Can a search partnership between Yahoo and Google possibly pass regulatory muster?

Brad Smith, Microsoft's general counsel, quickly waved the antitrust flag on Wednesday, saying: "Any definitive agreement between Yahoo and Google would consolidate over 90 percent of the search-advertising market in Google’s hands. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo."

Even a longtime antitrust litigator who rarely agrees with Microsoft called the temporary partnership "an agreement in restraint" of trade that is "almost certain or very likely to violate" Section 1 of the Sherman Antitrust Act.

Not so fast. The key to understanding how Google and Yahoo could clear the antitrust hurdle if they try to make the two-week trial a broader deal is this: The agreement is nonexclusive, says a person close to the situation.

"Nonexclusive contracts are generally thought to be pro-competitive," this person said. "This preserves Yahoo as a competitor search engine. And it provides them with the means to monetize their site."

In other words, others, including Microsoft, could bid for search results under the agreement. Google, however, would probably win the vast majority of search traffic.

Harry First, an antitrust professor at New York University School of Law, is skeptical about the agreement, or at least what is known about it.
 
The partnership "just sounds like an extension of Google's dominance," he says.  

But what's unclear, he added, is how the deal affects pricing and whether Yahoo and Google would still be competing with each other.

"That sort of platform partnership means that they don't compete vigorously on the commissions they make for clicks," he said.

Complicating the discussions about a Yahoo-Google partnership are the merger talks involving Yahoo: whether a Microsoft takeover of Yahoo, with or without the help of News Corp., or a Yahoo merger with the AOL unit of Time Warner.

Antitrust regulators look at "some market in which we can determine how price and output are affected," First notes. But the proposed deals, which focus on the future and control of the dominant platform on the internet, "may be hard to translate on today’s antitrust analysis," he says.

And there is the question of which federal regulator would review a Google-Yahoo alliance.

It was agreed last year that the F.T.C. would review Google's $3.1 billion deal to purchase DoubleClick (later approved), and in exchange the Department of Justice would review any potential for Microsoft to buy Yahoo—long rumored to be a possibility—and that Justice Department would get another big deal, should it come along.

During the Bush administration, the F.T.C. has been much tougher on deals than the Justice Department.

Microsoft would surely want an F.T.C. review of a Google-Yahoo partnership.

And whoever strikes a deal with Yahoo will want to have it reviewed this year, while George Bush is still in the White House.