“The settlement would alter the landscape of copyright law, for millions and millions of rights holders of out-of-print books,” Peters said. “It would flip copyright on its head by allowing Google to engage in extensive new uses without the consent of the copyright owner–in my view, making a mockery of Article One of the Constitution, that anticipates that authors shall be granted exclusive rights.”

The settlement, as Peters sees it, will allow Google (GOOG) to profit from the work of others without prior consent. “It could affect the exclusive rights of millions of copyright owners, in the United States and abroad, with respect to their abilities to control new products and new markets, for years and years to come,” she said. “In essence, the proposed settlement would give Google a license to infringe first and ask questions later, under the imprimatur of the court.”

One of the more blistering attacks on the deal to date, especially given its source: The nation’s top copyright official. But Google nevertheless dismissed it as unfounded: “We think the settlement is legal, and we think it is structured well within the guidelines of what you can do in a class action settlement,” David Drummond, Google’s chief legal officer, said during the hearing. “It certainly is not usurping Congress’s authority to do whatever it wants.”

A typically arrogant response from Google, though the company does appear to be conceding a bit of ground in the face of widening opposition to the deal. Responding to Peters’s criticism and claims that the deal will essentially grant Google a de facto monopoly over out-of-print books, Drummond said the company plans to make those works available to any book retailer.

“For the out-of-print books being made available through the Google Books settlement, we will let any book retailer sell access to those books,” Drummond told the committee. “Google will host the digital books online, and retailers such as Amazon, Barnes & Noble or your local bookstore will be able to sell access to users on any internet-connected device they choose.”

Sadly for Google, that conciliatory gesture did not go over well with critics of the deal. “The Internet has never been about intermediation,” Paul Misener, Amazon’s vice president of public policy, said of the company’s offer. “We are happy to work with rights holders without anyone else’s help.”

The Internet Archive’s Peter Brantley was even more disdainful. “I fail to see what’s really new here,” he told the Los Angeles Times. “It’s like Macy’s telling Sears, ‘You can sell Macy’s clothing.’ There’s no fundamental change of the conditions under which Macy’s acquires those clothes. Google remains in control.”

In advance of its shareholder meeting today, Google is holding a press event at its Mountain View, Calif., campus with CEO Eric Schmidt presiding. Also on hand: Dave Drummond, senior vice president of corporate development; Susan Wojcicki, vice president for product management, Kent Walker, general counsel, and Marissa Mayer, vice president, search products and user experience.

Hot topics of the day: Google’s and Apple’s interlocking boards, YouTube and the company’s thoughts on the econalypse, AOL and netbooks.

This liveblog paraphrases most questions and answers. It is not, in other words, a verbatim transcript of the event.

A theme of the meeting is the just-opened inquiry by the Federal Trade Commission into Apple’s and Google’s interlocking boards. Schmidt gets right into the topic with a joke: Looks like we’re at a legal deposition. He adds that he doesn’t believe Google (GOOG) views Apple (AAPL) as a primary competitor. If there are issues that are competitive during a board meeting, he will recuse himself, he says, just as he has regarding the iPhone.

Would Schmidt consider resigning from the Apple board?

Schmidt: “Hasn’t crossed my mind.” Ken Walker adds: “The law is clear that there is safe harbor for companies that don’t have overlapping revenues, and we’re comfortable with that position.”

Regarding the recession, are there any signs that we’re at the bottom?

Schmidt: “We don’t yet see a change.”

As Google gets bigger and faces more antitrust scrutiny, does this change how the company approaches partnerships?

Schmidt: Information is incredibly important, and we should expect governments around the world to pay attention to what we do and hold us to the principles we’ve articulated. Internally we tell our employees to pay attention, there are consequences to mistakes they make.

In the last few years, we’ve worked harder to anticipate the concerns of people affected by the power of the Internet. In my biased judgment, we’re getting better at anticipating those concerns.

We are more careful about when and how we do things that are raising the concerns of any party, but that care doesn’t stop us from doing those things.

Is there anything you haven’t done because of that?

Schmidt: I can’t think of a specific.

What do you think of the long-time monetization potential of social networks?

Susan Wojcicki: “We’ve been learning a lot about monetizing social inventory. And we believe there are ways to monetizie it over time, but those ways are different from search.”

Why did Google decide to sell its stake in AOL?

Schmidt: “We love AOL….We also like money… and look, we sent our best guy over there to run it,” he says referring to Tim Armstrong who recently left Google for AOL.

When will YouTube be profitable?

Schmidt: YouTube will eventually be a successful product and business. We don’t know how long that will take. But YouTube is a huge traffic phenomenon. (Wojicki jumps in to note that that traffic is attracting a lot of advertiser interest, so there is monetization going on. She adds that Google is adding new ad formats to the site, prerolls and click-to-buy ads on music videos.)

