Microsoft-Yahoo deal no lethal threat to Google death star
February 12, 2008
WASHINGTON -- It's hard to imagine that a $42-billion (U.S.) pile of cash would ever be deemed insufficient.
But that's essentially what Yahoo's board told Microsoft yesterday in rejecting its unsolicited bid to acquire the Web giant.
And yet, oddly enough, it isn't about the money. Microsoft has deep pockets, and will almost certainly offer more. Yahoo, without many viable alternatives, may be hard-pressed to resist a richer overture.
No, this takeover is about control of the Internet. One company has emerged as the titan, and everyone else is playing catch-up.
And for once, Microsoft is not the bully. Google is.
Flash back a decade, to early 1998. It was Bill Gates and Microsoft against the world. The U.S. Justice Department, 20 state attorneys-general, European regulators, and an army of high-priced lawyers hired by Microsoft rivals Netscape, Oracle and Sun were out to stop Darth Vader from dominating the emerging Internet business.
The experience left Microsoft badly bruised. The company narrowly escaped a forced breakup, eventually paying $6-billion in penalties and settling the case out of court after a wrenching legal battle with U.S. and European regulators.
Distracted, Microsoft would watch helplessly as Google and Yahoo came along to dominate the lucrative Web advertising business.
This time around, Google is the outsider, eyed with suspicion by everyone, including antitrust regulators, politicians and its rivals.
Microsoft has spent a decade preparing for this battle. Since the browser wars, Microsoft has spent heavily currying favour in Washington, and learning to play the spin game.
Microsoft has cleverly recast itself as competition's friend. A Microsoft-Yahoo tie-up, far from being uncompetitive, would actually "create a more competitive marketplace," Microsoft chief counsel Brad Smith has argued.
In other words, the Internet needs this deal to create a viable No. 2 competitor to keep Google from gobbling up all Web advertising. Yes, it's acquiring a competitor, but a bigger Microsoft would actually create a counterweight to Google's existing anti-competitive market position, Microsoft argues. So Google can squawk all it wants about how Microsoft and Yahoo would dominate in e-mail (Hotmail and Yahoo Mail), text messaging (Windows Live Messenger and Yahoo Messenger), as well as in control of various Web portals. Or grouse that Microsoft virtually owns the operating system and browser markets.
That's not where the money is these days. It's in advertising.
Google is the dominant player in Web advertising, thanks to its commanding 60-per-cent share of all searches - the way most people find what they're looking for on the Internet. Google gets paid handsomely to deliver up those links you see every time you do a search. Combined, Microsoft and Yahoo (or MicroHoo as some are calling the would-be combo) would have just 16 per cent of the search market.
Google has an even more commanding share - 75 per cent - of paid search revenue worldwide, according to Microsoft. And the business is enormously profitable ($4.2-billion profit on $16.5-billion in revenue in 2007).
What's more, Microsoft has lost an estimated $2-billion on its various online businesses - proof that just owning heavily visited websites doesn't equate to market clout.
"For consumers, a stronger competitor for Google could be a good thing for the online advertising space," said David Hsu, a management professor at the University of Pennsylvania's Wharton business school.
"A different competitor is always going to put downward pressure on prices."
So it's a bit hard to swallow when David Drummond, Google's chief legal officer, complains that Microsoft's M.O. is to establish proprietary monopolies. Mr. Drummond suggested that if the merger happens, Microsoft might try to "exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC."
Microsoft might well covet that kind of clout. But right now, Google is the one holding all the cards. Proof of that is that a bid of its own for Yahoo would almost certainly be blocked by regulators.
There certainly will be antitrust issues for regulators to chew on in this deal. The U.S. Congress is already planning hearings and the Justice Department is gearing up to review the merger.
But, on balance, it's hard to see how a Microsoft-Yahoo marriage would substantially lessen the competition that really matters. It's apparently too late for that.