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Google-Yahoo partnership: Not if, but when it becomes anti-competitive

The new Google-Yahoo partnership to better converge the search and display markets is skating on thin antitrust ice that will only get thinner over time -- unless Microsoft or some unknown competitor somehow starts taking lots of market share from the new Goohoo. 

What are the important takeaways here? 

First, at core, the Google-Yahoo partnership is clearly about trying to snuff out Microsoft as a competitive force on the web. 

  • Per Yahoo, the partnership "will enhance its ability to compete in the converging search and display market." 
    • Given that: #1 Google now has "partnerships" with most all it's biggest search competitors, #2 Yahoo, #4 AOL and #5 -- comprising roughly 90% of search market share -- what other legitimate competitor is there, but #3 Microsoft, which has declining single digit search market share?
  • Per Yahoo, the partnership will be "advancing the company's open strategy."
    • To the few people who do not know, an "open" strategy means embracing open source software which is the competitive alternative to -- surprise! -- Microsoft.  
  • At one level antitrust authorities will have to assess whether:
    • Antitrust-decree-encumbered Microsoft is sufficient search and display competition alone to discipline market? and
    • Promoting competition in software is relevant to competition in the search or display advertising marketplaces?

Second, this is an unfamiliar un-structured antitrust process for most observers and investors trying to gauge outcomes and timing.

  • This is not a merger so it does not follow statutory timelines or a trackable process.
  • This is an ongoing investigation process.
    • If and when investigators conclude that the partnership involves any illegal anti-competitive collusion among Google and Yahoo, the DOJ or the FTC would then file suit in court without any warning.
      • This could happen at anytime or never at all.
      • There is no transparency into the prosecutorial process -- for understandable reasons -- as leaks or sharing of findings or plans could be used to obstruct justice.
      • There is no statute of limitations here; if a suit is not brought for a period of time, it can still be filed in the future. It is fact-driven process, not a timeline or milestone-driven process.
      • There is no double jeopardy here.
        • If one DOJ administration does not bring a case, it does not prevent another Administration from bringing a case anytime in the future.
        • With prosecutorial discretion, there could be a different assessment depending on whether it involves Bush, Obama, or McCain antitrust decisionmakers.
    • This will be an ongoing investigation into whether there is any restraint of trade, foreclosure of competition, collusion, price-fixing or cartel behavior among the four leading Google search partnerships.

Third, Google and Yahoo are choosing to put themselves under intense ongoing antitrust scrutiny.

  • Given the surprisingly long review of the Google-DoubleClick merger that resulted in a 4-1 approval and that presumed Yahoo would remain a sustantial competitor to discipline Google, both the DOJ and the FTC can be expected to watch these markets very closely. 
    • The FTC even said so in its December approval of the DoubleClick acquisition: "...we will closely watch these markets and, should Google engage in unlawful tying or other anticompetitive conduct, the Commission intends to act quickly."
  • The EU also predicated its approval of the merger on the presumption that Yahoo would be one of the vertically integrated competitors that would sufficiently discipline Google in the marketplace.

Finally, what could make the Google-Yahoo partnership fall through the thin antitrust ice?

  • If Google and Yahoo continue to take search or display share from the only remaining independent competitor of any scale -- Microsoft.
  • If Yahoo search weakens further like AOL search weakened when it partnered with Google.
  • If Google or Yahoo show signs of competing less vigorously with one another in either search or display.
  • If they are discovered to be colluding among themselves or with AOL or to disadvantage the remaining scale competitor Microsoft.
  • If they are discovered to be sharing internal data or company information outside of their agreement.
  • If Google and Yahoo together foreclose competition in the converging search and display markets.  

Why am I so confident that the antitrust ice will get thinner over time or that the Google-Yahoo partnership will get heavier over time?

  • It is Google-Yahoo's stated goal to better compete with the only remaining scale competitor, Microsoft, in search and display.
  • If the trend is any indication, Google will continue to take search share from Microsoft MSN, especially with Yahoo's help.
  • There are massive network effects at play here. As I said in my Senate Judiciary testimony, Google enjoys a network effect of network effects. 
    • I concluded that the addition of DoubleClick would tip Google over time to a monopoly.
      • The addition of Yahoo as a new partner with Google will be devastating to remaining online advertising competition.
    • Google and Yahoo combined totally dominate in Internet audience offered to advertisers; advertisers offered to publishers, and publisher content offered to users.
  • In the DoubleClick decision, the FTC concluded that:
    •  "search engines offer a unique opportunity for advertisers to reach potential customers." and
    • "Google, through its Adwords business, is the dominant provider of sponsored search advertising..."
    • It sure sounds as if the FTC has concluded that search is a separate market. If so, they are unlikely to be swayed by Google and Yahoo saying that they should define it as online advertising. 

Bottom line: Google intensely believes it is right and can be expected to steamroll ahead continuing to gain market speed, weight, and power going forward. 

  • In my mind, the question is not if, but only when Google crashes through the thinning antitrust ice. 
  • History repeats itself.
  • Google is the next Microsoft-like antitrust case.