Talk of anti-trust issues in the Yahoo deal with Google is overblown

Yesterday, representatives of the Holy Trinity of Search arrived on Capitol Hill: Google, Microsoft and Yahoo. They had been called upon to discuss the anti-trust implications of Yahoo’s search deal with Google. As would be expected, there was a lot of huffing and puffing on all sides. The big highlight according to the Merc’s man in D.C., Frank Davies, was when Microsoft general counsel Brad Smith claimed that Yahoo CEO Jerry Yang copped to the fact that the deal would violate anti-trust rules:

Yang “looked us in the eye,” Smith said, and told Microsoft executives, “The search market today is basically a bipolar market. On one pole there’s Google, and on the other pole there are Yahoo and Microsoft both competing with Google. If we do this deal with Google, Yahoo will become part of Google’s pole, and Microsoft would not be strong enough in this market to remain a pole of its own.”

That apparently had Yahoo’s folks spitting up their milk through their nose. But no matter. Because it’s an overly simplistic reading of anti-trust rules to assume that such a scenario would violate competitive rules. And that’s because anti-trust isn’t really measured in the way many of us assume.

I had this same reaction earlier this month when The Washington Post reported that regulators had opened a “formal” probe into the deal. Of course, they hadn’t. The story concluded that because the Justice Department had issued “civil investigative demands” for information from third parties, that the investigation had been taken up a notch. But while the story quotes a couple of attorneys to buttress its argument, it’s still not correct.

A few years ago, I had the good fortune (or misfortune depending on your view) of covering Oracle’s hostile takever bid for PeopleSoft. The fight included a hostile tender offer and a long, drawn-out fight with the Justice Department which sued Oracle to block the deal. Justice argued that there were three main companies that sold business software, including Germany’s SAP. And that this would deal would make the market un-competitive because there would only be two players left.

Oracle took the radical step of fighting back in court, and won. In following that case, I spent a lot of time examining the anti-trust regulations. And this brings me back to the current Yahoo-Google deal, and why I don’t think it raises any anti-trust issues.

Our instincts tells us that if there are fewer companies in a market, then there is less competition. But that’s not necessarily so, according to federal anti-trust regulations. Even if there was only one company left in a market, the question then is whether that company has market power and can unilaterally raise prices, or do something else that would be considered harmful to consumers.

In this case, I don’t think Google can do that. Even though it’s the 800-pound gorilla of search now, it’s search market operates as a kind of auction house, with customers who have search accounts essentially bidding on placement and then paying by the number of clicks their text ads receive. And being connected to Yahoo’s network won’t give Google any additional leverage over what it charges customers.

Next, while the discussion around search tends to focus on the big three, there are an enormous number of other players in the market, albeit much smaller.

Beyond that, though, the deal between Google and Yahoo is relatively small. Yahoo is essentially taking parts of its search terms where it tends to do poorly, and allowing Google to compete to run ads. If Google has relevant ads that pay more than Yahoo, then Google ads would appear rather than Yahoo ads. But that arrangement is not exclusive. Yahoo could sign a deal to allow other companies to compete to substitute their ads in those same areas.

It’s also worth remembering something else about Google. While it’s getting all the love these days, it specifically dominates the category of text ads and search. It’s made little headway in the area of display advertising, an area where Yahoo is stronger. So when you look at the overall online advertising market, Google owns a big chunk of it, but mainly in that one area. Like most other companies, it also doesn’t seem to have a clue about how to make money off of its online video site, YouTube.

Finally, let’s go back to the “civil investigative demands” or CID. For some context, remember that so far, the review of this deal is voluntary. Yahoo and Google approached the Justice Department and gave them a heads up the deal might be coming. And when it did happen, they volunteered to put in on hold until there was a review. But otherwise, the deal itself would not have triggered an automatic review, unlike a full-scale merger of Microsoft and Yahoo would.

As part of the voluntary nature of this, Google and Yahoo are providing the Justice Department with tons of information. But what if the Justice Department needs info from, say, Microsoft? They didn’t volunteer to be part of this, and neither did a host of other third-party companies. But if Justice is reviewing the deal, then it should be no surprise that it needs to get info from these other folks to understand the dynamics of this market. And the standard way to do that is to issue CIDs. Why? First, a CID compels the company to turn over the information. But second, CIDs come with a promise to keep that information secret, so it doesn’t spill into the open marketplace. That’s designed to give these third-parties some peace of mind.

So no one should be surprised about the use of CIDs. And it’s no sign that the investigation has been escalated. And when this is all said and done, I have no doubt Justice will give its blessing and our lives will go on.

Of course, this all may only matter a couple more weeks. After Yahoo shareholders vote on Aug. 1 and shareholder activist Carl Icahn takes over, then there will be some kind of deal with Microsoft that may make this particular anti-trust review moot.

 

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