Why EU's concerned with a Google-Yahoo pact -- Google is close to monopoly share in Europe

A Yahoo-Google search outsourcing pact arguably faces even more problems with European antitrust authorities than the reported U.S. DOJ antitrust investigation, for two reasons:

• First, this Yahoo-Google pact represents a horizontal market problem of collusion between leading direct search competitors; this is very different from the recent approval of the Google-DoubleClick merger, which was a vertical merger where DoubleClick was not found to be an actual direct competitor of Google.
  • (Yahoo is universally viewed as one of Google's top two direct competitors.)  
• Second, the market facts of search concentration in Europe put Google perilously close to the unofficial definition of a monopoly, which is 90% share of a market. 
  • Comscore just reported that "8 of 10 European searches occur on Google sites." 
    • (Specifically, #1 Google sites have 79.2% of all European searches, #2 eBay has 3%, #3 Russian Yandex has 2.2%, #4 Yahoo has #4 at 2%, and #5 Microsoft has 1.9%.)
  • According to Yahoo, it believes Google can generate 60-70% more revenue per search than Yahoo. 
    • That is powerful evidence/admission by Yahoo that Google enjoys massive "network efects" i.e. the strong get stronger because more searches means more publishers, means more advertisers, which in turn means more revenue share for Google. 
    • What this means in an antitrust context is that Google already has more than 90% share of search advertising revenues in Europe -- i.e. a monopoly position -- even though it is not an official finding of fact -- yet. 

A helpful story I use to explain to non-experts what is legal and illegal in antitrust is the metaphor of a horse race.

• There is nothing illegal with having the fastest horse or steadily increasing one's competitive lead by virtue of one's own superior skill or effort in the competitive race.
• What is illegal however, is any effort by a company leader with monopoly market power, to try and slow down or stop any competitor from ever catching the leader, which can include paying or "partnering" with a leading competitor in order that that leading competitor competes less with the leader.

The huge under-appreciated risk to Google of pursuing this outsourcing pact with Yahoo is that it provides the official and actual impetus for competitors to file an antitrust case against Google that could result ultimately in Google being legally found to have search monopoly market power and to have exercised it anti-competitively. 

• EU: The EU in its Google-DoubleClick decision justified approving the merger in part because of "credible" vertically-integrated competitors like Yahoo.
  •  "The Commission found that the merged entity would not have the ability to engage in strategies aimed at marginalising Google's competitors, mainly because of the presence of credible ad serving alternatives to which customers (publishers/advertisers/ad networks) can switch, in particular vertically integrated companies such as Microsoft, Yahoo! and AOL."
• FTC: If people view the recent FTC (4-1) and EU approval of Google-DoubleClick as evidence that Google is "OK" with antitrust authorities, they are badly misreading the facts and the situation.
  • The FTC majority in its 4-1 approval of Google-DoubleClick in December warned Google:
    •  "We want to be clear, however, that we will closely watch these markets and, should Google engage in unlawful tying or anti-competitive conduct, the commission intends to act quickly."
  • For example the FTC majority acknowledged in its Google-DoubleClick decision that:
    • "...search engines provide a unique opportunity for advertisers to reach potential customers."
    • "Google, through its AdWords business, is the dominant provider of sponsored search advertising..."
  • Democratic FTC Commissioner Liebowitz effectively concluded that Google has  market power -- "...given Google's existing market power, presents serious competitive concerns."
  • Independent FTC Commissioner Jones-Harbor was concerned that the FTC staff/majority basically ignored the very real problem of "network effects".  

At Google's sharholder meeting yesterday Google officials were reported by the San Francisco Chronicle saying these statements that should raise antitrust eyebrows:

• "Sergey Brin, Google's co-founder, said Thursday that his company tried to help Yahoo remain independent by offering it an advertising partnership during the three-month acquisition battle."

• San Francisco Chronicle: "A deal would reshape the Internet landscape by making the No. 1 and No. 2 search engines partners, putting to rest years of rivalry." [bold added]

• "Brin said that he hopes a Yahoo deal can be reached and that it will be as broad as possible. The companies have a good cultural fit, he said, as well as shared roots stretching back to Stanford University, where both companies got their starts as student projects."

  • The desire for a "broad" deal and the allusion to the "good cultural fit," a phrase one usually reserves for mergers or takeovers, will concern antitrust officials.

• "Google CEO Eric Schmidt said Thursday that if a deal were to be finalized, it would be done in a way that would mollify regulators. "

  • Of course Google will try and construct the pact in a way that in Google's judgement will mollify antitrust authorities. Duh.

  • What Mr. Schmidt did not share is that it is not the job or responsibility of antitrust authorities to counsel companies how to construct outsourcing deals to only go up to the very edge of the law, but not surpass it.

    • Don't forget, these are prosecutors with very tight lips and who ethically and professionally will not divulge to Google anything in private that would potentially aid Google in fighting the DOJ, if ever the DOJ or the EU decided to bring an antitrust suit against Google.

    • What observers and investors really have to judge is Google's judgement trustworthy on what it can and cannot do concerning antitrust?   

Bottom line: as I warned in previous posts on this topic, here, here, and here and in my Googleopoly analysis and my Senate Judiciary testimony on Google-DoubleClick, Google is behaving in a way that it is almost guaranteed to become the next central focus of antitrust authorities going forward.   

• I continue to be amazed that Google does not appreciate how it is their behavior and their actions in the marketplace, not those of any other entities, that are attracting antitrust scrutiny -- like bees to honey.
• Google remains oblivious to the fact that Google is it's own worst enemy.