• by Wendy Davis  @wendyndavis, February 4, 2008

Microsoft's unsolicited $44.6 billion bid to take over Yahoo hasn't yet been accepted by the company's board, but it's already facing scrutiny in Washington.

The Department of Justice confirmed late last week that it will conduct an antitrust review of the deal, which would consolidate two of the Web's biggest players. In addition, the House Judiciary Committee's task force on antitrust and competition policy said it will hold a hearing Friday to address Web competition.

"Microsoft's bid to acquire Yahoo is certainly one of the largest technology mergers we've seen, and presents important issues regarding the competitive landscape of the Internet," said Representatives John Conyers, Jr., (D-Mich.) and Lamar Smith (R-Tex.), who issued a joint statement. They added that the hearing will address whether the merger "works to further or undermine the fundamental principles of a competitive Internet."

European authorities, who delayed approval of Google's pending $3.1 billion merger with DoubleClick pending an in-depth review, also are expected to scrutinize Microsoft's proposed acquisition of Yahoo.

"It will get looked at," said antitrust lawyer Ted Henneberry. If nothing else, the fact that the merger would combine two of the three major search engines will "cause the agencies to want to look very intensely at it," said Henneberry, who co-chairs the European practice group of Heller Ehrman.

If the deal closes, the new Microsoft-Yahoo entity would have a greater share of U.S. online display ads than any other single company. Combined, Microsoft and Yahoo would account for 31.5% of all search traffic, according to Nielsen Online. But that proportion still lags behind Google, which dominates with 56%.

Henneberry said that Google's continued strength in search will likely lead the antitrust authorities to conclude that this deal will increase, not decrease competition, on the theory that a combined entity will be better positioned to challenge Google than either company separately.

Google's chief legal officer wrote in a blog post Sunday that the deal "raises troubling questions."

"This is about more than simply a financial transaction, one company taking over another," wrote senior vice president David Drummond. "It's about preserving the underlying principles of the Internet: openness and innovation."

Referring to Microsoft's history of antitrust violations, including using its dominance with Windows to establish Internet Explorer as the leading browser, Drummond questioned whether Microsoft would attempt to leverage Yahoo's large user base "to extend unfair practices from browsers and operating systems to the Internet."

Specifically, Drummond questioned whether Yahoo's strength in e-mail and instant messaging services, as well as its status as a large portal, could lead Microsoft to "take advantage of a PC software monopoly to unfairly limit the ability of consumers to freely access competitors' email, IM and web-based services."

Meanwhile, Microsoft and Yahoo also face opposition from privacy advocates, who are vowing to press for new legislation limiting the companies' ability to use data about consumers for marketing purposes.

"Privacy is a hot button issue that will be raised by advocates, and Microsoft and Yahoo will be forced to address it," said Jeff Chester, executive director of the Center for Digital Democracy, which opposes Google's buyout of DoubleClick on both privacy and antitrust grounds.

Yahoo and Microsoft each have personalized information about many users of their popular e-mail services. Some industry observers say that simply combining the two databases could compromise some people's privacy.

"When a database gets larger, sometimes you can identify people you couldn't identify before," says Peter Swire, a senior fellow at the liberal think tank Center for American Progress and law professor at Ohio State University. For instance, he says, some consumers now might tend to use Microsoft Hotmail for e-mail but Yahoo for search; if the email registration information is combined with search queries, marketers could potentially compile more detailed profiles.

"As you merge all these databases together, you might get a deeper surveillance," Swire said.

Privacy advocates last year urged the Federal Trade Commission to consider how Google's pending merger with DoubleClick would affect online privacy when evaluating whether to approve that deal.

The FTC late last year cleared the deal, but also stated that privacy issues should be addressed on an industry-wide basis and proposed broad principles about the topic.