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Calling Yahoo's Bluff -- How real is the Google outsourcing option? Not!

In reading most all the major press reports on the Microsoft-Yahoo bid, there has been plenty of reporting on the personalities, the price and the process, but precious little analysis of the core assumption whether Yahoo truly has a credible alternative strategic option -- in outsourcing its search to Google. 

  • One can't get a true handle on the likely endgame of this transaction without a more rigorous testing of this outsourcing pillar assumption:
    • Is outsourcing Yahoo's search function to Google a viable and real strategic option given recent antitrust concerns?
  • No. Upon close examination of the facts, this alternative is a weak bluff by Yahoo at best -- designed to buy time and create the perception that Yahoo has more maneuvering room than Yahoo really does.

Would antitrust officials allow Yahoo to outsource its search function to Google? Highly unlikely. 

  • #1 Google has ~75% of search advertising revenue share and #2 Yahoo has 11% share per the FT-- so a "partnership" transaction outsourcing Yahoo's search to Google would consolidate 85+% revenue market share in a de facto FTC-defined relevant antitrust market.
  • Listen to what The Federal Trade Commission (FTC) just concluded after investigating the search and online advertising markets intensively in 2007: 

    • Effectively that "sponsored search advertising" is a highly concentrated separate market in that:

      • "search engines provide a unique opportunity for advertisers to reach potential customers." (P. 3)

      • "Google, through its AdWords business, is the dominant provider of sponsored search advertising..." (p. 3)

      • "Unquestionably, Google is the most popular search engine on the Internet today by almost any metric. As a result, it has a high market share in sponsored search advertising." (p. 9)

    • This strongly suggests that the FTC would view a "partnership" between the #1 and #2 providers in the defined market of "sponsored search advertising" as anti-competitive market collusion that would fall under their warning in the last sentence of the FTC's statement on Google-DoubleClick:

      • "We want to be clear, however, that we will closely watch these markets and, should Google engage in unlawful tying or other anticompetitive conduct, the Commission intends to act quickly." (p. 13)

  • Given that one of Yahoo's main reasons for staying independent was that it thought there was synergy between search and display advertising, outsourcing Yahoo's main value creation engine, search advertising, to Google would undermine its own definition of "independent."

  • What did the FTC say in its Google-DoubleClick statement that is relevant to how they would view a Microsoft-Yahoo combination?

    • The FTC concluded that Google, Yahoo,Microsoft, AOL and others are part of the broader ad intermediation market and that: "The evidence shows that this evolving market is at most, moderately concentrated." (p. 5)
    • Moreover in response to those who have raised a potential red flag over the concentration of Yahoo's leading display or contextual advertising share and Microsoft's contextual ad share have not read the FTC statement on Google-DoublClick which concluded that: "...that contextually targeted ads do not constitute a separate market; rather they are part of a broad market that includes all ads sold by intermediaries."  (p. 6)

    Bottom line: The conventional wisdom that Yahoo would be allowed to outsource its search business to Google without antitrust objection is simply not credible --based on what the FTC just concluded in its recent investigation of online advertising in its Google-Doubleclick review.  

    • Yahoo is bluffing that:
      • It has a comparable and viable strategic alternative to Microsoft's bid in Google outsourcing; and
      • The FTC would have significant antitrust problems with a Microsoft-Yahoo combination.