Sept. 11 (Bloomberg) -- Microsoft Corp. and Yahoo! Inc. have been asked by the U.S. Justice Department for more details on a proposed Internet-search partnership, expanding the agency’s review of the agreement.
The request means regulators will do a more extensive examination, rather than approve the deal immediately. Microsoft predicted an in-depth review when the accord was announced in July, said company spokesman Jack Evans. He declined to comment on the contents of the request.
Over the course of the review, the companies expect to be asked about their search-engine investments, ad pricing and product plans, a person familiar with the matter said.
The outcome will shape the future of the market for Internet search ads, where Google has triple the U.S. sales of its two rivals. The companies may face more difficulty proving the deal won’t hurt competition as regulators step up oversight of the technology industry, said Michael Katz, a former chief economist in the Justice Department’s antitrust unit.
“The antitrust agencies are pretty skeptical of the argument that you need to be bigger to compete,” said Katz, now a professor at the University of California at Berkeley. “The Justice Department will respond, ‘Why can’t you get bigger by competing?’”
Under the partnership, signed in July, Yahoo will use Microsoft’s Bing search engine on its Web sites. Yahoo will sell ads that appear next to Web-search results, with the companies splitting the revenue.
Bing Investment
Even though the antitrust agency will scrutinize the deal closely, the companies probably can get it done as long as they do enough to persuade the Justice Department that the agreement doesn’t hurt competition, Katz said.
During the Justice Department’s review, Redmond, Washington-based Microsoft expects to be asked to disclose its spending on Bing to ensure the company made enough investments to create a viable product, the person familiar with the matter said. Both companies also anticipate regulators will ask for their individual search-engine product plans so it can assess whether there’s an incentive to compete more or less vigorously as a result of the deal.
“Those plans will help the DOJ understand what the competitive impacts of the merger might be,” said Greg Neppl, an antitrust lawyer at Foley & Lardner LLP in Washington. If the department were to find the accord hinders innovation, it could seek to block the deal.
Ad Pricing
The government will also seek information on how the companies’ online-ad auctions operate and what might happen to prices as a result of the combination, the person said. While regulators will investigate pricing, it’s unlikely that they will dictate what prices will be, the person said.
The requests will help the agency determine whether to impose conditions to foster competition, or block the deal. Mountain View, California-based Google scrapped plans to team up with Yahoo last year after the Justice Department threatened to sue, saying the proposal would have helped them “become collaborators rather than competitors.”
“Google was dominant a year ago and is dominant today,” said Brad Smith, Microsoft’s general counsel. “Even if this is approved, Google organic seo will be dominant a year from now -- but if this agreement is approved, at least there is a chance for a more credible No. 2 to emerge.”
Laura Sweeney, a spokeswoman for the Justice Department, said the agency is aware of the proposed Microsoft-Yahoo partnership, and declined to comment further.
Fully Cooperating
“Yahoo and Microsoft are cooperating fully with the Justice Department and firmly believe that the information they will be providing will confirm that this deal is not only good for both companies, but it is also good for advertisers, good for publishers and good for consumers,” Adam Grossberg, a Yahoo spokesman, said in an e-mail.
The companies are now responding to the latest request, which they received earlier this week, Microsoft’s Evans said yesterday. They still expect the deal to close on schedule.
Microsoft rose 22 cents to $25 yesterday in Nasdaq Stock Market trading. Sunnyvale, California-based Yahoo added 67 cents to $15.45, while Google advanced $6.97 to $470.94. Microsoft has risen 29 percent this year, compared with a 27 percent gain at Yahoo and a 53 percent jump for Google.
“There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users,” Google spokesman Adam Kovacevich said in an e-mailed statement. “We’re interested to learn more about the deal.”
Of the three largest search engines, Google had 75 percent of search-ad spending in the U.S. last quarter, with the rest going to Microsoft and Yahoo, according to data from search-ad firm Efficient Frontier Inc. in Sunnyvale, California. The market should expand to $12 billion this year, according to New York researcher EMarketer Inc.
European Commission
In Europe, Microsoft is also likely to notify the European Commission about the agreement, said Neil Macehiter, a partner at Cambridge, England-based technology consultant Macehiter Ward-Dutton. If the commission gets involved, it will conduct an initial 25 working-day review, which can be extended by 90 days if the regulator has “serious doubts” about competition issues.
Last week, the Brussels-based commission put on hold Oracle Corp.’s $7.4 billion acquisition of Sun Microsystems Inc., saying its initial probe suggested the deal may reduce competition and lead to higher prices.
“I’d bet on Microsoft-Yahoo prevailing because it would be difficult for Microsoft to leverage its position,” Macehiter said.
Google Partnership
Microsoft objected to a proposed partnership between Yahoo and Google last year, saying the accord would allow them to fix prices. Now the software maker is on the other side of the same argument, and will likely tell the agency the venture won’t raise prices, said Andre Barlow, a Washington-based lawyer who worked for the Justice Department’s antitrust division and is now a partner at Doyle Barlow & Mazard PLLC.
Advertisers probably will face questions on the deal too. Carl Fremont, executive vice president at Digitas, an online ad agency, said a Microsoft-Yahoo combination would force Google to keep on improving its search engine.
“From a product offering side, I believe it will be better over time,” said Fremont, whose firm is owned by Paris-based Publicis Groupe SA. “It creates new competition in the market.”
