Microsoft, Yahoo Face In-Depth Review of Search Deal
Sept. 11 (Bloomberg) -- Microsoft Corp. and Yahoo! Inc.have been asked by the U.S. Justice Department for more detailson a proposed Internet-search partnership, expanding theagency’s review of the agreement.
The request means regulators will do a more extensiveexamination, rather than approve the deal immediately. Microsoftpredicted an in-depth review when the accord was announced inJuly, said company spokesman Jack Evans. He declined to commenton the contents of the request.
Over the course of the review, the companies expect to beasked about their search-engine investments, ad pricing andproduct plans, a person familiar with the matter said.
The outcome will shape the future of the market forInternet search ads, where Google has triple the U.S. sales ofits two rivals. The companies may face more difficulty provingthe deal won’t hurt competition as regulators step up oversightof the technology industry, said Michael Katz, a former chiefeconomist in the Justice Department’s antitrust unit.
“The antitrust agencies are pretty skeptical of theargument that you need to be bigger to compete,” said Katz, nowa professor at the University of California at Berkeley. “TheJustice Department will respond, ‘Why can’t you get bigger bycompeting?’”
Under the partnership, signed in July, Yahoo will useMicrosoft’s Bing search engine on its Web sites. Yahoo will sellads that appear next to Web-search results, with the companiessplitting the revenue.
Bing Investment
Even though the antitrust agency will scrutinize the dealclosely, the companies probably can get it done as long as theydo enough to persuade the Justice Department that the agreementdoesn’t hurt competition, Katz said.
During the Justice Department’s review, Redmond,Washington-based Microsoft expects to be asked to disclose itsspending on Bing to ensure the company made enough investmentsto create a viable product, the person familiar with the mattersaid. Both companies also anticipate regulators will ask fortheir individual search-engine product plans so it can assesswhether there’s an incentive to compete more or less vigorouslyas a result of the deal.
“Those plans will help the DOJ understand what thecompetitive impacts of the merger might be,” said Greg Neppl,an antitrust lawyer at Foley & Lardner LLP in Washington. If thedepartment were to find the accord hinders innovation, it couldseek to block the deal.
Ad Pricing
The government will also seek information on how thecompanies’ online-ad auctions operate and what might happen toprices as a result of the combination, the person said. Whileregulators will investigate pricing, it’s unlikely that theywill dictate what prices will be, the person said.
The requests will help the agency determine whether toimpose conditions to foster competition, or block the deal.Mountain View, California-based Google scrapped plans to team upwith Yahoo last year after the Justice Department threatened tosue, saying the proposal would have helped them “becomecollaborators rather than competitors.”
“Google was dominant a year ago and is dominant today,”said Brad Smith, Microsoft’s general counsel. “Even if this isapproved, Google will be dominant a year from now -- but if thisagreement is approved, at least there is a chance for a morecredible No. 2 to emerge.”
Laura Sweeney, a spokeswoman for the Justice Department,said the agency is aware of the proposed Microsoft-Yahoopartnership, and declined to comment further.
Fully Cooperating
“Yahoo and Microsoft are cooperating fully with theJustice Department and firmly believe that the information theywill be providing will confirm that this deal is not only goodfor both companies, but it is also good for advertisers, goodfor publishers and good for consumers,” Adam Grossberg, a Yahoospokesman, said in an e-mail.
The companies are now responding to the latest request,which they received earlier this week, Microsoft’s Evans saidyesterday. They still expect the deal to close on schedule.
Microsoft fell 14 cents to $24.86 at 4 p.m. New York timein Nasdaq Stock Market trading. Sunnyvale, California-basedYahoo added 14 cents to $15.59, while Google rose $1.20 to$472.14. Microsoft and Yahoo have both risen 28 percent thisyear, while Google has climbed 53 percent.
“There has traditionally been a lot of competition online,and our experience is that competition brings about great thingsfor users,” Google spokesman Adam Kovacevich said in an e-mailed statement. “We’re interested to learn more about thedeal.”
Of the three largest search engines, Google had 75 percentof search-ad spending in the U.S. last quarter, with the restgoing to Microsoft and Yahoo, according to data from search-adfirm Efficient Frontier Inc. in Sunnyvale, California. Themarket should expand to $12 billion this year, according to NewYork researcher EMarketer Inc.
European Commission
In Europe, Microsoft is also likely to notify the EuropeanCommission about the agreement, said Neil Macehiter, a partnerat Cambridge, England-based technology consultant MacehiterWard-Dutton. If the commission gets involved, it will conduct aninitial 25 working-day review, which can be extended by 90 daysif the regulator has “serious doubts” about competitionissues.
Last week, the Brussels-based commission put on hold OracleCorp.’s $7.4 billion acquisition of Sun Microsystems Inc.,saying its initial probe suggested the deal may reducecompetition and lead to higher prices.
“I’d bet on Microsoft-Yahoo prevailing because it would bedifficult for Microsoft to leverage its position,” Macehitersaid.
Google Partnership
Microsoft objected to a proposed partnership between Yahooand Google last year, saying the accord would allow them to fixprices. Now the software maker is on the other side of the sameargument, and will likely tell the agency the venture won’traise prices, said Andre Barlow, a Washington-based lawyer whoworked for the Justice Department’s antitrust division and isnow a partner at Doyle Barlow & Mazard PLLC.
Advertisers probably will face questions on the deal too.Carl Fremont, executive vice president at Digitas, an online adagency, said a Microsoft-Yahoo combination would force Google tokeep on improving its search engine.
“From a product offering side, I believe it will be betterover time,” said Fremont, whose firm is owned by Paris-basedPublicis Groupe SA. “It creates new competition in themarket.”
To contact the reporter on this story:Dina Bass in Seattle at dbass2@bloomberg.net;Kelly Riddell in Washington at kriddell1@bloomberg.net
Last Updated: September 11, 2009 16:13 EDTSource: Bloomberg
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