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Why Google-Yahoo deal is collusion -- Yahoo's lifeblood in exchange for Google's caffeine

Microsoft's resumed interest in Yahoo's search business, suggests that Yahoo is close to outsourcing some of its search to Google. The antitrust implications of the world's #1 and #3 online advertising competitors, Google and Microsoft, fighting over the #2 competitor, Yahoo, has finally attracted serious media attention.

  • A Financial Times editorial: "Search for a rival" asks: "How do you spell Googlopoly?" (I spelled it with an 'e' in my Google-Doubleclick analysis and Senate testimony.)
    • The FT: "Any deal that lets Google supply part of Yahoo’s search advertising, however it is dressed up, must be bad for competition." 
  • Today the New York Times', Steve Lohr, with contributions from Miguel Helft, produced the most in-depth reporting to date of the antitrust issues surrounding a Google-Yahoo search partnership: "Google Says It Will Defend Competitive Rationale of a Yahoo Deal."  

Now that the antitrust implications of this issue are beginning to get heightened media scrutiny, let me lay out my case of why a new Google-Yahoo search partnership is anti-competitive collusion and not benign collaboration. 

First, one must look at the competitive impact of a Google-Yahoo partnership.

  • To use an apt metaphor -- Yahoo outsourcing some of its lifeblood search business to Google in return for more cash than Yahoo's search monetization could earn -- is like a #1 marathoner getting a partial blood transfusion from its #2 competitor, in return for lots of caffiene to produce a short term burst of revenue speed. The problem with this type of transaction is that it is not sustainable.
    • Over time, the continued loss of Yahoo's business lifeblood inevitably would weaken Yahoo's body, because no amount of caffiene could replace the oxygen-carrying red blood cells the Yahoo marathoner would need to keep up the competitive pace.
    • This effective blood-for-caffiene transaction is an anticompetitive because the dominant #1 gets competitively stronger by steadily siphoning off #2's market share in return for cash.
    • At some point, this arrangement would eventually get so one-sided, that Yahoo would not have the "competitive" strength to warrant the orginal terms of the deal.  
    • Even more problematic is that over time, Yahoo's advertisers and publishers would glean that Yahoo sold its future to pay for a better present, and would abandon Yahoo as an increasingly unnecessary "middleman" -- in order to deal directly with Google, the victor.  

Second, one must look at the motives behind a Google-Yahoo deal.

  • If "efficiencies" or improved financial returns were the real reason behind a Google-Yahoo partnership, why did Google-Yahoo not get serious about this "collaboration" before Microsoft offered to buy-out Yahoo?  
  • Obviously Yahoo wants to stay independent and is looking for anyway to increase its stock price in the short term -- even if it involves outsourcing its "core" search business to its #1 competitor. 
  • Obviously Google is keen on preventing Microsoft from becoming more competitive, because it proactively called Yahoo to offer Google's "assistance" in thwarting the Microsoft bid.   

Third, the deal would create huge new incentives for Yahoo to not compete as vigorously with Google going forward.

  • If Yahoo could earn 60-70% more by outsourcing some search to Google, according to Yahoo estimates, how would Yahoo still have as much incentive to invest in search as it did before?
  • If Yahoo is motivated by improving its short-term economics, it could further improve its short-term financial performance by cutting back on its own investments in search improvements.
  • Why would Yahoo continue to invest as much in its own search effort, after "investing" in a Google-outsource deal that offers a much higher and more immediate return on investment?    

Finally, it appears that Google and Yahoo are trying to take refuge in the DOJ/FTC "Antitrust Guidelines For Collaborations Among Competitors."     

  •  The first sentence of the guidelines says: "In order to compete in modern markets, competitors sometimes need to collaborate."
    • Would anyone try and make the case that Google "needs to collaborate" with Yahoo in order to compete in search against its other competitors?
    • Yahoo has made the case to its shareholders that Yahoo has a bright future and does not "need" to merge with Microsoft, so how could Yahoo argue it "needs" to outsource to Google in order to compete against its other competitors?
    • Are Google and Yahoo going to argue to the DOJ/FTC that the #1 and #2 competitors that command 80-90% of the relevant market shares "need to collaborate" in order to compete with the weakening #3 competitor in the market?
  • The guidelines also include an ominous prediction for this proposed Google Yahoo partnership.
    • Page 20 section 3.34(c) "In general, the greater the financial interest in the collaboration, the less likely is the participant to compete with the collaboration."  
  • The guidelines also offer "safety zones" (pages 27-28) that show when collaboration could be expected to be pro-competitive.
    • The first criteria would be that the competitors' collaboration would be OK if the combined market shares were "no more than twenty percent."
      • Oops! This collaboration would involve 80-90% market shares depending on which way you slice it.
      • This seems way outside the "safety zone."
    • Another criteria is whether there are "three or more independently controlled research efforts" comparable to the collaboration.
      • Microsoft might be able to meet that criteria.
      • However, where would the other two come from?
        • Both the #4 and #5 "competitors" to Google, AOL and, already collaborate/outsource with Google on search! 

Bottom line: There is plenty of evidence above that would suggest there is significant risk that the DOJ or FTC could conclude now or sometime in the future that this Google-Yahoo "collaboration" would be anti-competitive collusion. 

  • The harder Google pushes this antitrust envelope with Yahoo, the sooner Google will become the world's primary antitrust problem and target going forward. 
  • If Google stays true to form, they will push it...