MicroHoo
Antitrust issues to consider -- if the deal goes through.

Monday, February 11, 2008

AFTER A YEAR of trying to seal the deal quietly, Microsoft has made a public, unsolicited bid for Yahoo. While the offer has not yet been accepted -- and Yahoo board members are reportedly going to demand a higher offer today -- Microsoft and its archrival Google have already sicced their lobbying armies on Washington. As in Microsoft's opposition to Google's recently approved acquisition of DoubleClick, both sides argue that any success of their own products is earned by superior design, and any success gleaned by their competitors is due to anticompetitive practices. Lawmakers have already announced three congressional hearings on the issue.

While some of the outrage about the deal seems premature, there's good reason for antitrust regulators to be interested. Microsoft is arguing that the takeover would promote competition: Google is so entrenched as the leader of online search advertising, it says, that the only way to create an effective competitor is to combine Microsoft and Yahoo.

There are several antitrust concerns, however. First, and most frequently cited, are the "vertical" issues. As Google noted in a company blog post, Microsoft might repeat its anticompetitive sins of the 1990s and use its dominance over the PC operating system and Web browser markets to leverage another product (by forcing Windows users to use Yahoo e-mail, for example). This scenario seems unlikely. After all, Microsoft's past browser-bundling provoked plenty of trouble, and there are still government supervisors overseeing the company as part of Microsoft's antitrust consent decree. If Microsoft wanted to repeat this bad behavior, it could already be doing so with the products it now offers.

That brings us to the "horizontal" antitrust concerns. Both Yahoo and Microsoft are gigantic companies with many different properties, some of which overlap. If Yahoo's board accepts the deal, antitrust regulators should look at Microsoft and Yahoo's Web-based e-mail and instant messaging services, which are some of the most popular worldwide; if they are combined, options for consumers could be reduced.

Regulators should also look at whether the deal would reduce competition in the overall online ad market. While Google is far and away the leader in search-based advertising, Yahoo and Microsoft beat Google in display (image-based) ads. According to Hitwise's analysis of the three companies, Yahoo's Web sites are also the most heavily trafficked, meaning that a combined Microsoft-Yahoo could have twice as many page views to put ads on as Google, potentially limiting advertisers' options in the long run.

These concerns are worth investigating carefully. But it's far from obvious that they should scuttle any Microsoft-Yahoo deal -- if, in fact, one materializes.