Microsoft-Yahoo! Merger Could Increase Internet Competition

Published April 1, 2008

Since Microsoft Corp. approached Yahoo! Inc. in early February with an offer of $44.6 billion ($31 per share) to acquire the online network provider, the media–and Congress, federal agencies, and tech experts–have been abuzz with anticipation, concerns, and speculation over the implications of the potential merger.

Though Yahoo! rejected Microsoft’s unsolicited offer as under value, most observers believe this is simply the beginning of a negotiating process, not a permanently closed door.

There are antitrust issues before a deal is even on the table–the U.S. Department of Justice has already laid claim to the review process. But while monopoly concerns have, famously, long focused on Microsoft, developments over the past several years (especially the rise of Internet giant Google) have created the possibility a Microsoft takeover of Yahoo! wouldn’t diminish competition but would in fact increase it.

Cloud Computing

While Microsoft has had a lock on pricey desktop software since the 1990s, in the new millennium Google has been providing online applications for word processing, spreadsheets, presentations, video editing, and more at an unbeatable price: free.

Growing numbers of individual users and smaller businesses have been giving up the traditional way of saving data to their own hard drives in favor of Google’s, Yahoo!’s, and other providers’ “cloud computing” systems–where data are stored remotely in a large network of servers.

Cloud computing is vastly cheaper than individual hard-drive storage, since it uses average consumer PC technology with special connections to spread out data processing among the servers, a much faster way of doing things. And since such storage is Web-based, those using cloud computing can access their files from virtually any computer in the world without having to carry around so much as a thumb drive.

With so many advantages and–to date–few reported drawbacks, it is easy to see why so many computer users, especially younger ones, see no reason ever to pay for basic software again. This means sooner or later clouds will gather rapidly on the sunny summer of Microsoft’s software domination.

Big New Underdog

With Google being the largest provider of free online applications, as well as creator and owner of the largest, fastest, and most-used search engine in the world, the potential for a next-generation monopoly is clear–and it isn’t Microsoft. In fact, if the oft-maligned Microsoft behemoth should end up succeeding in its bid for Yahoo!, it will actually be bringing in some healthy competition.

As a techie blogger put it on, “For those who think [an acquisition] is a bad move for Microsoft or Yahoo!, keep in mind that Microsoft + Yahoo! = better competition against Google. If Google has no serious competition it will get lazy.”

Cord Blomquist, technology policy analyst at the Cato Institute, is likewise unconcerned about an expansion of Microsoft’s power. In fact, he believes “a Microsoft/Yahoo! merger is the only real way to put downward pressure on Google.”

Dismissing concerns such a merger would hand Microsoft a permanent “hold on the market,” Blomquist explains, “the market isn’t static–trying to hold on to it would be like holding on to Jello.”

Privacy Concerns

A more serious issue might be the matter of privacy protection. Should cloud computing remote-server storage become the future standard, it is sure to raise concerns about the safety of people’s health and financial records and other personal data stored in cyberspace. Lawmakers might well feel pressure to protect their constituents’ privacy.

Blomquist believes any such legislation would be redundant. “Legislation wouldn’t solve anything that’s not already accounted for by the market,” he argues. “Microsoft and Yahoo! have every incentive to keep their customers’ data private. The marketplace will punish any company that fails to protect its customers’ information.”

That, Blomquist points out, is far more effective than government measures such as those by the U.S. Department of Commerce or the Veterans Administration, which put millions of people at risk by losing entire laptops with stored personal data.

Broadband Limitations

The more likely future hurdle to overcome in taking full advantage of cloud computing, some experts believe, will be the technical matter of how to expand broadband penetration across the country. The United States continues to lag behind many European and Asian countries when it comes to high-speed Internet connections–without which customers will not have ready access to “cloud” services.

It seems a good possibility a Microsoft/Yahoo! merger would keep Microsoft current and Google on its toes. But why would Yahoo! agree to a buyout? The answer is obvious: With an announced layoff of 1,000 employees, and only 15 percent of total U.S. online advertising in 2007 (Google’s share was 28 percent), the 12-year-old company might not be able compete with Google on its own much longer.

This is a continuously evolving situation with multiple potential outcomes. Perhaps to spice things up even more, Rupert Murdoch’s NewsCorp has begun talking to Yahoo! (again) about a possible collaboration.

Whatever happens, this is likely to be one of the most important developments in the Internet since the AOL-Time Warner merger. And as the failure of that merger indicates, not all big developments are necessarily positive ones.

Karina Rollins ([email protected]) writes from Washington, DC.