|Because Yahoo! and Microsoft's partnership gives super heavyweight Google more competition, antitrust watchdogs may find the deal more acceptable than a merger.|
SUNNYVALE, Calif. ( TheStreet -- After more than a year of talks and rejections, Yahoo! ( YHOO) and Microsoft ( MSFT) have finally struck a deal on Internet search. Now here comes the antitrust scrutiny. The plan calls for Yahoo! to use Microsoft's Bing search engine and collect 88% of the advertising revenue for the first five years of the 10-year pact. Yahoo! expects to use the search data to create display ads more targeted to search topics. The company expects it will add $500 million to its operating income. For Microsoft, which failed in a $44.6 billion takeover offer of Yahoo! last year, the deal will roughly triple its search traffic volumes. Microsoft will run the mechanics of the search operations and have access to a vast amount of search data to better compete with No. 1 Google ( GOOG) and presumably Yahoo! in targeted display advertising. "This will put two 800-pound gorillas in the ring together," says Stephen M. Axinn, antitrust lawyer with Axinn, Veltrop & Harkrider. The move combines the No. 2 and No. 3 players in the search industry, an equation, as Sprint ( S) and WorldCom discovered, that typically doesn't fly with antitrust regulators.
But since the plans call for Microsoft's Bing to run searches on Yahoo!'s popular Web sites, the deal becomes more of a product and services strategy to compete better with Google, and possibly less objectionable than an outright merger of Yahoo! and Microsoft. Yahoo! CEO Carol Bartz cast the combination as an advantageous development for consumers and advertisers, during a conference call Wednesday.
"This is a single platform and a single competitive alternative in search," says Bartz. Microsoft CEO Steve Ballmer echoed Bartz's comments on the call. "Consumers will really get better products, and advertisers will get better returns on their investments," Ballmer said. The timing of the deal comes as new Justice Department chief Christine Varney has vowed to examine some of the competitive fallout from a prior regulatory era when business deals went largely unchallenged. Antitrust experts see this as the first high-profile test of Varney stance on competition and industry consolidation. Varney has already taken aim at Google's book-scanning deal with publishers, and Justice has reportedly started an informal inquiry into large telco mergers that helped create behemoths like AT&T ( T), Verizon ( VZ) and Sprint. Bartz and Ballmer said they expect some resistance and scrutiny as they try to close the deal by early next year. "We expect the competitor to be aggressive," said Ballmer, referring to Google, which has about 64% of the search industry marketshare. As for regulators, Ballmer said: "We think we have a good case." Microsoft lawyer Brad Smith said the companies would start filings with regulators in Washington next week. "Microsoft has a checkered antitrust history," says Axinn, a former consultant to the Justice Department. The agency will be looking closely at whether Microsoft could used this search deal to further exert its power as the dominant PC operating system player. "This issue will be raised not just in Washington but also with the European Union and where ever else you find Microsoft, Yahoo! and Google," says Axinn.
Antitrust officials will likely force Microsoft to promise that it won't tie its search services to its operating systems like it has in the past with the Internet Explorer browser. "If Microsoft doesn't agree," says Axinn, "the government will keep them locked up in investigations for years." Reported by Scott Moritz in New York