News

Google-Yahoo Ad Search 'Monopoly' Gets a Hearing

• By Kurt Mackie
• July 16, 2008

The deal, publicized in April, would have Yahoo host search text ads from Google in exchange for a share of ad revenues. It is strongly opposed by Microsoft.

Yahoo has estimated the revenues from such an agreement with Google would range from $250 million to $450 million "in the first year," according to Senate Committee testimony given by Michael J. Callahan, Yahoo's executive vice president and general counsel.

Although the main topic was the Google-Yahoo deal, Microsoft's six-month struggle to buy all or part of Yahoo loomed in the background of the hearings. Microsoft's unsolicited bid for Yahoo became public knowledge on January 31, but it has been a point of contention ever since. Microsoft currently wants Yahoo's search business to boost its lagging numbers in the search market, currently positioning it in third place.

Google holds the No. 1 position in Internet search use, with a 70 percent market share. Yahoo is in second place with 20 percent of search use. Microsoft trails both companies with 10 percent of search use, according to the testimonies.

Microsoft's Objections
Google's lead in search and its potential teaming with Yahoo has caused Microsoft to cry foul. The deal would monopolize search advertising by aggregating "90 percent of all search advertisements sold in this country," contended Brad Smith, Microsoft's senior vice president and general counsel.

Google already has a market lock, with "approximately 70 to 75 percent of search advertising revenue," Smith told the Senate Committee, according to a published transcript. He estimated that "in just 10 years or so, Google has amassed a market capitalization of around $166 billion, nearly all attributable to its search advertising business."

Smith contended that the Google-Yahoo deal will amount to price fixing because the two companies will be determining an "illegal price floor" for ad costs. He also questioned Yahoo's control of consumer online browsing behavior, saying that "Google has shown a willingness to push the line when it comes to privacy."

Smith concluded that the Google-Yahoo deal may be illegal under antitrust laws, but he prefaced his statement by noting an obvious irony, since Microsoft maintains near monopoly market control with its operating systems and productivity suite software.

"I am fully aware that the presence of Microsoft at this hearing must strike some as ironic, given our own antitrust history," Smith said. "There also is no doubt that we have an interest here as a competitor to Google and Yahoo."

Pricing Monopoly
If that irony wasn't apparent, one of the witnesses against the Google-Yahoo deal was AT&T. The telephone company was busted up at least two times in its history by U.S. regulatory authorities for antitrust monopoly violations. AT&T was originally known as a "natural monopoly" back in the late nineteenth century, although it has greatly morphed since that time and lost its nation-wide local exchange carrier market control.

Testifying against the Google-Yahoo deal was Matt Crowley, chief ad product and marketing officer for Yellowpages.com, an online search firm owned by AT&T. Crowley noted that AT&T is also a partner with Yahoo, which provides Internet portals for AT&T's "14 million broadband Internet customers and more than 70 million wireless customers."

Crowley said advertisers have just two choices in the search ad market: Google and Yahoo. He added that Microsoft "simply lacks the scale and capabilities of Google and Yahoo! in this area and has been losing ground."

Crowley objected to the pricing system used by Google and Yahoo for search ads, calling it "opaque." A lack of competition between the two would undercut advertisers' bargaining positions, especially for small and medium-size companies. Google and Yahoo currently determine search ad pricing through so-called "auctions," but Crowley called that term "misleading" because the two companies control the number of ad slots and set the minimum bid prices.

That ad pricing scheme was described differently by David Drummond, Google's senior vice president of corporate development and chief legal officer.

"Google does not control the prices charged to an advertiser when a user clicks on a Google ad," Drummond told the Senate Committee. "Rather, advertisers themselves determine prices through an ongoing competitive auction for particular keywords."

Drummond described the Google-Yahoo deal as "non-exclusive," saying that Yahoo could enact similar deals "with any other company, including Microsoft." He said that Google does not need antitrust approvals to proceed with the deal, although Google and Yahoo have kept the Department of Justice informed since running a two-week test in April.

Moreover, Drummond depicted a past history for such cooperation.

"Yahoo! used Google's search engine to generate its search results until 2004, when Yahoo! transitioned to the search engine that it had developed," Drummond said. "Through an ad company it acquired called Overture, Yahoo! also supplied advertising for Microsoft's search site until 2006, when Microsoft phased in its own system."

Drummond also pointed to Microsoft's dominant position in other markets, saying that "Microsoft has a long history of abusing and extending its dominant positions through anticompetitive practices."

Yahoo's Callahan claimed that Yahoo isn't abandoning search to Google and that the deal will simply let Yahoo replace "our least valuable ads" with the more valuable ones sold by Google. He disputed the price-fixing claim because ad rates are set by "fair market-based auctions."

Audio and Transcripts
For video and full transcripts of the July 15 Senate Judiciary Committee hearings on the Google-Yahoo deal, go here.

Audio playback of the House Judiciary Committee hearings on the matter, titled "Task Force on Competition Policy and Antitrust Laws," can be found here (requires RealPlayer).