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Friday, August 1, 2008

Yahoo, Microsoft Clash At Congressional Hearings

Yahoo Inc. and Microsoft Corp. executives took their battle on the road Tuesday, trading barbs at two congressional hearings on the proposed advertising pact between Yahoo and Google Inc. in front of lawmakers who questioned the wisdom of the deal.

Microsoft General Counsel Brad Smith told a Senate panel that Yahoo Chief Executive Jerry Yang had said to Microsoft executives at a June 8 meeting at the San Jose, Calif., airport that a Yahoo-Google alliance would effectively dominate the Internet search business. Microsoft has opposed the proposed Yahoo-Google deal on grounds that it would be anticompetitive.

In sworn testimony, Mr. Smith recounted that Mr. Yang said at the time, "The market today is basically a bipolar market. On one pole there's Google, and on the other pole there are Yahoo and Microsoft both competing with Google. If we do this deal with Google, Yahoo will be part of Google's pole and Microsoft ... wouldn't be strong enough to remain a pole of its own."

Michael Callahan, Yahoo's general counsel, testified that he was at the same meeting and disagreed with Mr. Smith's version of events. Mr. Callahan said he didn't recall Mr. Yang making those comments.

The public clash between Microsoft and Yahoo executives provoked expressions of concern from some lawmakers, although there is relatively little Congress can do to stop the deal. An inquiry started by the Justice Department last month is more of a concern to the companies.

The companies agreed to hold off on completing the pact for as long as three and a half months during the investigation, which has included more than a dozen subpoenas to Google, Yahoo, their competitors and online advertisers.

In tandem with the federal inquiry, as many as a dozen state attorneys general are now scrutinizing the pact. Ongoing tension and bitterness between Microsoft and Yahoo -- heightened over the weekend when Microsoft's latest offer to buy Yahoo's search business was rejected -- spilled into the hearings Tuesday, foreshadowing the likely fight over the antitrust review.

In June, Yahoo and Google entered into a nonexclusive advertising pact that would let Yahoo run some search advertisements sold by Google and to get a share of the revenue from those ads.

At the time, Yahoo executives described the agreement as a way to generate additional operating income without giving up its search business. While its U.S. search advertising business continues to lose share to Google's, Yahoo believes it would be a less attractive partner for online advertisers without it. It was widely seen as an effort by Yahoo to resist Microsoft's overtures to acquire some or all of the company.

The deal has raised questions by federal and state regulators, who are looking into whether the deal could result in higher prices for businesses and fewer choices for consumers. Google has a roughly 60% share of U.S. Web searches, while Yahoo has a share of about 20%, according to comScore Inc.

Yahoo and Google lawyers argued at the hearings that the advertising pact would not curb competition between the two in the search-advertising market. The companies also rejected Microsoft's contention that the combination would result in an informal "price floor" and higher prices for advertisers.

"Yahoo is here to stay, and we intend to compete on multiple platforms for years to come," Yahoo's Mr. Callahan said.

Google's chief legal officer, David Drummond, argued the goal of the agreement was not to increase prices. "We're not looking to sell ads for higher prices. We're looking to sell more ads," he said.

But one of Yahoo's longtime partners -- AT&T Inc. -- said the deal was a bad idea and would result in higher prices for advertisers.

"We do believe that prices will increase, and we do believe that Yahoo will weaken," said Matthew Crowley, chief marketing officer of Yellowpages.com, an AT&T subsidiary. "Google is the dominant player in search today. Doing this kind of deal now weakens Yahoo's ability to compete," he said.

By: Amy Schatz and Jessica Vascellaro
Wall Street Journal; July 16, 2008