Advertisers should speak up on where Yahoo assets should be
The problem of anti-trustness
When thinking about the Google Yahoo deal and why we felt it was out and out anti-trust, we were reminded of an old joke. When it was told to us years ago it was about an accountant, but the punchline was the same.
In the accounting version of the joke when the successful accountant was asked what one and one made, he replied “What would you like it to be?” Defining anti-trust is much the same, “What would you like it to be?”
Competition law in most parts of the world is made up of three key elements: first you cannot do anything that restricts free trade like create a price fixing cartel; secondly you cannot use one monopoly to create or subsidize another; and thirdly some form of market supervisor must inspect all mergers and acquisitions so that new monopolies are not formed with the intention of carrying out items one and two.
So it seems pretty clear that if one company has more than 50 per cent market share in a market or major submarket, in this case search advertising in the USA, and it wants to merge with the second largest player in the market, it has to be anti-trust. Because that is a transaction which will “create” a more secure monopoly from an existing one.
The principles of anti-trust can be best detected if the answer to any of the following questions is yes:
Is the contemplated action going to create a monopoly where there was none before?
Is one of the parties dominant in a market area and is the contemplated action going to make it more dominant?
Is it possible that the dominance either already enjoyed, or which would be enjoyed after the contemplated transaction, is likely to lead to one company controlling market pricing? Ditto diminishing competition. Will dominance in this market allow the company dominance in related markets?
The key thing for people to understand is that it is alright for a company to have a bigger market share than anyone else, as is true in PC operating software, but it is not alright for a financial transaction to create this situation. It has to come about by market performance, and it is subsequently then not alright to abuse this dominance by making sure that retailers can only stock your product to the exclusion of the minor rivals.
We have sympathy with Microsoft, which was upset that its server software was considered dominant by the European Commission when it only had a 30 per cent market share, but there were a number of ingredients to this situation. It had dominance in PCs, and was keeping secret special integration tricks between the PC (where it had over 90 per cent software market share) and server side software. In fact it had rapidly amassed that 30 per cent market share because of this dominance, so it had already abused a dominant position to get as far as it had.
No one right now is saying that Google has yet abused its dominant position in search advertising, only that a transaction would artificially create further dominance and control over a huge amount of advertising inventory.
In the end Google would have been in a position to use Yahoo’s advertising in order to offer bigger and better discounts for key clients, and more importantly it could include it all in the same auctioning process which tends to make people pay more for advertising, so it can be thought of as a form of price control. Google can, and does argue that it cannot be anti-trust to let the market decide what to pay for advertising, but by not having a price list, it is extracting more from the market that the market really wants to pay.
A merger between the search advertising of Google with the search advertising of Yahoo would be like Avis buying Hertz or AT&T acquiring Verizon or worse still Comcast. Which is why we have always said that it couldn’t happen. We suspect that Yahoo knew all along that this deal was not feasible and entered into it only to send Microsoft packing and give it an excuse to ignore the Microsoft merger approach.
It is impossible to artificially create conditions for competition in some businesses, and there is no such thing as a natural market. Markets do not end up with three 33 per cent market share holders or four with 25 per cent of the market.
Natural market splits can be anything from a dominant player with over 50 per cent, a second player with 25 per cent and a third with 12 per cent and the rest shared between 3 players.
Right now search advertising is still growing, and it is a business that will soon be entered by the mobile giants such as Nokia, as they add the dimension of “where” to a search to create local search on a handset. Yahoo has a strong set of offerings here and good partnerships, which will eventually make it attractive even to risk averse and merger averse Nokia. Which is why the company has to be bought by one of the existing major search portals, to prevent that from happening.
If the current management sell the company to anyone for less than the $33 a share that Microsoft offered the first time around, they will attract class action suits over their behaviour. However they should be able to defend those given the suddenly arrival of the US recession and the fact that it could not foresee Google pulling out of the talks over anti-trust issues (even though we did).
Microsoft has made its first clear and obvious bid in what is now a vicious war of words, which is to say that they do not want any part of Yahoo. The presumption is that the current management would love that $33 deal back on the table. But with its current share value of just $16bn, instead of the $45bn which Microsoft previously bid, there is plenty of room for manoeuvre and the bet thing Balmer could say was “not interested,” to make it clear that we are discussing a different class of deal, at a far lower price.
The price could go far lower before the market begins to pick up, and with internet advertising not actually growing in the US right now, it will be virtually impossible for Yahoo to turn the ship around and convince analysts that it is a more viable vehicle in a recession.
It would be a case of merging two diminishing forces and hoping that will reverse their fortunes, and it might well not work. Does Microsoft want to buy a business even for $20bn, if in two years time the merged MSN and Yahoo are back to being around the same size? That might be danger. Which is why the smart money is on some kind of face saving merger between AOL and Yahoo.
However keeping the current search averting deal and deleting the name Google and replacing the word Microsoft has also been alluded to by Microsoft CEO Steve Balmer.
It is now up to the advertising community to decide just what they want in place to compete with Google. If it is an AOL-Yahoo partnership, then they must say so and let the two company’s management teams know they would support such a move. If it is a search partnership between Yahoo and Microsoft, similarly they need to reach out and give it their seal of approval.
Failure by the community to act would mean that Google gets stronger in an advertising recession, taking bigger and bigger market share, of a slightly shrinking market. By the time the dust had settled, Google would be up against three crippled rivals and totally in control of market pricing.
Sure advertisers can wait and let regulators bring Google to heal in about 5 years, or they can act now, give some up front promises to rivals and make sure there is a strong rival to keep Google honest.
Copyright © 2008, Faultline
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