Microsoft-Yahoo Venture Faces Scrutiny

Tech companies often get a bad rap for not understanding the ways of Washington, D.C. But Microsoft and Yahoo aren’t taking Capitol Hill for granted in their new joint venture.

The Silicon Valley giants huddled with their outside consultants Wednesday morning following the announcement of a partnership between the two companies to take on Internet search and advertising giant Google.

The meeting, which packed Microsoft’s conference room with about 40 outside consultants and members of each company’s in-house team, was led by Microsoft’s new government relations chief, Fred Humphries.

After explaining the details of the agreement, Humphries told the consultants to check the temperature on Capitol Hill, according to lobbyists familiar with the meeting.

So far both companies are staying quiet about their lobbying offensive.

“Yahoo!’s deal with Microsoft is aimed at creating true competition in search and driving innovation for consumers, advertisers and publishers,— Yahoo spokesman Adam Grossberg said in an e-mail statement.

Grossberg declined to discuss the companies’ strategy but said “both companies are now focused on ensuring that interested parties from the Hill to Madison Avenue understand the benefits of this agreement.—

Microsoft spokesman Jack Evans also declined to discuss the details of its Washington strategy.

“Microsoft and Yahoo! expect the agreement to be closely reviewed by the industry and government regulators, and welcome questions,— Evans said in an e-mail statement.

For that reason, they have established a joint Web site at choicevalueinnovation.com “to provide consumers, advertisers and publishers with additional information about the benefits of the agreement,— he added.

Microsoft and Yahoo have already started doing outreach with Members’ offices trying to sell the deal, according to a Senate aide.

Microsoft is in the thorny position of having loudly advocated last year against a similar partnership between Google and Yahoo.

At the time, Microsoft was making the case to Congress, the White House and the Department of Justice that a partnership between the two companies was anti-competitive. Google and Yahoo, on the other hand, said the proposed deal was not anti-competitive because unlike a merger, a partnership would not remove a competitor from the marketplace.

That aggressive lobbying campaign “probably hurts their credibility,— the Senate aide said.

“What’s changed?— the aide said. “Frankly, it’s something you think about when they say now that it will enhance competition.—

The partnership is not a merger. Under the deal, Microsoft will provide the technology for Yahoo’s Web sites.

The two companies will have a combined 28 percent market share in the U.S. compared with Google’s 65 percent market share in online advertising.

Reducing the number of competitors is likely to be an issue raised by Congress and the Department of Justice.

A similar deal between Google and Yahoo was nixed last fall after regulators said they would file a lawsuit to block it.

Antitrust lawyer Makan Delrahim expects the Department of Justice to look “at the economics of it.—

“It’s not immediately intuitive how the search market works. But it does, and that’s made Google successful here,— Delrahim said. “I think that’s an important argument and factor because without the right amount of searches, you can’t have a very significant competitor.—

So far, Google has not gone on the offensive against the deal.

The company has held conference calls with its outside consultants analyzing the deal and the reception it is getting on Capitol Hill.

“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 a statement. “We’re interested to learn more about the deal.—

Google’s top lobbyist is Alan Davidson, who started the firm’s Washington office in 2005.

Since then, Google has built up its in-house lobbying team. The company reported spending $1.8 million during the first six months of 2009 on lobbying. It has four lobby shops on retainer, including DutkoWorldwide, Franklin Square Group and McBee Strategic Consulting.

The Center for Digital Democracy and the Electronic Privacy Information Center have both said the deal would raise serious privacy concerns.

Microsoft and Yahoo could also face some opposition from Sen. Herb Kohl (D-Wis.), who chairs the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights.

Kohl said the partnership “warrants our careful scrutiny— and that members of the subcommittee are “concerned about competition issues in these markets because of the potentially far-reaching consequences for consumers and advertisers.—

The deal is the first real test for Microsoft’s new Washington leadership.

For years, Jack Krumholtz was the brain behind Microsoft’s lobbying efforts.

Humphries, who was a managing director at Microsoft in charge of state government affairs, relocated to Washington in January to lead the company’s Beltway outpost after Krumholtz exited.

In addition to Humphries, Microsoft has also recently installed David Pryor Jr. as director of government affairs for the Senate. Stephanie Peters, a partner at Patton Boggs, also joined Microsoft earlier this month as director of federal government affairs for the House of Representatives.

Microsoft has long been known for its list of hired guns. The tech company retains 19 outside lobbying firms, including Cornerstone Government Affairs, Elmendorf Strategies, Patton Boggs, Bryan Cave and Federal Policy Group.

Microsoft spent $3.54 million on federal lobbying during the first half of 2009, according to Senate lobbying disclosure reports.

Yahoo’s government relations team spent just $940,000 during the first half of 2009.

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