complicit in its spying activities. And again, a government wants to dictate to Google what it can and cannot link to as a search engine. For record labels, it's a replay of the 1990s fight against music download site Napster, with the government forcibly enlisting search engine companies in its crackdown on Napster copycats.

Schmidt defended his company against charges that it directs users to piracy websites during Wednesday's hearing, couching the IP debate in terms of censorship that Chinese dissidents would understand. "We have to represent the web as it is, as opposed to the way we wish it to be. We try to avoid censoring or deleting things," he said, suggesting that a more sensible public policy would be for law enforcement to go after piracy sites directly, rather than force Google to spy on websites or block search results. "Let's say, you know, 'imastealingsite.com,' we can identify that because we can do some kind of a test for trademark violation. That company can then surface as another site ... so it's a whack-a-mole problem."

Major record labels and Hollywood movie studios have never been shy about their opposition to free downloads; software companies have been far less vocal. As the PROTECT IP bill has progressed through Congress, the formal industry letters to lawmakers announcing support for the bill have generally not included signatures from Silicon Valley heavyweights. The promise of free knowledge and private-sector innovation, after all, was what originally attracted many of the tech industry's best and brightest to the software realm. The industry is still imbued with a worldview best captured by Gilmore's Law, a maxim laid out by John Gilmore, who made a fortune as an early developer for Sun Microsystems, where Schmidt started: "The Net interprets censorship as damage and routes around it." That ethic is difficult to square with corporate lobbying for Internet censorship.

But from a reputation standpoint, Microsoft has little to lose. The company was already viewed as a tech thug for the Internet Explorer marketing that brought the company antitrust scrutiny during the Clinton years. Microsoft has thrown in its lot with the Motion Picture Association of America and the Recording Industry Association of America in supporting the PROTECT IP Act, a key umbrella group representing software providers followed suit. Microsoft has even leveraged its support into a formal position from the U.S. Chamber of Commerce -- the foremost lobbying front-group in the United States for corporate behemoths. While the secretive Chamber writes letters advocating its full-throated support for PROTECT IP, it's not clear to the public just which elements of the Chamber's membership are behind the effort.

Google is taking a beating. Eight of Leahy's 20 largest career campaign donors are companies whose bread and butter is providing copyrighted materiel. They've been good for over $590,000 over the course of his political career, according to data from the Center for Responsive Politics. His top contributor, Time Warner, has also cast him in cameo roles in three films, most recently "The Dark Knight" -- pirated copies of which are no doubt available throughout China.

So Google has launched a public relations battle, appealing to Americans' sense of freedom while portraying itself as a target of government oppression. In May, Schmidt gave a speech in London calling the bill a free speech "disaster" that his company would not comply with if it were made law. Schmidt said Google would not spy on domain name services -- registries for website names -- for the federal government, nor would it report rogue sites to the Department of Justice. "It sets a very bad precedent because now another country will say 'I don't like free speech so I'll whack off all those DNSs' -- that country would be China."

This type of rhetoric packs a punch when it comes from a company that officially exited the Chinese market after the government raided its databases to oppress political dissidents. But when Google first went to China, it was not nearly so averse to censorship, officially accepting Communist party restrictions so long as the promise for long-term profit was present. When Google was hacked, however, the Chinese government not only accessed information on Gmail users, it copied key source code from the company. Google's intellectual property had been stolen, and it left China shortly thereafter.

