After years of being derided as the ''big bad wolf'' of software monopoly by competitors, Microsoft finds itself on the other side of the fence as it cries ''wolf'' over Yahoo's advertising deal with Yahoo, which Microsoft asserts, will ''increase prices for advertisers and start to consolidate more than 90 per cent of the search advertising market in Google's hands''.
There have been two new developments in the ongoing saga which started with Microsoft's unsolicited offer for Yahoo on 1 February this year. After Yahoo rejected Microsoft's overtures, not once, but twice, Microsoft CEO Steve Ballmer called off the deal and Yahoo sidled up to Microsoft's arch rival Google. (See: Yahoo strikes $800-million ad deal with Google, ends talks with Microsoft)
Now latest reports indicate that Microsoft is lobbying regulators to scuttle the Yahoo-Google, and more surprisingly, it had made a third offer of a partnership to Yahoo after the latter had declined takeover proposals.
As for the first development, it was not unexpected considering the vehemence with which Microsoft had opposed Google's acquisition of Doubleclick some months back (See: Google clears last hurdle to acquire DoubleClick; Closes deal for $3.1 billion) . Microsoft feels, and rightly so, that the Yahoo-Google deal would further increase Google's dominance over it in cyberspace, pushing it further back in the search advertising market. But will it be detrimental to advertisers and consumers, as Microsoft claims? That is for the US regualators and courts to decide.
In its effort to stymie the deal, Microsoft has already contacted advocacy groups that work to influence policy in Washington. Specifically, Microsoft says that the deal is akin to a price-fixing agreement, with Google and Yahoo effectively setting a minimum price for advertisements on some key word searches. It also believes the arrangement will lead to the demise of Yahoo's own search advertising business, eliminating a competitor to Google's dominance on the Internet.
Microsoft later said in statement its lobbying approach "reflects our belief that we have a responsibility to engage with policymakers on issues that impact our products, customers, shareholders and the industry overall.''
Microsoft's efforts may be the stepping stone to a formal complaint to the US Justice Department to file an antitrust lawsuit, quite ironical since it was itself at the receiving end of just such a case until it agreed to settle in late 2001. (See: Microsoft, US govt reach settlement)
The Yahoo-Google deal does not need up-front approval from American antitrust authorities since the two companies are not merging. However, the Justice Department could challenge the arrangement in court if it concluded that it would restrain competition between them. The two companies have agreed to wait three and a half months for regulatory approval and to offer a way to end it if Yahoo is taken over.
As for the merits of Microsoft's complaint, reactions are mixed. While several antitrust experts said the deal would probably not be opposed by US antitrust authorities, others disagreed, saying the Justice Department could be swayed by Microsoft's arguments, particularly if the deal generates concern among advertisers and publishers.
In response, Google has taken pains to stress on the non-exclusive nature of the agreement, saying that Yahoo was free to tie up with other entities. Google General Counsel Kent Walker asserted that Yahoo would remain a "robust" company and would have ample incentive to invest in its own search advertising business.
He also disputed Microsoft's suggestion that the companies would be setting prices in any way. Prices for the Internet search ads, he said, are determined through an ongoing competitive auction. "No one's coming in and saying, 'By the way, we're going to set the prices for those ads,'" he said.
As for the second development of a third offer, the surprising details were unveiled in a letter sent out yesterday to Microsoft employees by the company's president and key member of the Yahoo negotiating team Kevin Johnson.
He said that Microsoft had offered Yahoo $9 billion in cash, "which could have been used by Yahoo to reward their shareholders." His company also guaranteed Yahoo an annual increase in profit of $1 billion for three years, thanks to the savings Yahoo would have realized from selling its search business and a bounty that Microsoft promised to pay every time someone clicked a search ad on one of Yahoo's Web sites.
Microsoft's proposal had three parts. It would have paid Yahoo $1 billion for its search advertising business and an additional $8 billion for a 16 per cent equity stake. Microsoft also would have provided Yahoo with all the data on those searches and search ads, "so they could take all of that learning and put it into their display ad platform so they'd have a better display ad platform," according to a source.
Ballmer had supposedly spent a lot of time with Yahoo CEO Jerry Yang discussing this deal, which he positioned as being beneficial to the latter in many ways. It offered Yahoo independence, which it wanted; data, which it loved to hoard; and the cash it needed to prop up its stock. Microsoft also saw itself as taking a load off of Yahoo.
However, Yahoo turned down the offer because it supposedly undervalued the search business and the company as a whole. Moreover, the agreement would have locked Yahoo into an exclusive deal for 10 years, while only offering higher returns for three. On the other hand, the deal with Google, though offering a potential $450 million in operating cash flow in the first year, is non-exclusive, meaning that other companies will be able to sell advertisements that appear on Yahoo's pages.
Microsoft's third offer may have born of the challenge of a proxy fight with the Yahoo board by billionaire investor Carl Icahn. He has demanded that Yahoo approach Microsoft about a full acquisition at $34.375 a share. He has nominated candidates to replace Yahoo's board at its annual meeting on 1 August. Icahn owned 10 million shares of Yahoo and the option to purchase an additional 49 million as of 15 May.
Icahn has accused Yang and the Yahoo board of sabotaging Microsoft's acquisition plan after Yahoo adopted an employee-severance plan that would compensate workers displaced by a change in control. The plan would have cost Microsoft an additional $2.4 billion, Icahn said. Yahoo said the price would be no more than $845 million. He has also said he is open to a deal with Google as long as it can be cancelled to allow Microsoft to acquire the company.