Microsoft-Yahoo Search Deal Drawing Antitrust Scrutiny

Published October 1, 2009

A major technology deal that would unite software giant Microsoft with Web portal Yahoo in a bid to target a larger share of the $11 billion search engine market could be met with strong pushback from Washington, DC as Justice Department regulators seek to step up enforcement of antitrust regulations.

According to Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer, the intended arrangement would deploy Microsoft’s newly rebooted search engine, Bing, within Yahoo’s longstanding portal.

Based on current user estimates, this alliance of the No. 3 and No. 2 outlets for search traffic would combine to make up roughly 28 percent of the U.S. online search market.

Could Increase Competition

On their July conference call announcing the deal, Bartz and Ballmer were careful to claim the partnership would not harm competition in the search market but would instead enhance it. That elicited agreement from Berin Szoka, director of the Center for Internet Freedom and a senior fellow at the Washington, DC-based Progress & Freedom Foundation.

“By joining forces, Yahoo and Microsoft will be able to offer a stronger competitor to Google,” said Szoka. “This benefits consumers directly by encouraging innovation in the rapidly changing market for online search services, innovation that could make it easier for users to find information or make decisions, or improve other search engine features, like privacy management tools.”

The new partnership would lag far behind industry leader Google, which dominates the marketplace with more than two-thirds of all U.S. search traffic. Estimates place Google as holding 75 percent of worldwide search advertising revenue, which fuels the company’s investment in research and development of other products across multiple platforms.

“To put a real dent in Google’s market share, Microsoft can’t afford not to innovate,” Szoka said.

Congressional Scrutiny

The hurdles to the partnership are already appearing, however. Sen. Herb Kohl (D-WI), chairman of the Senate Antitrust Subcommittee, said the deal requires “careful scrutiny.” More pressure on the intended deal is expected to come from the Obama administration, which has stated it intends to monitor the tech sector closely.

Szoka says government trustbusters should remember “the goal of antitrust law is to protect consumers, not competitors.”
“Policymakers should recognize that the business, user, and technological paradigms of the Web are constantly being reinvented and replaced,” Szoka said. “Any delay in approving the deal would lengthen an awkward period of uncertainty for the blushing corporate couple at the antitrust altar.

“The government should avoid micromanaging the Yahoo/Microsoft partnership through regulatory blackmail [such as] demanding ‘voluntary concessions’ before granting approval,” Szoka added.

Answering to Justice

Microsoft and Yahoo will have to answer to Assistant Attorney General Christine Varney, head of the Antitrust Division of the Obama Justice Department. In remarks delivered this spring at the Center for American Progress, a Washington-based advocacy group supporting greater government intervention in a wide variety of areas, Varney announced “it is time for antitrust to step up its efforts,” particularly in the technology arena.

“It is my hope that the Antitrust Division … will have the opportunity to explore vertical theories and other new areas of civil enforcement, such as those arising in high-tech and Internet-based markets,” Varney said. “Increasingly, Americans are relying on high-tech solutions in the home and the workplace and enjoying the fruits of innovation in those markets that have been spurred on by competition between rival firms.

“We thus plan to devote attention to understanding the unique competition-related issues posed by these markets,” Varney said.

Varney Planned ‘Pushback’

Varney’s approach concerns many consumer advocates, who believe politicians and regulators may not fully understand the high-tech world.

“Although intended to protect consumers and competition, antitrust laws are simply a form of economic regulation that do more harm than good,” noted Nicolas Loris, a researcher in regulatory issues with the Thomas A. Roe Institute for Economic Policy Studies at the Washington, DC-based Heritage Foundation. “The decisions best left for the market to decide are put in the hands of a few politicians who know little about the industry.”

Some legal experts believe Varney will use the Microsoft-Yahoo deal as an Internet-age test case for application of antitrust law. They point to a speech Varney gave to the American Antitrust Institute in 2008, before her appointment to her current position, in which she said the next administration must “find the right cases to begin to push back on some of the doctrine that may have gotten too extreme in the last decade.”

Success Not Guaranteed

However, “Instead of promoting competition, antitrust regulation typically thwarts it,” Loris said. “It can lead to rent-seeking activity where politicians play favorites and the consumer ends up losing. Politicians attempting to micromanage such a dynamic industry will only slow the growth of the industry, which will reduce the benefits provided to its consumers.”

As regulators decide how they will handle Microsoft and Yahoo, the question remains whether, even if allowed, the union will be a success, coming as it does in the wake of a failed multibillion-dollar merger attempt last year.

“As a general rule of thumb, consumers are best served by increased competition, and competition in the search engine market is no different,” Loris said. “And even if a Microsoft-Yahoo merger increases its share in the search market, it does not guarantee profitability.

“While the size and scale of a firm certainly matters, it is innovation and entrepreneurial activity that ultimately increase a firm’s market share and [are] what led to Google’s success,” Loris added.

Ben Domenech ([email protected]) writes from Leesburg, Virginia.