Microsoft Faces "Uphill Battle" on Yahoo

When Microsoft announced its unsolicited $44.6 billion bid to buy Yahoo! this morning, antitrust lawyers who have represented various players in the internecine battle for dominance in the software industry took note. The deal, should it happen, will present serious antitrust issues both domestically and globally.

"This will get a serious look, as it should," says William Baer, head of the antitrust group at Washington, D.C.'s Arnold & Porter and a former director of the bureau of competition at the Federal Trade Commission.

To get the deal through, Baer says, will be "an uphill battle," because the combination will knock field of three competitors in the search-engine business down to two.

"To prevail, the parties will have to show that Yahoo! and perhaps even Microsoft lack the scale and scope to compete with Google," Baer says.

Microsoft, a defendant in epic antitrust battles here and in Europe, went on the offensive last April, urging antitrust regulators to shut down Google's $3.1 billion deal to purchase the online advertising company DoubleClick.

At the time, Brad Smith, Microsoft's general counsel, told the New York Times that the combination of the two largest online advertising distributors would "substantially reduce competition in the advertising market on the Web."

In December, the Federal Trade Commission voted 4-1 to allow the deal to go forward, but the antitrust regulator for the European Commission has opened a probe of the deal.

At a conference call with analysts this morning to discuss the Yahoo bid, published on the Microsoft website, Smith once again painted a picture of Google as the 800-pound gorilla, at least in the search-engine sphere:.

"Any number of companies might take an interest" in Yahoo!, he said. "I think there is really only one company that cannot. That is Google itself ... Given its super dominant market share, Google is clearly prevented by the antitrust laws from buying Yahoo!"

That much is true, but Microsoft's arguments aren't much better, lawyers say.

"Three to two doesn't look good anyplace, which makes me wonder what they are up to," say Harry First, an antitrust professor at New York University School of Law.

If the antitrust regulators are doing their job, First adds, they'll demand Microsoft show the deal creates lower prices for consumers and efficiencies that could not be achieved except through the merge.

But he did say if the U.S. regulators are doing their job. And that is very big "if." Trouble is, the current antitrust division at Justice is "comatose," according to one lawyer. "That's generous," said another expert.

In fact, the Justice Department urged U.S. District Judge Colleen Kollar-Kotelly to allow the five-year consent decree inked by Justice shortly after President Bush took office, to expire according to its terms.

Judge Kollar-Kotelly sided with the state attorneys' general, who have argued that Microsoft has consistently failed to meet its obligations under the consent decree to provide others in the software industry with vital information. She extended oversight until Nov. 1, 2009.

New York Attorney General Andrew Cuomo is one of the leaders in the case. His office did not return a call for comment about Microsoft's bid for Yahoo.

The F.T.C. and antitrust division of the U.S. Justice Department tussled over which of the regulators would take review of the Google/DoubleClick deal, and they are likely to bicker once again over a Microsoft/Yahoo deal. But Justice has tended to "own" Microsoft matters since the late 1990s, when the Clinton administration brought and won a landmark monopoly case against the software giant.

"The Justice Department, shall we say, has been very lenient on mergers, and has prided itself on not interfering with merger activity," says First. But he would not count out Justice challenging a Microsoft/Yahoo deal "just so that U.S. businesses know they are not completely closed for business."

First says he suspects the same concentration of advertising and search engine markets exist in Europe. "The Europeans will be very concerned about this, I am sure," he says.

Meanwhile, European Union regulators in mid-January opened two new investigations of Microsoft, focusing the company's Web browser, Internet Explorer, and its Office suite of software.

When a rival spooks it, Microsoft has often responded by trying to bundle something to its monopoly Windows operating system — really, a license to print money — so that another platform will not emerge to compete with it.

Google has beta applications for software to compete with products such as Microsoft word. "So Microsoft is very worried, and this deal is yet another way to disinter mediate them," First says.

First, who was an adviser to the states during the Microsoft trial, says the Microsoft/Yahoo! deal is "just another replay" of the company's longtime strategy to leverage it monopoly platform.

"It is wanting to take tolls on the bridge that everyone has to go over," he says.

He should know. He is literally writing the book on the Microsoft case for M.I.T. Press.

by Karen Donovan