NO matter how happy the bride and groom, there is always some tension at a
wedding when the vicar asks: “If anyone here has any objections to this
couple getting married, let them speak now or forever hold their peace.”
Outside of Hollywood movies, no one usually spoils the big day. But as
Microsoft attempts to frogmarch Yahoo down the aisle, at least one guest is
lining up objections to shout out from the pews. Microsoft’s unsolicited
$44.6 billion (£22.9 billion) bid for Yahoo was barely two days old when
David Drummond, Google’s chief legal officer, launched his first attack.
“The openness of the internet is what made Google – and Yahoo – possible,”
Drummond wrote on Google’s official blog. “A good idea that users find
useful spreads quickly. Businesses can be created around the idea. Users
benefit from constant innovation. It’s what makes the internet such an
exciting place.
“Microsoft’s hostile bid for Yahoo raises troubling questions. This is about
more than simply a financial transaction, one company taking over another.
It’s about preserving the underlying principles of the internet: openness
and innovation.”
It was the first salvo in a war of words that will pitch two of the richest
and most competitive companies in the world at each other’s throats. Google
is not commenting beyond Drummond’s statement, but analysts, rival media and
technology executives expect the company to fight furiously in Washington
and Brussels as it lobbies to get the competition authorities to block the
deal. It’s easy to see why Google is rattled. With the acquisition of Yahoo,
Microsoft could finally take the fight to Google after years of playing an
expensive and largely unsuccessful game of catchup. Microsoft was a late
developer on the net. Since 2002, the company has spent at least $15 billion
on building its online business. More than $5 billion has been spent in the
past 18 months alone, according to Matt Rossoff, an analyst at Directions.
“And by every measure they are not doing well,” he said, adding that Yahoo
could – and it’s a big could – end that bad run. Microsoft’s immediate goal
is to grab a bigger chunk of the online advertising market. It’s a sector
Google dominates and which Microsoft expects will grow from $40 billion last
year to nearly $80 billion by 2010. But behind the ad money is a larger tale
of rivalry for dominance of the internet as it weaves itself ever further
into the fabric of everyday life. Microsoft dominates software on computers
today and it has done so by selling Windows, Office and its other software
just like Procter & Gamble sells soap.
But the days when software was bought in boxes are coming to an end. If
Microsoft wants to maintain its dominance in the digital age, it will have
to move its services online aggressively. With Yahoo under its wing, the two
firms would attract more than 290m visitors a month in America alone. What
better way to start a new monopoly? It’s a story that Google will be hoping
regulators on both sides of the Atlantic will listen to as they lobby to
stop the bid. Yahoo and Microsoft lag behind Google in ad sales as well as
in internet search, but they have a huge lead in e-mail and instant
messaging. Yahoo’s front page is also among the most popular on the web.
Google has made Microsoft look flat-footed, but the Seattle giant’s software
still dominates the world.
“Could the acquisition of Yahoo allow Microsoft – despite its legacy of
serious legal and regulatory offences – to extend unfair practices from
browsers and operating systems to the internet?” Drummond wrote last week.
“In addition, Microsoft plus Yahoo equals an overwhelming share of instant
messaging and web e-mail accounts. And between them, the two companies
operate the two most heavily trafficked portals on the internet. Could a
combination of the two take advantage of a PC software monopoly to unfairly
limit the ability of consumers to freely access competitors’ e-mail, instant
messaging and web-based services?
“Policymakers around the world need to ask these questions – and consumers
deserve satisfying answers,” he added.
These are arguments lobbyists will be putting and rebutting at vast expense in
the coming weeks. Both companies have a strong presence in Washington.
Google and Microsoft have made donations to politicians, including Nancy
Pelosi, speaker of the House of Representatives. Microsoft paid $4.8m to
lobbying firms last year and Google spent $580,000, according to the Center
for Responsive Politics. Nonetheless, Google has Washington clout and was
able to get American approval of its controversial merger with DoubleClick,
the world’s largest internet-monitoring firm. It is still awaiting the
European decision.
Many analysts believe Google will be lucky if it can make the anticompetitive
charges stick. David Schatsky at Jupiter Research said: “Competition is at
the heart of this deal but maybe not in the way Google has so far portrayed
it.
“In online ads Yahoo and Microsoft are small players and getting
smaller, said Schatsky. “Microsoft and Yahoo do have a great lead in e-mail
and instant messaging but that’s not where the battle is occurring.”
Online advertising broadly splits into two camps – search and display. Google
makes 99% of its money from ads displayed after someone has performed a
search on its service. Display ads are more similar to the ads seen in
newspapers or magazines. Yahoo, with its popular front page, news and e-mail
services, has a bigger presence in display ads than Google. So far the
advertisers don’t seem especially worried by the combination of Microsoft
and Yahoo. They were less keen on Google’s purchase of DoubleClick, a deal
that Sir Martin Sorrell, boss of advertising giant WPP, has argued hands too
much power to Google.
Wayne Arnold, chairman of the London-based Institute of Practitioners in
Advertising’s digital group, said he saw few grounds for competition
concerns. “For online display ads there are hundreds of choices in Europe,”
he said. “Microsoft and Yahoo would always be near the top, but there is a
lot of competition. In the UK you have Sky, Orange, Beebo, MySpace,
Facebook. It’s not like ITV and Channel 4 getting together.”
After years of phenomenal growth, search advertising is beginning to show
signs of becoming a mature market. Advertisers bid to put their ads up when
people search for specific words like “car insurance” or “student loan”.
Once the price is set, if a person clicks on their ad, they pay that price
to Google, Yahoo or whoever. “Advertisers know what the rates are for those
words now,” said David Levinsky,pres-ident of Toppayingkeywords.com, which
tracks the more mature American market.
Certain words can become very expensive. For example, “mesothelioma” a type of
cancer that is caused by asbestos, became a $30 word after lawyers launched
huge lawsuits on behalf of sufferers. But in general, “firms know what the
clicks are worth”, said Levinsky. Over the last year, prices have risen
about 5% – between 2004 and 2006 they rose 25%, he said. Display
advertising, on the other hand, is still in its early days. Arnold said
European studies had shown that people now spent 25% of their “media time”
on the internet, but advertisers were spending only about 12% of their
marketing budgets online. A merger would give Microsoft Yahoo a significant
jump on Google in online display advertising, with a market share of about
30% compared with Google’s 2%.
Offering an integrated advertising package, giving advertisers the ability to
buy both search and display ads and get access to Yahoo’s mobile-phone
platform, could be a winning combination for big brand advertisers looking
to boost their online presence. Arnold said that the combination of Yahoo
and Microsoft could be a benefit to advertisers “creating a stronger
competitor to Google is arguably a good thing”. However, Arnold’s greater
concern is that a merged company will fail to live up to its promises.
“They are not as good as Google and the risk is that a combined product may
not be as good as Google,” he said. Both Yahoo and Microsoft have squandered
formidable leads online. But after years of big spending and little results,
the merged entity might be a more formidable opponent than the sum of its
parts. “It’s a bold and aggressive move,” said Schatsky. “But there’s a lot
of uncertainty. Uncertainty over whether it will go through, uncertainty
over whether they will execute a merger well and, even if they do get it
right, whether they will be able to slow Google’s progress.” And while the
deal comes under closer scrutiny, all that uncertainty will not make life
easier for Yahoo or Microsoft, leaving Google to do what is does best: stay
ahead of the pack.
