Microsoft: Forget It On Paid Search Partnership, Google & Yahoo

So Yahoo’s going to partner with Google for a test of search ads? Better be only a test, Microsoft seems to be saying. Microsoft General Counsel Brad Smith just put out a statement suggesting that any partnership would likely be opposed on regulatory grounds, as Google would get more than 90 percent of the ad search market:

Any definitive agreement between Yahoo! and Google would consolidate over 90% of the search advertising market in Google’s hands. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo! We will assess closely all of our options. Our proposal remains the only alternative put forward that offers Yahoo! shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers.

OK, the threat of a regulatory challenge isn’t actually said. It’s just hinted at. Microsoft fought hard to oppose the Google-DoubleClick deal, and the company seems to be signaling it would do the same in a Yahoo-Google deal, so Yahoo shouldn’t consider Google a safety ring.

Then again, Yahoo’s not talking about being acquired by Google. It’s partnering with the company. We’ve actually had a company that gained nearly 90 percent of the US paid search market through partnership, rather than acquisition, before. That was GoTo — later Overture, now owned by Yahoo. It had deals with all the major search engines but Google, which was tiny at the time. There were no regulatory objects raised anywhere, and the fact that Overture later lost accounts can be expected as an argument that partnership doesn’t guarantee a near monopoly.

Can Google Save Yahoo By Taking Over Search? from me in February looks further at the idea of how a Google deal might help Yahoo. From that:

I’ve commented before (most recently in Ad Age) that I think it would be silly for Yahoo to get out of serving ads on its own. But if Yahoo’s looking at a choice of being absorbed by Microsoft, it’s effectively getting out of the game anyway. If it wants to stay independent, an ad pact might make sense. That’s even more so if it gives Yahoo guaranteed revenues and can play out in countries where Yahoo isn’t strong….

I still think it would be a bad long-term move to make, for Yahoo to dump its own ad and search technologies. But getting out of ads in Europe makes more sense because Yahoo has been weaker there, plus it has a terrible system that requires advertisers who wish to target a particular country to open different accounts.

FYI, Microsoft has just put out a resource list via email to the press of statements from experts that say there might be regulatory challenges. Let’s take a look:

Approval Unlikely For Google-Yahoo Pact: Experts
Competition Law 360, February, 4, 2008

“Google and Yahoo really cannot form an alliance — that is the whole purpose of antitrust law — to prevent the biggest competitors in the market from aligning to the detriment of consumers. If the question is whether Google and Yahoo can collectively set the rates of online advertising, that is a complete no-no under antitrust law, That sounds a lot like blanket price-fixing, which is per se illegal under Section One. That is the simplest of all cases.”
– Marc Edelman, Professor (Antitrust), New York Law School,

“It would be seen as worse than the Microsoft acquisition of Yahoo, which at least can be viewed as No. 2 plus No. 3 to compete more successfully against No. 1. A Google acquisition of Yahoo would merely entrench Google in a dominant position.”
– Albert Foer, American Antitrust Institute

The Perils of a Google-Yahoo Blocking Move
The Wall Street Journal Deal Journal, Matthew Karnitschnig, February 8, 2008

If Jerry Yang is seriously considering cutting some kind of deal with Google to stave off Microsoft, he’d better make sure he’s got a good stable of lawyers.

“Google has more than 50% of the search advertising market,” says Gary Miller, a corporate attorney with Eckert Seamans in Philadelphia. “I can’t see the regulators allowing someone with 50% to take over the No. 2 or No. 3. It’s a non-starter.”
– Gary Miller, Eckert Seamans, Corporate Attorney

Yahoo weighs outsourcing search ads to Google
San Francisco Chronicle, Verne Kopytoff, February 9, 2008

Antitrust concerns also swirl around any Yahoo-Google partnership. Regulators would think twice about allowing Google, the most popular search engine, to add to its already sizable lead in the search advertising market.

