Washington — Yahoo Inc. that is still facing the heat of Microsoft’s unsolicited buyout offer has attracted the attention of many for carrying out a two-week experiment with outsourcing some of its Web-search ads to Google Inc. has drawn scrutiny from antitrust regulators, the companies said Wednesday.
Interestingly, both Yahoo and Google said Wednesday that they notified the Justice Department before the start of a two-week joint search advertising test, which was intended to discover how a possible collaboration could help Yahoo thwart Microsoft Corp.’s takeover bid.
“The two Internet giants also said we had informed the Justice Department before we launched the test and we have been responsive to their questions about it,” said a Google spokesman Adam Kovacevich, in an e-mail.
Yahoo further supported its claim saying “Yahoo proactively kept the Department of Justice informed of its intentions to conduct this limited test with Google and have provided information to DOJ on the nature of the test,” said Yahoo spokeswoman Tracy Schmaler in an e-mail.
A source familiar with the matter told Reuters that antitrust regulators’ “have initiated an investigation” of the test. The source, speaking on condition of anonymity, said the regulators were concerned about a telephone call from Google CEO Eric Schmidt to Yahoo CEO Jerry Yang to offer help in fending off Microsoft Corp.’s $44.6 billion takeover bid.
Microsoft is engaged in striking its next move in the buyout fight for Yahoo. People with the knowledge of company’s tactics said Microsoft did not expect to reach a deal before the Saturday deadline it set for Yahoo to accept the unsolicited bid, so the software giant intends to launch a proxy fight next week and nominate candidates for Yahoo’s board.
But, another source informed the news agency that the Justice Department was mostly apprehensive about the possibility of a longer-term deal between the No. 1 and No. 2 search-engine companies and opened an inquiry into matter.
DOJ spokeswoman Gina Talamona refused to confirm whether the department had initiated an investigation. However, she said the department “was aware of the collaboration.”
Microsoft refused to comment. Earlier, the company’s general counsel Brad Smith had bluntly attacked the test, saying it raised antitrust issues.
The two-week test, which was expected to end this week does not add Yahoo’s network of affiliate or premium publisher partners and is restricted to no more than 3% of Yahoo search queries. The companies have not said whether they are planning to extend the test.
“I assume Yahoo’s interest in its deal with Google is to forestall a merger with Microsoft, largely so that its management can remain in control,” said Keith Hylton, professor at the Boston University School of Law, in an e-mail.
The test was meant to illustrate how much more revenue Yahoo could extract from its search engine by outsourcing the search ads to Google, whose technology is better at matching ads to queries. By Yahoo’s own estimates, Google earns on average between 60 percent and 70 percent more per search query than Yahoo.
“Jointly, Yahoo and Google control almost 80% of the search engine market, which unquestionably brings into focus how few real competitors exist in the space.”
A number of antitrust experts however have warned that a broader search advertising partnership between the two companies would face serious objections, as it would further solidify Google’s dominant position in that market.
While Google last month conducted 59.8% of all U.S. searches whereas Yahoo had only 21.3%, according to research firm ComScore Inc. Soon after they announced their test, Microsoft complained that any “definitive agreement” between Google and Yahoo would make the search advertising market “far less competitive.”
“It is simple to distinguish how there would be antitrust questions about something like that,” said Gary Reback, an antitrust attorney who persuaded the Justice Department to pursue its landmark antitrust case against Microsoft in the 1990s. “On the other hand, are those bigger than having Microsoft acquire Yahoo?”
Microsoft has been reluctant to raise its bid price and has pointed out that it is willing to rescind its offer if the two companies cannot come to agreement on price. But it is not giving up yet.
Chief Executive Steve Ballmer says “we think the best way to move forward quickly is to come together with Yahoo. Hopefully that works. But if it does not, we go forward.”
But the people, who spoke on condition of anonymity due to the sensitivity of the talks, said they did not expect Microsoft to carry out its less explicit threat to lower its offer price. A lowered price might antagonize the Yahoo shareholders to whom Microsoft would be appealing in the proxy fight.
Those without doubt sound like fighting words, and Ballmer is all set to take a lower offer directly to shareholders if Yahoo’s board would not agree to the existing terms. It is distinctive Microsoft tactics, whenever Microsoft gets behind in a hot technology, it buys its way into the market–often with hostile tactics.