Down the Rabbit Hole with MicroYahooGle

Sam Gustin felt like today's Senate Judiciary subcommittee hearing over Yahoo's proposed search partnership with Google was an exercise in virtual reality. It just depends on whose reality you'd like to believe.

As expected, Microsoft blasted the proposal, with general counsel Brad Smith saying the deal would hand over unprecedented market power to Google.

"If search is the gateway to the internet, and most believe that it is, this deal will put Google in a position to own that gateway and the information that flows through it," Smith told senators.

Needless to say, the image of a top Microsoft official raising the anti-competitive bogeyman was too delicious to resist.

"Never before in the history of advertising has one company been in the position to control prices on up to 90 percent of advertising in a single medium," Smith said. "Not in television, not in radio, not in publishing. It should not happen on the internet."

In an effort to use Yahoo chief executive Jerry Yang's own words against him, Smith went on relate the details of a meeting between Yang and top Microsoft officials at which Yang described the Web search market as "bi-polar" and said that if Yahoo struck a deal with Google, it would move to Google's "pole" and Microsoft "would not remain a pole on its own."

But Yahoo general counsel Michael Callahan, who was at the meeting, which took place on June 8 in San Jose, disputed Smith's account, telling senator Arlen Specter, "I don't recall that remark."

He said the deal would make Yahoo "an even stronger competitor to Google, to Microsoft and to others in the dynamic and rapidly growing online advertising world."

"This is a commercial arrangement between two companies who will remain autonomous and compete aggressively -- in search and display advertising, mobile, news, e-mail, finance -- you name it," Callahan said.

For its part, Google argued that the search-ad deal was neither a merger nor a joint-venture.

David Drummand, Google's chief legal officer, said, "the online advertising marketplace is competitive, robust, and dynamic" and argued that the pact would benefit users, in addition to making money for the two companies.

Google's argument was undercut, however, by a new study that found that the search deal could raise the cost of advertising on Yahoo by 22 percent on average.