Justice reviewing Microsoft-Yahoo deal

The Justice Department is formally reviewing Microsoft’s proposed online search and advertising agreement with Yahoo, according to sources familiar with the situation, in the first wave of opposition the deal will likely face from antitrust regulators and lawmakers.

The review will also be a litmus test for how aggressive the newly appointed antitrust officials will be in regulating the online advertising industry, one of President Obama’s biggest supporters. The Obama administration has said it will increase scrutiny of anti-competitive practices in the technology sector.

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The deal, announced last month, gives Microsoft’s Bing search engine the right to power Yahoo’s search capabilities for a decade, with Yahoo collecting money on search ad sales. Yahoo will focus on building content for its popular sites and will handle sales of premium ads for both firms. The companies say they hope to close the deal next year.

A Justice Department spokeswoman declined to comment other than to say the agency is aware of the agreement.

Microsoft and Yahoo say combining search operations will create a viable competitor to Google, which delivers results and advertisements for 65 percent of the searches in the U.S. market. Combined, Microsoft and Yahoo account for less than half of Google’s share with 28 percent of the market, according to research firm ComScore.

Microsoft and Yahoo say that gap is much greater. Citing ComScore data that includes all search queries on Google and its partner sites, minus searches that did not include at least one paid search advertisement, the companies say Google’s market share is 79 percent. By that calculation, Yahoo’s market share is 16 percent and Microsoft’s is 6 percent.

Microsoft general counsel Brad Smith said neither Microsoft nor Yahoo have a big enough search business on their own to compete with Google.

“Clearly, scale is an important factor for success in search advertising because advertisers want audience,” he said. “Neither company comes remotely close to offering Google’s scale. This agreement will help bridge that gap.”

The companies also point out that they will continue to compete in other areas, such as instant messaging, e-mail and display advertising.

The deal “is aimed at creating true competition in search and driving innovation for consumers, advertisers and publishers,” said Michael J. Callahan, Yahoo executive vice president and general counsel, in a statement. “We are confident in the merits of the deal and look forward to working with regulators throughout the process.”

Consumer groups say the proposed pact could reduce competition and choice for consumers while increasing the data collected about their online behavior. Microsoft and Yahoo both process enormous amounts of information about users, and consolidating that data could lead to more in-depth tracking of online activities, privacy advocates say.

“This will be a test to see whether the new Obama antitrust team has real teeth when it comes to regulating this industry,” said Jeffrey Chester, founder of the Center for Digital Democracy.

“If Yahoo is turning over its search business to Microsoft, it will no longer have an independent search arm,” he said. “It will be a company that’s incapable of competing. This is nothing more than a takeover by Microsoft.”

Privacy advocates have also raised questions about the deal with the European Union. The European Commission, the EU’s executive arm that reviews joint ventures and mergers, has not yet said whether it will examine the deal.

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“It will be interesting to see how closely the U.S. will work with its European counterparts to develop a common approach,” Chester said.

Some lawmakers have also called for scrutiny. When the deal was announced, Sen. Herb Kohl (D-Wis.) vowed the agreement would be “closely reviewed” by the Senate Judiciary's antitrust subommittee, which he chairs. The deal, he said, would combine “industry giants and direct competitors in Internet advertising and search markets.”

“Our subcommittee is concerned about competition issues in these markets because of the potentially far-reaching consequences for consumers and advertisers, and our concern about dampening the innovation we have come to expect from a competitive high-tech industry,” he said in a statement.

Microsoft and Yahoo have been trying to find ways to compete with Google’s dominance in online search and advertising. Last year, Microsoft’s unsuccessful bid to acquire Yahoo also sounded anti-competitive alarms and protests from Google.

Google’s own attempt to strike an advertising partnership with Yahoo was abandoned last year when the Justice Department said the agreement would probably hurt competition for Internet search advertising.

It is unclear if Google will protest the new agreement, although it has said it is interested in learning more about the deal. A Google spokesman said in a statement, “There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users.”