Venture to face regulatory scrutiny

Microsoft’s landmark search alliance with Yahoo would face much stiffer scrutiny from regulators than generally expected, antitrust experts warned on Thursday.

The most intense interest will come from Washington. Brussels, which has taken the lead in reining in Microsoft since the US resolved its most recent antitrust action in 2001, is set to take a back seat.

The companies painted their alliance as the only realistic chance to create a viable alternative to Google in the increasingly important search advertising market. Already the biggest part of the online advertising business, this is set to continue to expand in significance, growing by 15 per cent a year to reach $30bn in 2014, to says Forrester Research.

According to Microsoft and Yahoo estimates, Google has 77 per cent of search advertising in the US and more than 90 per cent in Europe – larger than its market share in search, given its greater skill at turning searches into cash.

“This is really about going from one to two when it comes to having long-term sustainable competition in the search marketplace,” said Brad Smith, Microsoft general counsel.

“Neither Microsoft nor Yahoo alone could look at a future over the next decade with the kind of ability for sustained profitable competition that this now gives us the opportunity to create.”

That is a claim that is likely to be taken with a large pinch of salt at the Department of Justice.

As Microsoft has shown over a number of years, it has been prepared to pour large amounts of money into its own efforts to catch up with Google.

Steve Ballmer, chief executive, has repeatedly insisted that Microsoft will invest whatever is needed over the long term to catch up with Google.

Mr Smith’s claim that Microsoft needs a merger with Yahoo to become a viable competitor “is a plea that will fall on deaf ears” in Washington, said David Balto, a former DoJ official.

“Microsoft is not some also-ran that needs help from the antitrust division to stay competitive in the market,” he said.

Antitrust experts pointed to a case involving a proposed merger of baby-food companies as evidence that US regulators sometimes oppose a combination between number two and three players in a market, even when the market leader is dominant.

In that case, the Federal Trade Commission blocked Heinz from buying Beech-Nut, even though the two would still have had far less clout than Gerber, which accounted for two-thirds of the market.

That case remains controversial, and other similar cases have gone the other way – most notably Oracle’s successful resistance of a DoJ attempt to block its acquisition of PeopleSoft to become a stronger competitor to SAP in business software applications. Yet it suggests that Microsoft will face some tough questions in Washington.

European regulators were also likely to use the case as an the opportunity to take a closer look at search advertising for the first time, said Stephen Kinsella, a partner at business law firm Sidley Austin.

He added that Brussels was highly unlikely to raise any concerns, particularly given Microsoft and Yahoo’s very small market shares in Europe. “This is one of the few areas where the US takes a stricter line,” than Europe, he said.

In cases were the US has objected to the formation of duopolies, its concern has generally been about the risk of collusion between the remaining players in the market, said Mr Smith.

“I don’t know of anyone who thinks there is any possibility that Microsoft and Google would collude about anything.”

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