Microsoft ( MSFT) is terrified of Google's ( GOOG) plans to buy DoubleClick.

As well it should be.

Last week, the Redmond, Wash., software giant's push to block Google's proposed acquisition of ad-serving firm DoubleClick reached a fevered pitch. Microsoft's lawyers told a Senate subcommittee investigating the deal that a combined entity would violate antitrust laws and would make it that much harder for anyone to take on Google in the online ad space.

Unfortunately, for Microsoft -- and fortunately, for Google investors enjoying another 52-week high -- the software giant is probably only half right. Despite Microsoft's flurry to block the deal, a Google/DoubleClick combination isn't likely to be found to violate antitrust laws.

But much as Microsoft has been dreading, "GoogleClick" would occupy a prime position to further capitalize on the booming online ad market in which Microsoft has long been struggling.

While last week's courtroom theatrics made headlines, Microsoft has been working frantically behind the scenes to scuttle the Google and DoubleClick deal. Microsoft has hired a Washington lobbying firm and a public relations firm, and CEO Steve Ballmer and other top executives have placed phone calls to rally support, according to the blog SiliconAlleyInsider.

And along with AT&T ( T), Microsoft has funded a research paper written by the AEI-Brookings Joint Center for Regulatory Studies that agrees with its legal position against the deal.

While Google sees its purchase of DoubleClick as a move beyond the search-advertising market and into display, Microsoft's legal argument seems to be that the to-be-combined companies actually compete in the same market.

"If Google is allowed to proceed with this merger, it will also obtain a dominant gateway position over the other main type of online advertising, the nonsearch ads that are displayed on Web sites that we visit," Microsoft general counsel Brad Smith told the subcommittee. "Today, Google and DoubleClick are the two largest competitors in this area."

In other words, despite the notion that search ads, the type of contextual ads on other Web sites Google offers through its AdSense network and the rich display ads DoubleClick serves up on other Web sites are distinctly different, Microsoft is pushing the idea that online advertising is one large category.

The AEI-Brookings study presents what Microsoft sees as a key piece of evidence supporting its case: Surveying 200 online retailers about what they'd do if there was a significant increase in the price of one type of advertising, the study found that "a significant share of online advertisers would substitute among the three channels in response to relative changes in price."

Essentially, if advertisers are willing to switch from one style of advertising to another because one gets more expensive, the different types of ads must be pretty similar, the study argues.

But the problem with the study is that it only samples online retailers. While they're heavy users of online ads, their goals are much more straightforward and substantially different than those of a more general pool of online advertisers.

Instead of focusing on building a brand or inspiring curiosity about new products -- elements where having the rich sort of graphical advertising that DoubleClick serves is crucial -- most online retailers focus on selling products that are already available. The study -- and Microsoft's argument more generally -- may be correct when it comes to the limited world of online retailers, but fails for advertisers more broadly.

In reality, there's a big difference in how most advertisers use search, contextual and display advertising -- and how they'll use emerging forms like video and behaviorally targeted ads. And Google thus far has been confined largely to the world of search advertising.

"Yes, we forecast Google will sell $16.4 billion ads in 2007 (before DoubleClick), or roughly 40% of the $40+ billion in ads expected this year," wrote Susquehanna Financial analyst Marianne Wolk in a research note on Monday. "However, this is entirely driven by its 75-80% share of search spending. It has nominal share of the branded ad market where DoubleClick is a player." Susquehanna makes a market in Google shares.

Still, Microsoft's fears and frantic attempts to torpedo the DoubleClick deal show just how powerful Google's strategy is for charging into the display ad market. At the time the deal was announced, many commentators believed Google vastly overpaid when it shelled out $3.1 billion to outbid Microsoft for DoubleClick.

But if that were the case, Microsoft would be happy to see Google throw its money away, rather than spend so much on its own efforts to block the deal.

Despite some of its reaching allegations, Microsoft seems to know how much is at stake. "Given the nature and economics of online advertising, this concentration of user information means that no other company will be able to serve ads as profitably," Smith told the committee. "In short, it will substantially reduce the ability of other companies to compete."

If the deal goes through -- as it most likely will -- those are words investors should take seriously before betting on an online ad competitor and against a combined Google and DoubleClick.

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