Yahoo defended its planned advertising deal with Google at a U.S. Senate hearing on Tuesday, while Microsoft assailed it as anticompetitive and perhaps even "illegal."
The hearing before an antitrust panel replayed arguments that the three companies have made before: Microsoft is trying to raise antitrust objections as a way to derail the deal, and the two Silicon Valley firms say it's perfectly fine and a boon to competition.
One reason Microsoft is so irked is that the ad deal amounts to a poison pill that would raise the price of buying Yahoo by as much as $250 million. That's the so-called termination fee that Yahoo would owe Google if an acquisition ended the ad relationship, though it can be reduced by 50 percent of the revenue Google earned. A lawsuit (PDF) against Yahoo claims that "Microsoft could not swallow a Google-encumbered Yahoo due to antitrust implications" and undoing it would prove a formidable barrier to an acquisition.
Senators' remarks on Tuesday seemed mixed, with little to no outright condemnation of Yahoo and Google's new friendliness, but little enthusiasm for it either. (The Justice Department, not the Senate, is reviewing the deal on antitrust grounds before it goes into effect; Congress has no formal role to play.)
Sen. Arlen Specter, a Pennsylvania Republican, seemed to view it in terms of the takeover bid that now involves activist investor Carl Icahn. "Icahn wants Microsoft to acquire Yahoo. Apparently Yahoo is worth more money in Microsoft's hands than in Yahoo's hands," Specter said. "That adds another dimension to an already extremely complicated picture."
About the only surprise at the hearing was Microsoft general counsel Brad Smith's description of a closed-door June 8 meeting in San Jose, Calif., between executives from his company and their counterparts from Yahoo.
He said that Yahoo CEO Jerry Yang looked across the table and described the search market as bipolar, with one pole dominated by Google and the other led by Yahoo and Microsoft. "If we do this deal with Google, Yahoo will become part of Google's pole," Smith quoted Yang as saying. And Microsoft "would not be strong enough in this market to remain a pole of its own."
If that quotation is accurate, it would amount to a red flag waving at the Bush administration's antitrust bureaucrats (and the state attorneys general that are also investigating).
"I don't recall that comment, sir," Yahoo general counsel Michael Callahan replied, under questioning from Specter.
Sen. Orrin Hatch, a Utah Republican, reserved his sharpest questioning for Microsoft--perhaps showing that his decade-old enmity from Redmond's own antitrust case has not entirely faded.
Hatch noted that Microsoft used Yahoo's Overture Services to place ads on its Web sites until 2006--and now is complaining about a similar Google-Yahoo deal. "If the Microsoft-Overture contract did not amount to price-fixing, how can you argue now that the Google-Yahoo agreement amounts to per se price fixing?" he asked.
Making the hearing somewhat confusing, or perhaps confused, was the politicians' lack of understanding of the online advertising market and how prices for ads are established. That led the Los Angeles Times' Jim Puzzanghera to write, delicately, that the politicians "by and large didn't know much about how search advertising works."
The combination of the politicians' confusion and criticism led one witness, Tim Carter of ad-supported AsktheBuilder.com, to express astonishment that marketplace success would be penalized by Washington.
"I'm on my way to being the most popular home improvement Web site," Carter said. "Are you going to say, 'Tim, sorry, you can't do Google ads anymore?' Sorry, that's un-American."
The U.S. Senate is holding a hearing Tuesday on the antitrust implications of the Google-Yahoo ad deal, and the two companies, along with Microsoft, are testifying. You should expect sober, selfless discussions conducted with the public's best interests in mind.
Or not. In reality, Microsoft will offer fanciful claims about the alleged detrimental impact of a Google-Yahoo partnership, just as Google offered fanciful claims a few months ago about the alleged detrimental impact of a Microsoft-Yahoo combination.
According to his prepared testimony, Microsoft general counsel Brad Smith will call the Google-Yahoo deal possibly "illegal under the antitrust laws." His statement predicts the combined "market share would harm competition."
If this sounds oddly familiar, it's because he is echoing what Google vice president David Drummond said in February. Drummond suggested in a blog post that Microsoft would exert "inappropriate and illegal influence" over the Internet. A combination "equals an overwhelming share" of the market, and would harm competition, he said.
Five months ago, when Microsoft seemed ready to make a deal with Yahoo, Google invoked the specter of antitrust law, and Microsoft downplayed its significance. But now that the situation is reversed, so are the political positions.
This is no surprise. It costs relatively little, in time and money, for technology executives to lobby antitrust subcommittee chairman Herb Kohl (D-Wis.) in hopes he'll ask the administration to do something. That would not merely provide political cover for the Federal Trade Commission or the Justice Department; it would actually make action more likely.
Kohl surely knows that one additional congressional hearing raises the probability of an FTC merger challenge, for instance, by approximately 4.2 percentage points. What's more, the political influence tends to happen at the higher levels of the agency. It turns out that Washington bureaucrats are political creatures after all.
The underlying problem is that antitrust law is so malleable that it can be bent into virtually any shape that its practitioners desire. Given nearly any set of hard-nose business practices, some economist can be hired to claim that "predatory" prices are illegally low (hurting competitors) or illegally high (hurting consumers). No wonder Lester Thurow, the former dean of MIT's business school, concluded that "the time has come to recognize that the antitrust approach has been a failure. The costs it imposes far exceed any benefits it brings."
And no wonder that some state attorneys general are now sniffing around to see if there's a way for them to join the antitrust hunt.
Microsoft claims that "the Google/Yahoo agreement contemplates significant, ongoing coordination between the dominant provider of search advertising and its chief rival. Together, Google and Yahoo control an estimated 90 percent of search advertising, with Google alone accounting for over 70 percent... The effect of this agreement would be to further entrench the control of the dominant supplier of search advertising and, in the process, reduce choice and innovation and increase prices."
If Microsoft truly believes that "illegal" activity is happening, it doesn't need to wait for Washington. It has the ability to launch a private antitrust lawsuit against Google and Yahoo. Redmond knows firsthand how this works: Sun Microsystems filed a private antitrust suit that Microsoft settled for $1.95 billion in 2004.
Similarly, if Google truly believes that Microsoft is, say, violating the law with the way Windows Vista search is configured, it has the option of pursuing a private antitrust lawsuit.
But it tends to be cheaper and less risky to lobby government officials to spend tax dollars suing your competitor rather than doing it yourself. Another bonus is you gain the imprimatur of a government suit that supposedly protects the public interest. Which are two reasons these discussions about ostensibly "illegal" activities have been taking place in political circles--instead of the normal venue of a lawsuit between two companies that happen to disagree.
Disclosure: Declan McCullagh is married to a Google employee
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