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In Heavyweight Battle, Trying to Avoid a Knockout
Fight Over Yahoo Is Question of Which Winner Would Be Worse

By Peter Whoriskey
Washington Post Staff Writer
Tuesday, February 5, 2008

On its own, Yahoo is a stumbling Internet giant.

But to Microsoft and Google, two of the world's most powerful technology companies, control of Yahoo has come to represent an unmatched strategic prize. With its vast reach, Yahoo offers a combination of a strong foothold in online display advertising and an audience of 137 million monthly visitors to its sites.

Now the duel over Yahoo, initiated by Microsoft's surprise $44.6 billion offer last week, has set off a policy and public-relations battle between the corporate rivals that revolves around a simple question: Which company, Google or Microsoft, most threatens to become an Internet monopoly?

Both companies dominate some areas. Google, with its preeminent search engine, controls the way most people find Internet information. Microsoft, through its Windows PC software empire, dominates the way most people interact with their computers -- and the addition of Yahoo would hand it the world's most trafficked site.

Which company poses the bigger potential threat is a question that could divide the regulators, consumer advocates and privacy watchdogs who are weighing the effects of the proposed purchase.

In response to the proposal, the House Judiciary Committee has announced that it will hold a hearing Friday on Internet competition, with a focus on the deal.

In a joint statement, Judiciary Committee Chairman John Conyers Jr. (D-Mich.) and ranking Republican Lamar Smith (Tex.) said "Microsoft's bid . . . is certainly one of the largest technology buyouts we've seen and presents important issues regarding the competitive landscape of the Internet."

The committee will consider whether Microsoft's proposed acquisition "works to further or undermine the fundamental principles of a competitive Internet."

Before any Yahoo-Microsoft deal can be consummated, it must be accepted by Yahoo's board. The company said it was sorting through a number of inquiries from other companies interested in possibly purchasing Yahoo at a higher price. Google, hoping to fend off the Microsoft offer, has reportedly signaled that it could form a business alliance with Yahoo.

Exactly what sort of deal Google might offer remained unclear yesterday. A source familiar with the Microsoft-Yahoo deal said that although Yahoo had other interested parties none had made a concrete offer. AT&T, Comcast, Time Warner and News Corp. were considered by Wall Street as possible bidders. The source, who spoke on condition of anonymity because the talks weree ongoing, called the prospect of a Google counteroffer unlikely because of "regulatory issues that are complete showstoppers."

Spokesmen at Time Warner and Comcast declined to comment, although someone close to Comcast said it had made no offer for Yahoo.

"Yahoo's Board is carefully and thoroughly evaluating the Microsoft proposal in the context of all of the company's strategic alternatives," Yahoo said in a statement yesterday.

As for whether Google or the Microsoft-Yahoo buyout would pose the greater danger for competition, each company has a case to be made, experts said.

Microsoft has pitched the deal as a means of confronting Google's dominant position in Internet search and the lucrative advertising that goes along with it. Google's search engine conducts -- and provides side-by-side ads for -- 62 percent of the world's Web searches, according to ComScore, a marketing-research company. Together, Yahoo's and Microsoft's search engines would have about 16 percent of the market.

"The combination of Microsoft and Yahoo will create a more competitive marketplace by establishing a compelling number two competitor for Internet search and online advertising," Brad Smith, Microsoft general counsel, said in a statement released Sunday.

Indeed, many small and midsize Internet-based businesses have argued that Google could use more competition, because as the dominant search engine it does not have enough incentive to meet their needs.

"Google is a power," said David Steiner, president of AuctionBytes.com, an independent trade publication for online merchants, which registers more than 5 million page views monthly. "When you are building a site, e-commerce or a publication, you are really dependent on paying for Google AdWords to get visibility," he said, referring to Google's advertising system which allows marketers to buy ads associated with certain search terms.

He added that dealing with Google can be frustrating to Web sites and small retailers because their methods seem to change arbitrarily.

"They may change search algorithm. They may change payout," Steiner said. "It's all a deep, dark mystery."

Jonathan Zuck, president of the Association for Competitive Technology, a trade association of 3,000 companies that has received financial support from Microsoft, said many were waiting for another company to rival Google.

"Advertisers and customers and even Wall Street have been looking at this for some time to see if a viable competitor to Google could be created," he said.

He said Microsoft's previous troubles with antitrust regulators are too often used to portray the company as "the boogey man."

"I think that's getting a little old," he said. "I think people are a little more afraid of the Googley-eyed monster at this point."

On the other hand, Google and others have warned that the combination of Microsoft and Yahoo could give them a dominant share of e-mail and instant-messaging accounts.

In addition, Google and some public policy experts have warned, if Microsoft acquires Yahoo, it could set up its market-dominating Internet browser to automatically run Yahoo services, possibly to the exclusion of other services.

The buyout could mean "that the next great idea that competes with any of the Yahoo software might never see the light day," said Ben Scott, policy director at Free Press, a public-interest firm. "There's certainly cause for great concern from an antitrust perspective."

Staff writers Tomoeh Murakami Tse in New York and Kim Hart contributed to this report.

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