Register Log in

Ministry of Innovation / Business of Technology

Microsoft tells Congress Yahoogle will own 90% of ad market

A subcommittee of the Senate Judiciary Committee heard testimony this morning …

A US Senate subcommittee heard testimony today about the competitive implications of Yahoo's recent deal with Google, which will see the company mix ads supplied by Google with its own on search result pages. In addition to two individuals who currently purchase search advertising, the hearings featured testimony from senior executives from the two principals involved in the deal, as well as Microsoft's top lawyer, Brad Smith. Their testimony presented radically different pictures of what constitutes competition in the search market, how this deal will affect that competition, and the ongoing negotiations between Microsoft and Yahoo.

The chairman of the Subcommittee on Antitrust, Competition Policy, and Consumer Rights, Herb Kohl (D-WI), opened the hearing by noting that Yahoo and Google combined control over 90 percent of the search market, and he raised the concern that the deal would "reduce Yahoo to nothing more than the latest satellite in Google's orbit." He also noted that Microsoft could testify regarding competition issues from experience; although he termed the company "reformed," he suggested that its activities in the '90s had "nearly quashed competition." Each of the executives was then allotted five minutes for direct testimony.

The groups fell into two camps. Yahoo's general counsel, Michael Callahan, and Google's chief legal officer, David Drummond, both testified that their companies' partnership would help maintain a competitive market. Callahan argued that the cash from the deal would be reinvested, making Yahoo a stronger company. "With all due respect to Google," he said, "we have every expectation of fighting them and winning." He also noted that deals of this nature weren't unusual in the search business. Prior to 2004, Yahoo had outsourced its search to Google entirely and only recently developed its own algorithm.

Drummond echoed many of his sentiments, indicating that Google planned to keep competing with Yahoo in other areas. The companies received support in this from Tim Carter of, who, whenever given the opportunity to speak, argued that search advertising, and internet advertising in general, remains a dynamic, competitive market.

Both Callahan and Drummond took their shots at Microsoft. Callahan flatly stated that dismembering Yahoo would be bad for competition. Drummond suggested that Microsoft's strategy had nothing to do with competition and everything to do with weakening Yahoo. He painted Redmond's resistance to the deal as arising out of nothing more than its fixation with his own company and suggested that Microsoft's continued monopoly in the desktop OS arena left it in a position where it could inhibit future development of the Internet as a platform.

Microsoft's Brad Smith, not surprisingly, had a very different take. He argued that the deal would essentially set a floor on search advertising prices as, whenever Yahoo didn't make sufficient profits from its own ad auctions, it would simply take Google's ads. Despite the fact that each company would continue selling its own ad space, and Yahoo's claims that the deal allowed it wide leeway to insert Google-supplied ads as it chose, Smith claimed this aspect of the deal would essentially create a single ad entity that controlled 90 percent of the market. Smith was backed up by Matthew Crowley, who handles marketing for AT&T's Yellow Pages. Crowley also predicted the deal would produce higher ad rates.

On the hot seat

Both of these perspectives were predictable heading in to the testimony, and there are elements of truth to each. It's impossible to tell how this deal will affect competition in this arena without knowing how search prices respond to an altered market, and whether Yahoo actually does invest the added revenue, rather than using it to polish its bottom line. As a result, some of the more interesting aspects of the hearing came when the witnesses were put on the spot during questioning.

Smith dropped the biggest bombshell by claiming that Yahoo's Jerry Yang had discussed the Google deal during negotiations with Microsoft execs. According to Smith, Yang claimed that the deal would essentially create a single entity that left Redmond on the sidelines—Smith used the term "monopolar." Callahan was at this meeting, and he testified that he didn't recall Yang saying what Smith attributed to him, which elicited a reminder that everyone was testifying under oath.

Orrin Hatch (R-UT) asked Smith why Microsoft, which had concluded an essentially identical deal with Yahoo in the past, didn't have competitive concerns about its own actions. Smith argued that it was now a different market, as Microsoft didn't have a search advertising division when it cut that deal. Smith also gave some perspective on what Microsoft hoped to gain by obtaining Yahoo's search property outright, suggesting that search required economies of scale and a critical mass of users to make sense. Merging the second and third place search properties, Smith said, "would create a more competitive market."

The Senate is unlikely to act in any way to block the Google/Yahoo deal, but it does have the ability to influence public perception, which can affect the response of regulatory agencies like the Federal Trade Commission. As such, the testimony was largely a platform for Microsoft to highlight aspects of the deal that should leave regulators troubled, while Yahoo and Google got the chance to push regulators to let the agreement sail through without restrictions.

Based on these goals, it didn't appear that either side landed a knockout blow, but the circus isn't over yet. Instead, it's packing up all three rings and heading over the House for a similar hearing on a similar issue this afternoon.

Expand full story

This article does not have a comment thread.

Need to register for a new account?

If you don't have an account yet it's free and easy.