Google Ad Deal Rankles

Microsoft Lobbies To Stop Accord

Posted October 10, 2008 at 6:19pm

Correction Appended

Microsoft has been rallying its mighty lobbying forces to fight a proposed deal between Google and Yahoo to share their advertising, according to numerous sources on and off Capitol Hill.

But while Microsoft says it is only concerned with keeping a competitive marketplace in the online advertising scene, others see this fight as little more than an opportunity for Microsoft to exercise its considerable political clout against Google, a company it sees as an ever-increasing rival.

“Microsoft’s opposition has very little to do with online advertising and is part of a broader, longer-term strategic battle between two visions of where technology is going to be,” said Glenn Manishin, a partner in Duane Morris’ antitrust and technology practice, who does not represent parties on any side in this issue. “I think Microsoft’s concern isn’t directly with the competitive effect of online advertising, because Microsoft doesn’t do a lot of online advertising.”

Instead, he said, Microsoft is worried that Google’s increasing free online software offerings and advertising revenue will tip the balance and render desktop software programs such as Microsoft Word irrelevant.

The brouhaha over the Google-Yahoo deal gives Microsoft an opportunity to “put roadblocks in front of a rival,” Manishin added.

Microsoft’s pressure over the Yahoo-Google enterprise seems to be paying off, and for now has helped lead to a delay in the agreement, which was originally planned to be implemented this month.

Google and Yahoo said in recent days that they would hold off in order to give Department of Justice regulators more time to assess the proposal.

While not a merger, the proposed deal between Google and Yahoo would enable Yahoo to display some ads from Google on Yahoo search-result pages. The companies would then share the revenue.

Yahoo and Google argue that the deal is not anti-competitive because, unlike an actual merger, it would not remove a competitor from the playing field.

The companies also say that it actually makes Yahoo more competitive because it would bring in additional advertising revenue.

“Microsoft is pulling out every favor it’s got,” said one knowledgeable tech industry source who is not aligned with either side’s viewpoint on the issue. “It has a very close relationship with DOJ and the White House, and all of that pressure is being brought to bear.”

Online advertisers currently can pay to have their links featured in an advertising section when search results pop up. There is no exclusivity; advertisers can pay for their links to come up on any Internet search site.

But Google has been most successful at making money from ads placed that don’t use frequent and general search terms such as “shoes” or “autos” but instead are more specific and far less common such as the “elevation of Mt. Elbert,” according to Yahoo spokeswoman Tracy Schmaler.

The deal would allow Yahoo to tap into that revenue stream.

Microsoft has raised opposition both publicly and privately, saying the deal is anti-competitive and could lead to higher costs for online advertisers. The situation is all the more complicated because Microsoft made a run earlier this year at a takeover of Yahoo, though that effort seems off for now.

“I don’t think we’re doing anything untoward here,” Microsoft spokesman Jack Evans said. “I think we’re doing simply what people do. The concern that we’ve consistently expressed here is that the deal is essentially a price-fixing agreement.”

He added, “The bottom-line concern here that we have, the other issue that we’ve raised, is that the deal erodes Yahoo’s advertising platform.”

That’s not Yahoo’s take.

“We believe strongly that this agreement will strengthen Yahoo!’s competitive position in online advertising and will help to drive a more robust, higher quality Yahoo! marketplace for our advertisers, publishers and users,” Schmaler wrote in an e-mail.

Evans noted that Google has been actively lobbying on behalf of the Google-Yahoo deal.

But it’s Microsoft’s opposition that has had many in the tech industry buzzing.

“There is no doubt that Microsoft has been the most energetic opponent of this agreement and has lobbied hard to generate opposition from behind the scenes,” Google spokesman Adam Kovacevich said. “Of course, this is the same Microsoft that would still like to buy Yahoo, so their motives aren’t exactly pure.”

Microsoft maintains an impressive roster of in-house and outside consultant lobbyists, a team created since the Redmond, Wash., company famously bulked up in the late 1990s after being hit with a sweeping antitrust lawsuit brought by the Justice Department.

Its K Street collection, led by its top in-house lobbyist Jack Krumholtz, includes several of the city’s top-tier firms: Bryan Cave Strategies; Covington & Burling; Elmendorf Strategies; Johnson, Madigan, Peck, Boland & Stewart; Patton Boggs; and the Raben Group, among others.

Microsoft has reported spending just shy of $5 million for the first six months of 2008.

Google, which in the past three years has expanded its lobbying presence, is still significantly smaller than Microsoft. Google reported spending $1.4 million on federal lobbying in the first six months of 2008, and its outside consultants include Dutko Worldwide, Franklin Square Group, Podesta Group and Van Ness Feldman, among others.

Google’s top in-house lobbyist is Alan Davidson, who started the firm’s Beltway outpost as a shop of one in 2005.

Sources familiar with the recent effort say that Microsoft also has helped to encourage other groups to oppose the deal, from a cross-section of agriculture groups such as the American Corn Growers Association to the Association of National Advertisers, whose members include Microsoft (though not Google and Yahoo) as well as General Motors, Procter & Gamble, IBM and American Express.

A spokeswoman for the corn-growers group said her organization’s concerns “have to do with the impact on small communities and fair competition,” but she refused to elaborate — or to discuss any involvement with Microsoft — and promptly hung up the phone.

In a letter earlier this year that the corn growers and other groups sent to the House and Senate Judiciary committees, the groups argued that the Google-Yahoo deal could lead to a large “monopolist” that could then “discriminate against small and middle-sized businesses from rural communities in favor of larger, more moneyed firms, driving up online advertising prices for everything from feedstock to equipment and shutting out hundreds of small businesses who need an open platform on which to market their products.”

Dan Jaffe, executive vice president for the ANA, said his group took a careful survey of its members and is representing their collective views, not just the position of Microsoft.

“One of the few categories of advertising that’s been growing is online advertising,” Jaffe said. “We have said [the deal] raises significant issues, enough that the DOJ should look at it, and we have concerns that it could lead to increased costs for online advertising.”

Last month, the ANA sent a five-page letter to the Justice Department spelling out its concerns, calling it a “negative” for advertisers.

“Search advertising prices are likely to increase as Yahoo selects higher-priced Google advertising to enhance its profitability,” the letter said. “ANA believes it is in the best interests of the marketplace for the Department of Justice to not support the proposed collaboration.”

But while encouraging outside groups has been part of Microsoft’s strategy, it is focused on Capitol Hill and the DOJ.

Congressional sources in the House and Senate say they have heard from both Microsoft and Google on the deal.

This month, Sen. Herb Kohl (D-Wis.), who chairs the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, sent a letter to the DOJ encouraging the agency to monitor the deal.

It “presents a number of antitrust questions which require an examination,” Kohl wrote. “If, over time, you determine that Google is gaining a dominant market position as a result of the Google-Yahoo agreement, then we would encourage the Justice Department to intervene to protect competition.”

“In terms of lobbying, I know Microsoft has had a presence,” a Kohl aide said. “Typically, we don’t discuss what happens in meetings. Our meetings are confidential.”

The aide added that Kohl would continue to examine the deal.

The knowledgeable tech industry source that is not aligned with either side’s viewpoint on the issue said that much of Microsoft’s effort has been behind the scenes. “At least for the last year and a half, they’ve had a Google battle in mind,” this source said. “They have hired some good folks.”

Daniel Strauss contributed to this report.

Correction: Oct. 20, 2008

The article incorrectly stated that Brownstein Hyatt Farber Schreck represents Google. The law firm terminated its representation with Google on Jan. 1, 2008.