How does Google continue innovating given the cost-cutting measures it recently implemented?

Schmidt Innovation is a cultural value at Google, so this hasn’t really been an issue. Cutbacks were more efficiency-related, a move to stay lean but nimble in the midst of a recession.

What’s your take on the balance between Android being an open platform and the trade-offs the company needs to make with handset makers?

Schmidt: “On the one hand, you benefit by having free access; on the other hand there is some sacrifice of stability. We are doing our best to achieve stability without exercising too much control.”

What about China?

Dave Drummond: It’s an “ongoing challenge” to operate there. YouTube is blocked. There is a government preference for local business that makes things very difficult. That said, “we think we’re doing well there.”

Schmidt: “We will continue to do business in China….We would like YouTube unblocked.”

How do you respond to critics who argue that Google is the new Microsoft (MSFT)?

Schmidt: “They obviously don’t remember the old Microsoft.”

In recent public forums you’ve been asked about acquisitions and you’ve said the price isn’t right right now. Has there been any change in that opinion?

Schmidt: No change. There’s simply just not a lot of activity out there now.

What are your thoughts on netbooks?

Schmidt: “The netbook phenomenon looks very real. It looks like it will be a significant element of growth in the PC industry over the next few years.” Schmidt further notes that Google is obviously interested in the market given its business. “Watch the space,” he concludes.

Peter Fleischer, Google’s global privacy counsel; David Drummond, Google’s senior vice president and chief legal officer; George Reyes, the company’s former chief financial officer; and an unidentified exec from Google Video in London, are today in a Milan courtroom facing possible jail time for the incident, though they were not involved in it. Talk about blaming the tool for the way it is used….

Google (GOOG), for its part, insists the charges against the four executives are unwarranted. “As we have repeatedly made clear, our hearts go out to the victim and his family,” the company said in a statement. “We are pleased that as a result of our cooperation the bullies in the video have been identified and punished. We feel that bringing this case to court is totally wrong. It’s akin to prosecuting mail service employees for hate speech letters sent in the post. What’s more, seeking to hold neutral platforms liable for content posted on them is a direct attack on a free, open Internet. We will continue to vigorously defend our employees in this prosecution.”

Recorded with a cellphone camera, the three-minute video featured a group of teenagers harassing a boy with Down Syndrome. Google quickly removed it. But not quickly enough. The clip was viewed some 12,000 times before it was pulled. Enough times to inspire an investigation into the issue, and now apparently, charges of defamation and breach of privacy.

Google, for its part, claims there is no basis for legal action against the four officials because they weren’t involved in the incident itself and the company isn’t required to monitor third-party content on its sites. Said a Google spokesman, “We believe that this proceeding is not about Google Video and what happened, but about the internet as we know it–an open and free environment.”

The deal was designed precisely to meet the terms of antitrust laws in the United States because we knew people would raise these questions. We spent months and months working with Yahoo to come up with a good deal. We’re very committed to the deal.”

– Google CEO Eric Schmidt, Sept. 18, 2008

Apparently Google would rather abandon its proposed advertising partnership with Yahoo than have the government dictate its terms. This morning Google walked away from the deal saying it’s not in the company’s best interests to risk the protracted legal battle brewing over it. This, not a week after Google and Yahoo submitted a revised, diminished version of the pact that the companies had hoped would appease regulators. “Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners,” Google chief counsel David Drummond wrote in a post to the Google Blog. “That wouldn’t have been in the long-term interests of Google or our users, so we have decided to end the agreement.”

Seems Google (GOOG) wasn’t quite as committed to working with Yahoo as CEO Eric Schmidt suggested. But you know, time is money in Google’s business, and this deal was taking up a lot of it.

A tough break for Yahoo (YHOO), which expected the deal to generate between $250 million to $450 million in incremental operating cash flow in its first year. In a statement, the company said it was “disappointed that Google has elected to withdraw from the agreement rather than defend it in court.”

What’s Yahoo CEO Jerry Yang going to do now? Wait by the phone for a call from Steve Ballmer? I wonder what sort of terms he’d offer Yahoo today? Not nearly as good as those offered this past summer, I suspect.

Statements from both companies, and the Department of Justice, after the jump …

From the official Google blog:

Ending our agreement with Yahoo!

In June we announced an advertising agreement with Yahoo! that gave Yahoo! the option of using Google to provide ads on its websites (and its publisher partners’ sites) in the U.S. and Canada. At the same time, both companies agreed to delay implementation of the agreement to give regulators the chance to review it. While this wasn’t legally necessary, we thought it was the right thing to do because Google and Yahoo! have been successful in online advertising and we realized that any cooperation between us would attract attention.

