Yahoo-Google's search outsourcing pact: the fine line between collaboration and collusion

Interested observers in the Microsoft-Yahoo-Google-AOL-Ask.com-MySpace incestuous soap opera called search advertising, would be wise to bone up on the fine line between acceptable industry collaboration and illegal collusion, if recent reports prove true.

• The Wall Street Journal reports that Yahoo may be days away from announcing "an agreement to carry search advertisements from Google.." and that Google feels "that the upside is much greater than the potential downside" from the arrangement."  
• The Financial Times broke the story that the Department of Justice was investigating Google's interaction with Yahoo and that "the prosecution of collusion is a top priority."     

The fine line between collaboration and collusion. 

First, while many may be aware that a Google-Yahoo outsourcing deal "would likely attract intense antitrust scrutiny" there is precious little analysis on this linchpin issue -- hence the genesis of this piece.

I believe the pattern of Google becoming the outsourced search engine for most all of the Internet -- save for a few properties -- is one of the most important and least understood competitive Internet issues.  

• The underappreciated facts here are that if Google outsourced Yahoo's search -- Google would be a key revenue driver of the #1, #2, #4 and #5 search engines encompassing 90.6% share of those search engines share per Comscore.  
  • Google's dominance of search advertising would actually be even greater than that 90% figure, because Google outsources search for the world's largest social networking company, MySpace, and also is the only major outsourced search engine for the long tail web properties -- which number in the hundreds of thousands.
    • (See my Googleopoly analysis for a more in-depth analysis of Google's dominance of search or see the FTC decision on Google-DoubleClick where the FTC concluded
      • "...search engines provide a unique opportunity for advertisers to reach potential customers." and
      • "Google, through its AdWords business, is the dominant provider of sponsored search advertising..."

Second, this Google-Yahoo outsourcing deal has ongoing, long-term implications. Many investors will assume, probably incorrectly, that if Google was communicating with the DOJ and still goes ahead with the Yahoo outsourcing pact, that Google must be free and clear -- having gotten a "nod and wink" that all would be ok with the arrangement.

• Let's test that assumption. 
  • DOJ antitrust prosecutors are not in the business of providing legal advice and counseling about how a #1 company in a market can engage in an outsourcing deal with the #2 company and not get in antitrust trouble. 
  • They are in the business of criminally prosecuting anti-competitive collusion under Section I of the Sherman Antitrust Act. 
    • Any substantive analysis of this assumption would prove it false because no honest prosecutor would provide the investigated party with intelligence and information that could be used to thwart an official investigation or a prosecutor's case.
• Let's test another assumption -- that if Google goes ahead, it has passed the threshold and is free and clear going forward. 
  • Contrary to conventional wisdom, there is no double jeopardy, statute of limitations, or legal time limit on investigations -- involved here. 
  • And DOJ guidelines also warn that any business arrangement that may begin as legal can become illegal at any time depending on new facts.  
• Let's test yet another assumption  -- that the Bush antitrust division has proven to be historically lax and Google-DoubleClick got approved 4-1 -- so there's little to be worried about here. 
  • First, this is not a merger review, but a Sherman Section I collusion/restraint of trade issue, which this Administration has made a priority to prosecute.   
  • For those that have forgotten there is a Presidential election going on, and a potential Democratic Administration would be expected to be tougher on antitrust issues than the current one, and any current arrangement could be re-investigated at any time as the facts change -- and facts always do change over time as markets evolve either in a competitive or anti-competitive direction.

Third, Google's own Code ofConduct warns against what Google is proposing with Yahoo. 

• "Most countries have laws designed to encourage and protect free and fair competition. Generally speaking, these laws prohibit 1) arrangements with competitors that restrain trade in some way..."
• "Some real life things to be cautious about include:
  • sharing of competitively sensitive information (e.g., prices, costs, market distribution, etc.) with competitors..."      
    • What information could possibly be more competitively sensitive than an inside assessment of whether your main competitor: can succeed, thinks it can compete, or how it evaluates its competitive options to maximize its monetization capability?
    • The timing and critical sensitivity of these discussions at this juncture could hardly be more "competitively sensitive." 

  Fourth, the DOJ is not going to get involved in an investigation of complex computer algorithms in such a fast-moving dynamic marketplace like the Internet.

  • Not so fast... there is clear precedent of the DOJ investigating an anti-competitive algorithm in the Sabre airline reservation system, which was found to be skewing "screen presence" anti-competitively.  

  Fifth, Google is arguing that they can structure an outsourcing deal with Yahoo so that it is not anti-competitive because they won't make it an exclusive arrangement or officially tie Yahoo to the arrangement. They view these adjustments, as an effective "get out of jail free card." 

  • This is a critically important point that no one should miss here.
  • Google says it has learned from the Microsoft or Dell experience to not engage in exclusives, tying arrangements or locking down information.
    • That is all well and good -- and wise too.
    • However, is it sufficient to avoid a charge of anti-competitive illegal collusion?
      • It may not be.
      • That's because Google has accumulated so much scale and scope as the retail search leader and also as the only major wholesaler of search services to the #4, #5 competitors, MySpace and ~90% of the long tail outsourced search market, that Google has already achieved near monopoly scale and scope efficiencies -- in having the largest user base in the world -- the largest advertiser network in the world -- and the largest website publisher network in the world.
      • The core question for the DOJ, is it an anti-competitive restraint of trade if Google tries to encourage its leading competitor in search and display advertising, to pull back from competing with Google and allowing Google to subisidize Yahoo -- so that it no longer is in Yahoo's interests to compete against Google because Google has agreed to share part of its monopoly profits with Yahoo?
      • In my opinion, if the DOJ does not ultimately have serious problems with this attempt by a #1 competitor to coopt a #2 competitor to attack a substantially weaker #3 competitor, in such a highly concentrated market, the DOJ is asleep at the switch.
        • As I explained in my testimony before the Senate Judiciary Committee on the Google-DoubleClick merger, the stakes are extremely high, because Google is becoming the de facto monetization engine for most all online content in world.   

Bottom line:

If Google is genuinely worried about getting the reputation of being the "next Microsoft" in terms of antitrust, Google should be looking to avoid brushes with antitrust authorities instead of "chumming shark-filled waters" like they are with such a public intervention on such a high-profile transaction as Microsoft-Yahoo. 

To use another metaphor, when you hang around and make camp at the edge of a swamp, you risk getting mired in the swamp permanently, because it always rains.

• What is Google thinking?
• There's no "upside" in proactively miring onself in the antitrust swamp.