Google prepares for possible $500 million settlement with U.S. Justice Department

Search giant reduces Q1 earnings; probe involves online advertising

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Google is revising down its first-quarter earnings to reflect a possible $500 million settlement with the U.S. Justice Department over online advertising issues, the search company revealed in a filing Tuesday with the Securities and Exchange Commission.

In its 10-Q document, Google explained:

In May 2011, in connection with a potential resolution of an investigation by the United States Department of Justice into the use of Google advertising by certain advertisers, we accrued $500 million for the three month period ended March 31, 2011. Although we cannot predict the ultimate outcome of this matter, we believe it will not have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.

By setting aside the $500 million for a potential settlement, Google lowered its first-quarter net income to $1.798 billion, or $5.51 a share, from $2.298 billion, or $7.04 a share, reported on April 14. On a percentile basis, that's a hit to the bottom line of almost 22 percent.

(Also see: Feds approve Google's purchase of ITA Software, with conditions)

But Google's correct in that losing $500 million in a settlement with the feds isn't going to jeopardize it financially. That's about three weeks of revenue for Google, based on Q1's total.

The real question is: What's the investigation about? The "use of Google advertising by certain advertisers" almost makes it sound as if the advertisers were on the hook for doing something wrong, not Google. But the search-market leader is the one prepared to write a big check to make a legal or regulatory problem go away. What's going on?

More importantly, is a settlement the end or just a continuation of Google's problems with Washington antitrust officials? Google's deals have been under constant scrutiny for some time now, the ITA Software probe (see link above) being the most recent example.

What makes this different is that Google's core business is advertising. For all its attempts to diversify, 97 percent of the company's revenue in the first quarter came from online ads. You don't want anyone messing with that, especially government regulators.

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