Inside Google

Microsoft and Yahoo finally tied the knot, but they signed an expansive pre-nup to limit antitrust scrutiny. The companies said Wednesday that Microsoft will power search results for both companies and Yahoo will handle all search ads. The deal, which includes revenue guarantees but no up- front payment from Microsoft, prohibits cooperation between the two on Web properties and products, e-mail, instant messaging, display advertising or "any other aspect of the companies’ businesses," the companies said. Analysts predicted some difficulty clearing Justice Department review.

Senate Antitrust Subcommittee Chairman Herb Kohl, D- Wis., made it clear that he’s skeptical. The deal "warrants our careful scrutiny," because of the "potentially far-reaching consequences for consumers and advertisers, and our concern about dampening the innovation we have come to expect from a competitive high-tech industry." He said the deal will be "closely reviewed" in the subcommittee.

The combined search operation will make the companies a "market competitor with the scale to fuel sustained development in search and search advertising," Microsoft and Yahoo said. Advertisers will gain from buying on a single platform and having a choice other than "one company that dominates more than 70 percent of all search," they said in an obvious reference to Google. Yahoo CEO Carol Bartz, who carried on a sustained flirtation with Microsoft, though ex- CEO Jerry Yang was pessimistic to the end (WID June 26/08 p1), said the deal carried "boatloads of value for Yahoo." The company will be able to up investments in "priority areas" such as gaining audience, improving display ads and mobile usage, she said.

The deal will give Microsoft’s Bing greater scale and visibility among users and advertisers, improving its ad and search results, the companies said.

"Microsoft and Yahoo know there’s so much more that search could be," CEO Steve Ballmer said. Yahoo Chairman Roy Bostock said the deal had the board’s "full and unanimous support" — an allusion to activist investor Carl Icahn, who with two associates won Yahoo board seats after criticizing Yang’s opposition to a Microsoft deal.

Microsoft will get a 10-year exclusive license for Yahoo’s search technology and unify it with Microsoft’s own. Bing will be the exclusive search platform for Yahoo sites. Yahoo will handle all "premium" ad sales, while Microsoft’s adCenter will handle "self-serve advertising" and the auction process for both companies. Yahoo will continue to "own" the user experience on its sites.

Microsoft will pay Yahoo through a revenue-sharing agreement on traffic to both Yahoo and affiliated sites — 88 percent of revenue on Yahoo sites the first five years and guaranteed revenue-per-search for the first 18 months in a country. Yahoo estimates $500 million more in operating income, $200 million in capital expenditure savings and $275 million in operating cash flow once the deal is fully followed-through on.

In a nod to privacy concerns that have dogged search- engine deals, the companies said they’ll limit sharing of data to "the minimum necessary to operate and improve the combined search platform, and restrict the use of search data shared between the companies." Microsoft and Yahoo hope to close the deal early next year. They created a Web site at ChoiceValueInnovation.com to promote the benefits to consumers, advertisers and publishers.

Stifel Nicolaus analysts said getting regulatory approval is "doable," but there’s a "material risk" they will be blocked or made subject to conditions.

Authorities besides those in the U.S., states and Europe may want a say. But the deal will likely have support from publishers, Yahoo already has DoJ experience from its failed pact with Google, and DoJ antitrust chief Christine Varney has said Google is the "dominant firm in tech," the analysts said. Because the argument that combining two of three major players "generally has not fared well" with regulators, Microsoft must show that increased competition with Google is worth letting Yahoo search "atrophy." Varney told DoJ observers to "stay tuned" concerning Internet business when the department scrapped Bush administration antitrust policy (WID May 12 p1), they noted, and "privacy issues may intrude."

The Computer and Communications Industry Association said it had been won over after being skeptical earlier of an outright Microsoft purchase of Yahoo. The deal "appears to strike a reasonable balance" by being limited to search, and "it is this dynamic that antitrust authorities should focus on in their review," said President Ed Black.

Vocal Google critic Consumer Watchdog didn’t denounce the deal outright, noting that "some have suggested" that the tie-up may increase competition against Google. But the Microsoft-Yahoo deal is a chance for regulators to "set to the gold standard for privacy guarantees by Internet companies and for the government to use its leverage to obtain it," it said. Consumer Watchdog’s John Simpson said the FTC should take a strong lead on privacy matters. "If the result of this deal is that there are two stronger Internet search enterprises who exploit users’ data at the expense of their privacy rights, consumers are worse off, not better," he said. "Justice and the FTC can — and must — insist on this."

Analyst Jeff Kagan told us the Clinton administration’s antitrust actions, including the Microsoft operating-system antitrust suit, were the best guide to what will happen with Microsoft and Yahoo. The deal would have been better off if completed last year under the Bush administration, he said. But "at this point there’s not really a reason to block it" given Google’s size and the relatively small search share the combined operation would have — less than 30 percent. Kagan predicted that privacy issues will be "part of the conversation," but not a big part. "We’ve lost privacy. We’ve lost that battle," and the companies won’t have to do anything more than Google does, he said.

The Competitive Enterprise Institute said Google would be driven to improve its search engine. And if Microsoft- Yahoo fails, "rivals, partners, consumers, investors, advertisers, and even global competitors are perfectly capable of dealing with any challenges to competition," said Wayne Crews, director of technology studies. "Consumers stand to lose if Washington gets involved."

In contrast to the Google-Yahoo search deal sunk by DoJ, "the bar is simply not that high for this agreement," the Association for Competitive Technology said, pegging the combined market share at a "measly" 25 percent. Without the inclusion of other products such as e-mail, and with vocal support already from advertisers who were mainly disillusioned with Microsoft’s low traffic but not its ad technology, the competitive threat to Google "will weigh heavily in favor" of approval of the Microsoft-Yahoo deal, the association said.