That's Google's story, anyway. Shortly after Google's righteous rejection of China, the company began sending signals to the market that it wasn't entirely abandoning the largest potential consumer base in the world. The company still employs hundreds of people inside China and continues to provide Android smartphones to the country, where it has a tremendous share of the mobile market. It's computer-based search engine, by contrast, had been unable to make serious inroads against Baidu over nearly five years, a fact which helps explain Google's surge of morality on search that curiously does not apply to its mobile business. Google continues to post hiring videos emphasizing its Android mobile platform at its google.cn website:

Translated, the recruitment video implores Chinese job seekers: "Join us, innovate together. We have a very simple talent strategy here: We invite excellent talents to join us and realize their dreams. We appreciate diligent work, a pleasant working environment and the innovative ability inspired by the mixture of talents with diverse backgrounds. We have Olympic athletes, crossword puzzle champions, professional chefs and independent film producers. Wherever your work location is, we believe you will be inspired to reach your self-transcending glory. Google has been ranked top 10 among 'Ideal Employers of Chinese college graduates' by Universum for five consecutive years since 2006, and we have been ranked top 10 among 'Best Employers of Chinese college graduates' by ChinaHR since 2008. Google China looks forward to your joining. Let's fulfill more dreams together."

Nevertheless, Google continues to cash its freedom chips in the United States, a platform bolstered by the company's "Don't Be Evil" slogan and its CEO, who commutes to the office via skateboard. For advocates of the traditional Internet, however, recent intellectual property fights in the U.S. create cause for concern. The PROTECT IP Act seeks to crack down on copyright violations -- areas in which a specific branded product is distributed without permission -- a pirated copy of Microsoft software, for instance. A patent, by contrast, grants exclusive rights to the very idea behind a device -- the whole notion of a web browser, perhaps. These software patents have long been maligned in Silicon Valley for hampering innovation. A patent creates a monopoly, and in the fast-moving world of software, a broad patent on the very idea of a certain form of computing makes it difficult to improve on the innovations of others. The sheer flimsiness of many software patents has compounded the problem -- the U.S. Patent and Trademark Office doesn't even require software patent seekers to present it with actual code.

Armed with such patents, lawsuit specialists can target tech giants and secure huge judgements in court, or force lucrative settlements. In the smartphone market, where a single device can involve literally thousands of individual patents, the potential for lawsuit abuse is extreme. This kind of activity was once considered shameful in the tech community, but as the patent reform bill designed to combat this behavior disintegrated in Congress,, tech firms started shifting their strategies. Microsoft started buying up patents. And as Google's Android platform rocketed to the top of the mobile market, Microsoft started launching lawsuits against companies that manufactured phones using Google technology. HTC, a company which makes most of its phones in China, currently pays Microsoft $5.00 for every Android-based phone it sells.

Google has railed against these lawsuits in court and in Capitol Hill backrooms. And even as Schmidt continues to officially blast the patent regime as a barrier to innovation, his company is actively acquiring patents that would enable it to launch lawsuits of its own. After buying the Motorola cell phone maker and its huge patent portfolio, Google quietly transferred nine key patents to HTC, which HTC immediately deployed in a lawsuit against Apple. After acquiring 17,000 patents from it's Motorola merger, Google now has ample ammunition to retaliate against Microsoft.

Google runs an exceptional public relations campaign and has an appealing message for both consumers and intellectuals: more free stuff and easy access to knowledge. Three years ago, few would have believed the company would have exited the search engine game in China while dominating the smartphone market. And the debate has critical implications for democratic principles. While Microsoft always made clear that it intended to dominate software markets in any way it could, Google's market isn't software -- it's knowledge. If Google wins the domestic intellectual property war and fends off antitrust scrutiny, there's no telling how its business will adapt to the new system in which it enjoys total market dominance.

"Google has managed to be more ambiguous," says Bert Foer, President of the American Antitrust Institute. "Microsoft would come at you like a fullback up the middle. Google is more like a tailback. You don't know which way he's gonna cut."

Bianca Bosker, Tyler Kingkade and Hayley Miller contributed reporting.

DISCLOSURE: The Huffington Post is owned by AOL, which also owns MapQuest, as well as other Google and Microsoft competitors. AOL's search function is powered by Google and HuffPost's internal email is powered by Gmail. This story's reporters occasionally appear on MSNBC, which is part-owned by Microsoft; they do so for free, though they'd rather be paid. This story was written in Google Docs, which we appreciate, but which is still buggy.

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