August 19, 2009 / 4:34 AM / 10 years ago

Microsoft legal chief sees risk in Yahoo deal

* Microsoft legal chief says ad deal “not risk free”

* “Impossible” to know how long antitrust review will take

* Says deal will make Google-led market more competitive

By Bill Rigby

SEATTLE, Aug 18 (Reuters) - Microsoft Corp (MSFT.O) has confidently described its planned search advertising deal with Yahoo Inc YHOO.O as a “win-win”, but the software company’s legal chief is prepared to concede that the outcome is not certain.

The deal, struck in late July after months of talks, faces a tough regulatory review, and the possibility that it won’t be enough to effectively challenge Google Inc (GOOG.O).

“For both companies, it would be right to say this is not risk-free,” said Microsoft general counsel Brad Smith, in an interview last week. “I don’t know of any investment that is.”

The deal, struck on July 30, proposes that Microsoft’s Bing becomes the search engine for both, while Yahoo focuses on attracting big advertisers.

Microsoft shareholders generally welcomed the deal, but Yahoo’s shares plunged as investors bemoaned the lack of an upfront payment from Microsoft or revenue guarantees in hard dollars.

Analysts pointed out that Microsoft still had an incentive to take market share from Yahoo, and that Yahoo’s salesforce could end up selling ads they would not be paid for if clicked on in a Microsoft site.

Smith acknowledged that such a situation was possible, but pushed attention to the potential upside. “I do think there is a compelling business return that each company has a strong opportunity to generate for its shareholders,” he said.


The first hurdle is the antitrust review, which Microsoft and Yahoo do not expect to be completed until early 2010. Microsoft has made its initial Hart-Scott-Rodino antitrust filing with the U.S. Department of Justice (DoJ), according to Smith. The DoJ is expected to lead the review, but has not yet commented on the matter publicly. “It’s impossible to know for certain how long that review will take, obviously it’s up to the governments involved,” said Smith.

Microsoft is confident it can persuade regulators that a stronger rival for Google is in the best interests of the market.

“It’s widely understood by governments around the world that the search marketplace needs to become more competitive,” said Smith, whose job it is to steer Microsoft through the antitrust approval process.

“The only way to do that is to bring the No. 2 and 3 providers together and thereby create a stronger counterbalance to a very dominant No. 1.”

Antitrust experts generally expect the deal will get close scrutiny from regulators, but ultimately will be approved. [nN29273592]

According to Microsoft’s own research, Google has 78 percent of the U.S. market for paid search — results pages featuring ad links, rather than just pure algorithmic results

— compared with Yahoo’s 16 percent and Microsoft’s 6 — compared with Yahoo’s 16 percent and Microsoft’s 6 percent.

Yahoo, which must also make antitrust filings, will make a similar case to regulators.

“We feel good about what advertisers and publishers and users are going to see here, which is really a long-term sustainable opportunity for some competition to Google, which has been quite dominant,” said Michael Callahan, Yahoo’s general counsel, in an interview last week.

Callahan says the Justice Department’s opposition to a planned search-ad partnership between Yahoo and Google last year — which ultimately led to the companies abandoning the plan — will have no bearing on the Microsoft deal. “These are not similar types of transactions,” he said.


Microsoft, which vehemently opposed the Yahoo-Google tie-up last year, says the Justice Department was right to object to the deal.

“The most important thing is not what any single private company argued last year, it’s what the DoJ concluded,” said Smith. “And what the DoJ concluded last year was that Google already had a dominant position in this marketplace.”

Alone, Microsoft cannot effectively challenge Google, said Smith.

“We pointed out a year ago that despite our size and our financial resources, we did not have a profitable search business. Today we do not have a profitable search business.”

The Microsoft-Yahoo tie-up is an “important step” in building a viable search business, he added, as it helps them gain the scale necessary to play a significant role in the market.

“It’s like having an auction house,” said Smith. “If no one comes to your auction you don’t have the kind of business that causes people to want to sell products at your auction house. You need a certain scale to be competitive.”

(Reporting by Bill Rigby; Editing Bernard Orr)

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