Microsoft alarms over outsourcing

Google/Yahoo get 90% control of web ads

Spurned suitor Microsoft painted an alarmist portrait of Yahoo’s outsourcing deal with Google during congressional antitrust hearings on Tuesday.

Google and Yahoo execs, on the other hand, described the alliance as good for consumers.

Execs from the three companies presented very different pictures of the deal during testimony before the Senate and House judiciary committees. Yahoo inked the Google deal on June 12 after failing to reignite acquisition talks with its former suitor.

Microsoft senior VP-general counsel Brad Smith spoke darkly about rising prices and reduced competition resulting from the alliance of the two search companies, noting that Google already controls at least 70% of the market for search advertising. He said Google will control up to another 20% of this market with the Yahoo deal.

“Never before in the history of advertising has one company been in a position to control prices on up to 90% of advertising in a single medium,” Smith said. “Not in television, not in radio, not in publishing. It should not happen on the Internet.”

Yahoo and Google say Congress has little power to stop the arrangement, but lawmakers can use the bully pulpit to raise concerns about the deal at a time when Yahoo is fending off a proxy battle with investor Carl Icahn. Icahn has been trying to oust Yahoo management since execs turned down Microsoft’s $47.5 billion takeover bid on May 3. Both sides have been ratcheting up the rhetoric as the Aug. 1 Yahoo shareholder meeting draws nearer.

If Washington somehow scuttles the partnership with Google, Yahoo could find itself under even more pressure to head into some kind of deal with Microsoft after all.

Solons turned up the heat by asking whether the Google partnership will further weaken Yahoo and cement Google’s dominance in the online ad biz.

House Judiciary Committee chairman John Conyers (D-Mich.) asked whether the partnership would be more anticompetitive than a Microsoft purchase of Yahoo. And Herb Kohl (D-Wisc.) chairman of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, said Congress needs to explore “whether this agreement will reduce Yahoo to nothing more than the newest satellite in the Google orbit.”

David Drummond, Google’s senior VP of corporate development and chief legal officer, countered that the partnership will benefit consumers and advertisers by enabling Yahoo and Google to deliver targeted ads that are more relevant to those who see them.

“The whole system becomes more efficient,” he said.

Yahoo exec VP-general counsel Michael Callahan maintained that the Google agreement will make the company “an even stronger competitor to Google, to Microsoft and to others in the dynamic and rapidly growing online advertising world.”

Although the Justice Dept. and several state attorneys general are examining the partnership between Yahoo and Google, lawmakers mostly refrained from passing final judgment on Tuesday.

“I’m confident that Yahoo, Google and Microsoft will wake up the next morning and prepare for the next battle,” said Sen. Charles Schumer (D-N.Y.). “I am not concerned that this deal will spell the end of any of these three companies.”

Still, he added: “What I am concerned about is whether this deal is good for everyday Internet users.”

(The Associated Press contributed to this report.)

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