We’re of course disappointed that this deal won’t be moving ahead. But we’re not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on. Google’s continued success depends on staying focused on what we do best: creating useful products for our users and partners.

From the Yahoo Press Room:

Yahoo! Announces Termination of Services Agreement by Google

SUNNYVALE, Calif., Nov 05, 2008 — Yahoo! Inc. (Nasdaq: YHOO), a leading global Internet company, today announced that Google has terminated the advertising services agreement the companies announced in June. Yahoo! continues to believe in the benefits of the agreement and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court. Google notified Yahoo! of its refusal to move forward with implementation of the agreement following indication from the Department of Justice that it would seek to block it, despite Yahoo!’s proposed revisions to address the DOJ’s concerns.

Going forward, Yahoo! plans to continue to provide the cutting-edge advances in products, platforms and services that the industry needs and expects, and intends to be the destination of choice for advertisers and publishers who want to reach one of the largest and most engaged populations of consumers on the web.

From the Department of Justice:

Yahoo! Inc. and Google Inc. Abandon Their Advertising Agreement

WASHINGTON — Yahoo! Inc. and Google Inc. abandoned their advertising agreement after the Department of Justice informed the companies that it would file an antitrust lawsuit to block the implementation of the agreement. The Department said that, if implemented, the agreement between these two companies accounting for 90 percent or more of each relevant market would likely harm competition in the markets for Internet search advertising and Internet search syndication.

The Department’s investigation revealed that Internet search advertising and Internet search syndication are each relevant antitrust markets and that Google is by far the largest provider of such services, with shares of more than 70 percent in both markets. Yahoo! is by far Google’s most significant competitor in both markets, with combined market shares of 90 percent and 95 percent in the search advertising and search syndication markets, respectively. Yahoo! provides an alternative to Google for many advertisers and syndication partners, and Yahoo! recently had begun making significant investments in order to compete more effectively against Google, including the 2007 introduction of its Panama search advertising platform. Had the companies implemented their arrangement, Yahoo!’s competition likely would have been blunted immediately with respect to the search pages that Yahoo! chose to fill with ads sold by Google rather than its own ads, and Yahoo! would have had significantly reduced incentives to invest in areas of its search advertising business where outsourcing ads to Google made financial sense for Yahoo!

The World Association of Newspapers said Monday that it opposes the deal, adding its name to a growing list of critics that now includes not just Microsoft, but the Association of National Advertisers and European Union as well. Late Monday, WAN, which represents 76 national newspaper associations and more than 18,000 publications on five continents, issued a statement condemning the Google-Yahoo deal as disastrous for the newspaper industry. Surprisingly hostile in tone, it argues that the proposed advertising alliance between Google (GOOG) and Yahoo (YHOO) will weaken competition in the online advertising space and solidify Google’s dominance in search at a time when the company is expanding its own content businesses:

The upshot is that the deal will force newspapers to become even more dependent on Google than they are today. By handing Google control of up to 90 percent of paid search and content advertising, Google will exert tremendous power over both newspapers’ ability to reach readers and their ability to generate online advertising revenue. Perhaps never in the history of newspaper publishing has a single, commercial entity threatened to exert this much control over the destiny of the press.

It is particularly worrisome that this consolidation of power is occurring at the same time that Google increasingly takes positions that are adverse to newspapers and other content creators. Google already owns several content sites that directly compete with content developed by newspapers and other creators–often by simply copying others’ content without authorization. Usually, Google alone profits from this misappropriation. Take, for example, the case of Google News, which a Google senior executive recently admitted drives $100 million in advertising revenue to Google itself yet provides nothing–not a penny–to the newspaper companies whose works appear on those pages.

Clearly, newspapers have quite a few axes to grind with Google, and WAN appears intent on grinding them all at once. That said, Google’s partnership with Yahoo would be limited to the United States and Canada, so the protestations of a group of international newspapers may not carry as much weight with the regulators reviewing the deal as WAN would like. Especially after the U.S.-based Newspaper Association of America so quickly distanced itself from them. Said NAA CEO John F. Sturm, “While NAA is a member of the World Association of Newspapers, I would like to clarify that the NAA Board of Directors has taken no position on the proposed advertising partnership between Google and Yahoo.”

Troubling indeed. Almost as troubling as the questions raised by Google’s (GOOG) partnership with Yahoo (YHOO), as Kevin Johnson, president of Microsoft’s (MSFT) Platforms and Services Division, pointed out during a panel discussion at the Cannes Debate today. Commenting on a Yahoo exec’s description of the deal as a “win-win,” Johnson had this to say:

If win is consolidating around 90% of the paid search with Google, you can say, OK, Google would do that as a win. I don’t think that from an industry perspective that supports having choices and having a number of strong players in the advertising business.”

And who better than Microsoft to point this out, given the company’s monopolistic past?