Congress waded into the escalating fight over the future of Yahoo Inc. on Tuesday, demanding to know whether the Internet company's advertising partnership with Google Inc., intended to keep Yahoo out of the clutches of Microsoft Corp., raises antitrust concerns.
Testifying before the Senate and House Judiciary Committees on Tuesday, executives from the three companies painted very different pictures of an agreement that will allow Google to sell some of the ads displayed alongside search results on Yahoo's Web site. While Microsoft said the deal would limit competition and raise prices in the online advertising market, Yahoo and Google insisted it would benefit consumers and advertisers.
The stakes are high for Yahoo. It has embraced the partnership with its rival Google as an alternative to a $47.5 billion acquisition offer from Microsoft. But that decision to reject Microsoft has spawned a showdown with shareholders and activist Carl Icahn, who is trying to overthrow Yahoo's board and CEO Jerry Yang. If Washington somehow scuttles the partnership with Google, Yahoo could find itself under even more pressure to head into some kind of deal with Microsoft after all.
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Yahoo and Google say Congress has little power to actually stop the arrangement, but lawmakers can use the bully pulpit to raise concerns about the deal.
Indeed, some of them turned up the heat Tuesday by asking whether the Google partnership will further weaken Yahoo and cement Google's dominance in the online advertising business.
House Judiciary Chairman John Conyers asked whether the partnership would be more anticompetitive than a Microsoft purchase of Yahoo. And Herb Kohl, chairman of the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, said Congress needs to explore "whether this agreement will reduce Yahoo to nothing more than the newest satellite in the Google orbit."
Microsoft's senior vice president and general counsel, Brad Smith, noted that Google already controls at least 70 percent of the market for advertising tied to search results. The Yahoo partnership, he said, will let Google control up to another 20 percent of this market — reducing choices, pushing up prices for online advertisers and potentially compromising consumer privacy.
"Never before in the history of advertising has one company been in a position to control prices on up to 90 percent of advertising in a single medium," Smith said. "Not in television, not in radio, not in publishing. It should not happen on the Internet."
Smith also said Yang had warned Microsoft officials, in a meeting at the San Jose airport last month, that a partnership between Google and Yahoo would freeze Microsoft out of the market for search-related advertising.
Microsoft's concerns were echoed by Matthew Crowley, chief marketing officer for AT&T Corp.'s Yellowpages.com, which helps small and medium-sized businesses place online ads.
If Yahoo "does anything but continue to compete all out to best Google, there is a real risk that the market will tip even further toward Google," Crowley told the Senate Judiciary Committee. "No one in the industry wants that to happen."
David Drummond, Google's senior vice president of corporate development and chief legal officer, countered by telling lawmakers that the partnership will benefit consumers and advertisers by enabling Yahoo and Google to deliver targeted ads that are more relevant to those who see them.
"The whole system becomes more efficient: people see and click on more ads that are useful to them ... and advertisers get more potentially interested customers," Drummond said.
Yahoo's executive vice president and general counsel, Michael Callahan, added that the Google agreement will make the company "an even stronger competitor to Google, to Microsoft and to others in the dynamic and rapidly growing online advertising world."
Yahoo projects the deal will boost its operating cash flow by about $250 million to $450 million in the first year — capital the company says will help strengthen its balance sheet.
Although the Justice Department and several state attorneys general are examining the partnership between Yahoo and Google, lawmakers mostly refrained from passing final judgment on Tuesday.
"I'm confident that Yahoo, Google, and Microsoft will wake up the next morning and prepare for the next battle," said Sen. Charles Schumer. "I am not concerned that this deal will spell the end of any of these three companies."
Still, he added: "What I am concerned about is whether this deal is good for everyday Internet users."