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Will The Microsoft-Yahoo Partnership Result In U.S. v. Microsoft Redux?

Posted  September 23, 2009

Antitrust enforcers may be seeing a lot of their old friends at Microsoft thanks to the Internet search deal the computer giant has reached with Yahoo!  As Constantine Cannon’s Matt Cantor discusses in his recent article, “Microsoft-Yahoo! ‘Partnership’ Is Anti-Competitive, the deal raises substantial antitrust issues that may doom it.

It appears that Microsoft and Yahoo!’s proposed “partnership,” which provides for Yahoo! to exit the search business and rely exclusively on Microsoft’s search engine, Bing, will cause the Internet search market – which has indisputably high barriers to entry – to shrink to a duopoly consisting of Bing and Google.  If the DOJ applies traditional antitrust analysis, the deal should be viewed as presumptively anticompetitive, and the partnership will survive the Department’s scrutiny only if one of the legally cognizable antitrust merger defenses can be established.

However, it is doubtful whether any of the traditional merger defenses apply.  For instance, the “defense against giants” argument (that the merger will help Microsoft better compete against the dominant Google) has historically been viewed with skepticism, and the Bing search engine – powered by Microsoft’s vast financial and technological resources – has received favorable reviews.  In fact, just a few months ago, Yahoo! argued to the Antitrust Division that Microsoft, as a stand-alone entity, would continue to significantly compete against Google in Internet search for the foreseeable future.

Other merger defenses also seem futile.  Despite Yahoo!’s recent financial troubles, a “failing firm” defense (which can only establish when a party will liquidate for the transaction) is unavailable.  Likewise an “efficiencies” defense predicated on cost savings appears likely to fail because there is nothing to suggest that any cost savings will pass to consumers in the form of lower pricing.

Absent changes to the deal structure (such as the preservation of the Yahoo! search engine by divestiture), it appears unlikely that traditional antitrust merger defenses can save the Microsoft-Yahoo! partnership.

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