Third place is nothing to crow about—unless you're an attorney for Microsoft (MSFT). The world's largest software maker has never been proud of being a laggard in Internet search and advertising. But Microsoft's weakness on the Web may very well ensure it gains government approval for its proposed $44.6 billion acquisition of Yahoo! (YHOO).
And regulatory authorities have every intention of scrutinizing the deal. Hours after Microsoft announced its takeover bid, the House Judiciary Committee's antitrust task force scheduled a Feb. 8 hearing to discuss the proposed merger. The Justice Dept., which can restrict or block the deal, has also expressed "interest" in reviewing the merger.
Antitrust experts say any review is likely to be lengthy, given the overlap in Microsoft's and Yahoo's businesses, but ultimately decided in Microsoft's favor. "I don't think the deal has any obvious problems that would preclude it from going through," says Hewitt Pate, a lawyer with Washington (D.C.) firm Hunton & Williams, who served as an assistant attorney general in the Justice Dept.'s antitrust division until 2005.
Microsoft can thank Google (GOOG) for its anticipated approval. Google, the No. 1 search engine, dominates online advertising to such a degree that it poses significant competition for even a combined Microsoft/Yahoo. Google accounted for 56.3% of all Web searches in December, compared with a combined 31.5% for Microsoft and Yahoo, according to Nielsen Online. Google accounts for an estimated 42% of online advertising dollars. Microsoft, Yahoo, and Time Warner's (TWX) AOL combined grab about the same share of the market as Google alone, according to Jeffrey Rayport, founder and chairman of business strategy firm Marketspace.
Typically, Microsoft has fielded probes by antitrust regulators in connection with its dominance of software—in particular, computer operating systems. "The shoe is on the other foot," says Mark Ostrau, co-chair of the antitrust group at Fenwick & West, a technology law firm based in Mountain View, Calif. "Microsoft can finally get their day to argue that there is someone else out there who is bigger."
Google nonetheless will try to convince regulators that the combination could imperil innovation and curtail consumer choice in key products, such as e-mail and instant messaging. "Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC?," Google Senior Vice-President David Drummond asked in a Feb. 3 blog, the company's first public statement on Microsoft's attempt to buy Yahoo. "Could a combination of the two take advantage of a PC software monopoly to unfairly limit the ability of consumers to freely access competitors' email, IM, and web-based services?"
Regardless of how it fares in the U.S., the deal will surely come under stricter scrutiny in Europe, before the European Commission. The European Union's executive branch has already ordered Microsoft to share the codes associated with its operating system (BusinessWeek.com, 10/22/07). And the commission has delayed Google's planned $3.1 billion purchase of ad network DoubleClick (BusinessWeek.com, 11/14/07) to hear more about the anticompetitive issues. It has until Apr. 2. to decide whether it will block the deal.
While EU officials may not ultimately block the Microsoft/Yahoo transaction, they're likely to impose conditions on it. The commission, as well as U.S. authorities, could demand that Microsoft divest portions of Yahoo, such as its instant messaging service, to ensure it does not dominate a particular sector of the market. Microsoft also has an instant messaging service. Neither body is likely, however, to demand that Microsoft spin off search, the largest area of overlap with Yahoo.
Though Yahoo may not accept the deal, it has already spun off one business that overlapped with Microsoft's own. On Feb. 4, the company announced it will shut down its music subscription service, moving customers to Rhapsody America. Microsoft has its own music subscription service associated with its Zune music player.
Federal Intervention Unlikely
Recent merger approvals from the Federal Trade Commission give cause for optimism that Microsoft's proposed acquisition will sail more smoothly in the U.S. On Dec. 20, the FTC announced (BusinessWeek.com, 12/20/07) it would not block Google's DoubleClick deal. The decision, which followed a green light for Microsoft's $6 billion acquisition of ad network aQuantive, brought the already dominant Google closer to extending its reach into online display advertising, a market Yahoo largely controlled. "It might be desirable to allow Microsoft and Yahoo to combine in order to be a stronger competitor to Google/DoubleClick," says Pate.
Indeed, even those who believe the deal could hurt competition see little chance of the federal government stepping in. Joseph Turow, a communications professor at the University of Pennsylvania, believes the recent consolidation of ad networks and the major search engines has concentrated control of the online advertising market among a handful of global conglomerates that can offer not only to serve ads to nearly everyone on the Web, but also to target those ads based on much of the information they put online. As a result, he says, all but the largest Web publishers will soon be unable to effectively compete on their own for the online ad dollars needed to support their sites, forcing them to sign up with a major portal. But the government has not stepped in, he says. "Either they don't get it or they don't seem to mind it," says Turow.
Some groups are still not giving up on blocking the merger, though they are appealing to Congress rather than the regulatory bodies that ultimately can stop the deals. Jeff Chester, executive director of the Center for Digital Democracy, has written letters to congressional leaders requesting an investigation into the merger. One hope is that members of Congress will put sufficient pressure on regulators to, at the very least, curb how the companies can combine their services and data on individuals. "It is tragic that we so quickly ended up with a duopoly for control of online advertising," says Chester. "The FTC has bungled it. They sanctioned Microsoft to grow larger and Google to grow large, and now we are left with a mess that the DOJ is certainly not going to be able to fix."