Google-Yahoo Agreement Bitter Pill for Microsoft

Microsoft abandoned its initial bid to take over Yahoo in its entirety, but made an offer to take over Yahoo’s search business – an offer that Yahoo declined. Among the reasons given by Yahoo for its rejection of the Microsoft offer was that it would leave Yahoo without an independent search business, which would not be in shareholders best interest and would prove detrimental to the company’s strategic future.

The Google-Yahoo agreement (not merger – as Yahoo and Google executives keep emphasizing) would allow some of Google’s ads to be displayed on Yahoo’s website. The partnership is seen by many as Google throwing Yahoo a lifeline to rescue the company from Microsoft advances. Executives from Microsoft, Google and Yahoo have had the opportunity to state their case to the Senate and House Judiciary Committee on 15 July, and if lawmakers decide to rule against the proposed deal, this will once again leave Yahoo open to overtures from Microsoft.

Internet technology and the so-called “cyberworld” have raised a whole new set of issues that law-makers have not yet addressed, and may possibly only address as issues arise. Microsoft are arguing that the agreement between Google and Yahoo will severely, and unfairly, limit competition and most likely result in an increase in online advertising prices.

Brad Smith, general counsel representing Microsoft, asserts that search engines serve as the gateway to the internet, and the Google-Yahoo agreement may very well put Google in a position of internet gateway ownership and, by extension, ownership of the information that flows through that gateway. This gateway ownership situation may form a legitimate basis for antitrust violation concerns. Smith further contends that never before has one company been in the position to control as much as 90 percent of advertising, and therefore advertising prices, in a single medium.

Reportedly, Yahoo has estimated that displaying Google’s ads in Yahoo search results can potentially generation revenue of up to $800 million. This additional revenue must come from somewhere, and Microsoft believes it will come out of the pockets of American businesses, who will be obliged to pay higher prices for ads they currently buy from Yahoo.

Google’s chief legal officer, David Drummond, counters these arguments, saying that the online advertising marketplace is “competitive, robust and dynamic”. He also points to Microsoft’s long-held dominant position in desktop computing and Windows applications. This brings to mind Microsoft’s long history of aggressively extending its market position through various anti-competitive strategies and rejection of interoperability.

There seems to be more than two sides to this particular story, and with Microsoft, Google and Yahoo all being stock exchange listed companies, investors will no doubt be interested to see how events will play out in the coming months.