Google is watching you. But you already knew that. Every time you conduct a search using its search engine, Google keeps tabs—and uses the information to send you ads tailored to the interests and tastes suggested by your searches.

Here's something you probably didn't know: The company may let you close the blinds, digitally speaking. Google Chief Executive Eric Schmidt told legislators on Sept. 27 that the company is exploring whether to let users keep Google from tracking the sites they're visiting. To do so, the company would enable Web surfers to shut off so-called cookies, the bits of code used to track the sites visited by individual computers and deliver ads related to those sites. Schmidt outlined that and other steps in an e-mail to Senator Charles Schumer read during a Senate hearing concerning Google's proposed purchase of DoubleClick. Google also is investigating technology that would keep user data collected from different sources from being concentrated in one place, and ways to better notify customers of Google's data-collection practices.

Government Influence

The proposals demonstrate the lengths to which Google may go in exchange for government approval of its planned $3.1 billion acquisition of online ad outfit DoubleClick, which specializes in ad placements across the Web. Senators on the Judiciary Committee also heard from Google opponents, including Microsoft, that would like to see the deal blocked. Marc Rotenberg, executive director of the Electronic Privacy Information Center, told senators that they should not let the deal go forward without rules governing how information can be collected and used, and how long it can be kept.

Senators can't block the deal, but they can influence the thinking of the Federal Trade Commission, which will ultimately decide whether to let it go forward. The most likely scenario is that the FTC will propose restrictions on how Google and DoubleClick can combine the information they collect—if it decides to do anything at all. In July, the FTC approved a similar $6 billion acquisition by Microsoft of aQuantive, a DoubleClick competitor. The government agency also approved Yahoo!'s  $680 million acquisition of the 80% of online ad exchange Right Media that it did not yet own.

An Industry Issue

Opponents say owning DoubleClick will give Google too much control over online advertising, and in particular the user data collected and stored on Google's massive computers. Google counters by saying the whole online advertising industry is in the midst of consolidation. As the number of Web sites where people spend their time has grown, online ad giants have acquired ad networks to expand the number of users they can monitor and the number of sites on which they can place ads. In testimony before the committee, Google Chief Legal Officer David Drummond argued that despite the search leader's success (more than 60% of searches are performed on the company's site and it brings in roughly 75% of all search ad revenue) it's no different from competing online advertising players, particularly Microsoft. "This is an industry issue," said Drummond. "That is how these issues should be worked out, not in the context of one company."

Google said it would welcome global privacy laws governing how Web companies obtain, combine, retain, and use the massive amounts of data collected on the Web surfing and searching habits on individual computers. But it doesn't want those rules to apply solely to its deal with DoubleClick. Through its general counsel, Brad Smith, Microsoft also said it would support privacy legislation.

Pipeline or Choice?

However, Smith and Scott Cleland, president of Precursor, a telecom research and consulting firm, also argued vehemently for rules that would treat Google differently from its main search competitors. According to Smith and Cleland, Google's dominance of search and access to the advertisers and sites that work with DoubleClick would enable the company to become a "pipeline" through which most of the Web's relevant data would flow. The reason, they argued, is that Google's ability to reach the majority of U.S. Web surfers on the most highly trafficked Web sites would be so great that advertisers would be forced to work with the company.

And, with Google's access to advertisers, any publishers not working with Google would also feel they had to work with the company, further increasing Google's reach. As a result, Google would be able to potentially collect Web surfing data on most Internet users, which would also lead to increased advertiser reliance on the company. "In a lot of ways it would be like combining the New York Stock Exchange and the NASDAQ," Microsoft's Smith said. "Somebody could build an alternative exchange, but would anybody go there to take their company public?…this merger is about creating a single pipeline."

Drummond argued that Google—whose main business is selling ads based on search keywords and then displaying those ads on its search pages, as well as the partner sites those same searchers visit—is not in the same business as DoubleClick, which delivers ads that an advertiser and Web publisher have contracted for outside of DoubleClick's site. "There is no pipe," said Drummond. "A user, at a moment's notice, can go use another and they do all the time…there are all kinds of choices."

Whether the government will single out Google at all is an open question. The hearing was the first round of what Senator Herb Kohl  called a "heavyweight fight." In the next round, Google, Microsoft, and others plan to speak about privacy issues before the FTC at a two-day "town hall" meeting, starting Nov. 1.