"I think it would definitely raise regulatory concerns," said Richard Idell, an attorney with Idell & Seitel, a San Francisco law firm. "You would have this one consolidated entity that is controlling the vast majority of the market share."
– Richard Idell, Idell & Seitel, attorney

Yahoo Expected to Reject Microsoft’s Takeover Bid
New York Times, Andrew Ross Sorkin and Miguel Helft, February 10, 2008

Legal analysts said the board’s deliberations were complicated by the fact that both of its most talked-about options could face antitrust objections. Google has already raised potential antitrust issues about a Microsoft-Yahoo tie-up. A Google-Yahoo partnership in search advertising could have "even bigger antitrust implications,"
– Carl Tobias, law professor at the University of Richmond in Virginia

Yahoo Considers Playing a Google Defense
The Wall Street Journal, Kevin J. Delaney and Matthew Karnitschnig, February 9, 2008

But antitrust experts say even such a pact with Google would likely raise red flags with regulators because of Google’s and Yahoo’s large shares of the Web-search and search-advertising markets.

Yahoo looks to raise its game in the UK
Media Week, By Andrew McCormick, April 1, 2008

"The Microsoft bid for Yahoo is about creating a viable competitor to Google. On this basis, we don’t have a problem with the proposed takeover. There has been some talk of Yahoo seeking to see off the bid by outsourcing its search to Google – we would most definitely have a problem with this."
–Nigel Gwilliam, Head of Digital at the Institute of Practitioners in Advertising

Would The FTC Block A Google Deal With Yahoo?
Barron’s, Eric Savitz, February 7, 2008

Meanwhile, investors may be overlooking the potential regulatory scrutiny Yahoo would get from an oft-cited rescue strategy: outsourcing search to Google (GOOG). In a research note this morning, UBS analyst Heather Bellini summarizes a conference call she hosted yesterday with Glenn Manishin, a litigation attorney and partner and the law firm Duane Morris.

Manishin notes that the Federal Trade Commission has the authority to review any agreement, even if it does not involve M&A. And his view, according to Bellini, is that “such a deal probably would not be approved because of Google’s existing very significant search share.” She writes that Manishin believes “an agreement between Yahoo and Google would be much more problematic than a deal between Yahoo and Microsoft.”
– Heather Bellini, UBS analyst and Glenn Manishin, Duane Morris, litigation attorney and partner

Yahoo’s last stand
Financial Times Lex Column, February 10, 2008

Yahoo could threaten to outsource its search advertising to Google to boost profitability. Such an agreement would put the wind up Microsoft, potentially forcing it to raise its bid. The trouble is, if Yahoo thinks that being bought by Microsoft has a serious anti-trust risk, such a deal with Google looks even more tenuous.

Yahoo Board to Determine Fate Of Company Today
Techcrunch, Michael Arrington, February 8, 2008

“…There is also the strong likelihood that any deal reached between Yahoo and Google would be rejected by U.S. regulatory authorities.

From what I can see, a lot of these assume a Google-Yahoo merger, which is a far different thing than a partnership. I’m not an expert on how anti-trust law governs partnerships (if at all), as opposed to a merger. So take what I’ve written with a grain of salt. But then again, I doubt anyone in the stories above even remembers the large marketshare that Overture once had, one made through partnerships and one that got eroded by a strong competitors. That’s an important fact not to be overlooked.

For further discussion, see related articles at Techmeme.

Related Topics: Channel: SEM | Google: AdSense | Google: Partnerships | Legal: General | Microsoft & Yahoo Search Deal | Microsoft: Business Issues | Yahoo: Partnerships | Yahoo: Search Ads

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About The Author: is a Founding Editor of Search Engine Land. He’s a widely cited authority on search engines and search marketing issues who has covered the space since 1996. Danny also serves as Chief Content Officer for Third Door Media, which publishes Search Engine Land and produces the SMX: Search Marketing Expo conference series. He has a personal blog called Daggle (and keeps his disclosures page there). He can be found on Facebook, Google + and microblogs on Twitter as @dannysullivan.

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