Regulators Likely to Green-Light Microsoft, Yahoo Deal

Now that Microsoft (Nasdaq: MSFT) and Yahoo (Nasdaq: YHOO) have finally come to terms on how they will work together to gain turf in the search advertising market, they must convince antitrust regulatory authorities both in the U.S. and in Europe that their union will create more competition -- not less.

That will be no easy task -- a fact that executives from both companies have acknowledged.

Indeed, the dark cloud that formed last year over a proposed Yahoo-Google search advertising partnership has not quite dispersed. That endeavor was derailed following pointed inquiries from the Department of Justice.

Two to One

Still, there is a sense that the Microsoft-Yahoo deal will eventually get a thumbs-up, mainly because even combined, the two are a puny adversary for Google (Nasdaq: GOOG).

Google still has a two-to-one advantage over them in terms of market share, Chris Karagheuzoff, a partner in Dorsey & Whitney's trial group, told the E-Commerce Times.

"The Google Yahoo deal was a case of Goliath getting even larger," he said. "This time, Yahoo and Microsoft are going up against Goliath -- and even combined they are no David."

What the Department of Justice will ultimately weigh, Karagheuzoff predicted, is whether the partnership will improve the search experience for users and advertisers and whether combining Microsoft and Yahoo will present viable competition to Google.

"I don't see any serious antitrust issues," Keith N. Hylton, a law professor at Boston University, told the E-Commerce Times.

"Microsoft, before this deal, has been a fringe player, at best, in the online search market, and Yahoo is small in comparison to Google. The theory behind this team-up is that they can make a more effective competitor against Google if they are combined. If true, that's obviously good for competition. If it's not true, then nothing has changed."

It's too simplistic to argue that the Yahoo-Microsoft deal will reduce the number of major players from three to two, Hylton said.

"If you talk only about the number of players, you can always make an argument about anticompetitive effects in any merger scenario," he pointed out. "There should be some effort to consider the competitive strategies of these firms."

Obama Administration's Stance

The Obama Administration is taking a harder line on antitrust issues than in the past, which could prove to be a wild card, noted Ryan Radia, information policy analyst with the Competitive Enterprise Institute, although he's also convinced that the deal will go through.

"Antitrust administrators are looking to make headlines now," Radia told the E-Commerce Times, pointing to investigations he dubbed "dubious," such as the probe into the Google book deal or the inquiry into Silicon Valley employment practices.

"The latest line of attack is that lack of regulation and enforcement is behind the recession," he said.

The Obama administration is going to heavily scrutinize the deal, expects Kendall Millard, a partner in Barnes & Thornburg's antitrust practice group.

"Both Christine Varney, the assistant attorney general for antitrust, and Jonathan Leibowitz, the chair of the FTC, have indicated their intent to scrutinize mergers more than the previous administration," Millard told the E-Commerce Times, "and the burden will be on Yahoo and Microsoft to convince them this merger will increase rather than decrease competition."

European Pushback

A bigger question is what the European regulatory authorities will do, suggested Dorsey & Whitney's Karagheuzoff. Europe's approach to competition is different from the United States -- indeed, some would argue it has distinct protectionist leanings.

"It is said that the EU is vigilant in protecting the competitive interests of European companies -- not just competition per se," he said, "so it is conceivable that we will see a different outcome over there."

Microsoft has been battling EU antitrust charges for years, CEI's Radia noted, with the most recent involving accusations that it violated EU antitrust law by bundling Internet Explorer with its Windows operating system.

"It is going to be more of a problem over there than with U.S. regulatory authorities," he predicted.