Partner With Us

Microsoft's lawyers battled attorneys for Google (NASDAQ: GOOG) and Yahoo (NASDAQ: YHOO) before a Senate subcommittee today, sparring over the competitive implications of the latter two companies' recent search and advertising agreement.

In testimony before the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights, Microsoft's general counsel, Brad Smith, blasted its rivals' deal as blatantly anticompetitive.

Through the partnership, Yahoo would import ads from Google to display on a portion of its search results.

But since Google's ads generally command higher prices at auction, critics have warned that the practical result will be a cost increase for advertisers, arguing against a partial marriage of the players who together control 90 percent of the search market.

"The whole basis for this agreement is Yahoo's opportunity to raise its prices," Smith said, referring to Yahoo's assurance that the deal would deliver "better monetization opportunities" as "a fancy way of talking about a price increase."

"The technology is complicated, but the antitrust issues are straightforward," he added.

While the ad deal was the nominal focus of the hearing, the spirited discussion inevitably took a wider focus on Microsoft's ongoing attempts to challenge Google through its own combination with Yahoo -- either through an outright purchase or by acquiring its search business.

Yahoo is now facing a proxy war with billionaire investor Carl Icahn, who wants to oust the company's board and engineer a deal with Microsoft (NASDAQ: MSFT).

Microsoft-Yahoo talks in the spotlight

In one revealing exchange, Smith recounted a meeting between Yahoo and Microsoft, held in San Jose on June 8, in an attempt to convince the senators that Microsoft wasn't alone in its view of Google's hegemony in search.

Smith said that in one session, Yahoo CEO Jerry Yang had told Microsoft representatives, "Look, the search market today is basically a bipolar market," explaining that Google was at one pole, with Yahoo and Microsoft at the other.

"If we do this deal with Google, Yahoo will become part of Google's pole," Smith quoted Yang as saying in reference to the ad deal. Since Microsoft would not be strong enough to compete alone, Smith concluded that the bipolar market would become a "mono-pole."

That caught the senators' interest. After reminding witnesses that they were under oath, Herb Kohl, the Wisconsin Democrat who chairs the subcommittee, asked Michael Callahan, Yahoo's general counsel and executive vice president, about his recollection of the meeting.

Callahan said that he was present but declined to address Smith's comment directly.

Instead, he embarked on a somewhat lengthy explanation of Yahoo's theory that search and display advertising are converging markets -- that advertisers are increasingly looking to make bundled purchases of both formats. Given Yahoo's dominance in display ads, Callahan concluded that the market convergence gave Yahoo a position of strength in search as well.

"Clearly, what you're saying contradicts what your boss said," Kohl said in response.

Arlen Specter, R-Penn., also pressed Callahan about Yang's comment. Callahan said he took issue with Smith's characterization of the meeting, but admitted that "I don't recall that comment."

Asked if he stood by his testimony, Smith said, "Absolutely."

The attorneys' sparring also provided another reminder that there is no love lost between Microsoft and Google.

"The most energetic critic of this agreement is Microsoft," said David Drummond, Google's chief legal officer and senior vice president of corporate development. "This is the same Microsoft whose CEO said he wanted to -- quote, 'Kill Google,' unquote -- along with some other salty language that I can't repeat here."

Drummond charged that Microsoft -- itself no stranger to anticompetitive allegations -- was using the same flawed rhetoric it had invoked when lobbying against Google's acquisition of DoubleClick, which ultimately received regulatory approval.

"The regulatory agencies were right to reject Microsoft's arguments then, and they'll be right to reject them here," Drummond said.

Because it is not a merger, Yahoo and Google did not need regulatory approval to implement the partnership, but they volunteered to put it on hold for three-and-a-half months to accommodate a Department of Justice review.

Aside from the question of ad pricing, the key point of debate is how much the deal will further tilt the playing field in Google's favor.

Yahoo and Google are quick to point out that it is nonexclusive, so Yahoo could sign an alternate search agreement with a third party. The deal also affords Yahoo the flexibility to use as few or as many of Google's ads as it wants, and the company says it plans to use the additional revenue to improve its own search technology.

In addition, Yahoo's Callahan attempted to debunk speculation that the deal foreshadowed his company's exit from the search market and a concession of defeat to Google.

"Yahoo is here to stay, and we intend to compete across countless platforms, including search, for years to come," Callahan said. "This will not result in Google controlling 90 percent of the search. With all due respect to Google, we have every intention of fighting them and winning."