MS-Yahoo, The Web, and Your Future

by Mark Simon, Feb 11, 2008, 10:00 AM

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More than a week has passed since Microsoft's announcement that it plans to acquire Yahoo. As I wrote last week, there are reasons to applaud a combined MS-Yahoo, foremost among them being the fact that it will eventually level the playing field against Google. I do, however, want to acknowledge the many legitimate concerns arising from such a combined operation, because there are many consequences that may not be fully foreseeable today:

Microsoft's past behavior does not auger well for open platforms. As we all know, Microsoft is a "platform" company that makes the bulk of its money from controlling the conduits through which information travels. In the early 1990s, Microsoft, like many other powerful companies, was blindsided by the explosive growth of the World Wide Web, and its response was a predicatively defensive reaction. Over the years, it has repeatedly sought to add proprietary hooks to the Web's set of open standards to advantage itself, attempted to launch proprietary end-to-end publishing systems that offer "enhanced" functionalities (at the expense of openness), taken steps to enforce patents against competitive open-source operating systems, and, in the most notorious example of raw market power, leveraged its Windows desktop monopoly to destroy Netscape.

Other examples of Microsoft's go-for-the-jugular approach are too numerous to mention here; suffice it to say that when Google's chief legal officer warns that Microsoft's acquisition of more market power with a Yahoo acquisition raises "troubling questions," he isn't just blowing smoke.

Microsoft's entry into advertising (whose dollars will contribute up to 25% of the company's future revenues, according to Steve Ballmer) will significantly change the way that we all buy, sell, and otherwise work with media, and many of these changes may not be good. To put it bluntly, we may well be afforded the very narrow set of choices that Microsoft has dealt its legions of applications developers in the past: "Will you develop content for Windows (and obtain all the rich advantages of doing so or not?" "Will you be first to market with a next-generation ad creative unit (perhaps using Microsoft's next-generation, proprietary, XAML-based Silverlight platform) or not?" Applications developers learned long ago to live with such a limited set of choices, which come down to this: "Do you want to develop for Windows or do you want to die?"

The question is whether we in the advertising business will soon be living in this same, highly constrained, binary world.

Inevitable conflicts of interest. In search, a Microsoft-Yahoo combination poses a set of troubling questions for marketers using advertising agencies for media buys, because Microsoft now owns aQuantive, one of the largest interactive agencies. While there is no evidence that aQuantive is using its access to Microsoft's network to steer clients away from buying media on competing networks, it is clear that having such access provides it with a unique advantage over other competing agencies that can be leveraged at any time.

One obvious example would be to provide the equivalent of an agency discount to clients in the form of price discounts, rebates, or other pricing advantages for advertisers making large buys on MSN-Yahoo. Such anti-competitive behavior hasn't to my knowledge happened yet, but will clearly be a temptation in any all-out battle between MS-Yahoo and Google. One thing's for sure: regulators examining the antitrust ramifications of such a combine will certainly be looking at the potential for such predatory pricing.
 
But there are other competitive advantages which accrue that are equally troubling. What if Microsoft decided that aQuantive, and only aQuantive, would be the first agency to have access to next-generation advertising technologies such as Silverlight, or access to advanced targeting technologies on AdCenter? Would this be unfair? Well, of course. Would it be illegal? Well, no. These are just a few ways that Microsoft could use its ownership of an agency to steer business away from competitors, and they should trouble all of us who work for ad agencies.

Competitive impact: short- and long-term issues. As I mentioned last week, I believe that a Microsoft-Yahoo combination will be good for competition, at least in the short term, because it will partially equalize the overwhelming market share that Google currently enjoys in search. Google's strength in search qualifies it as a practical monopoly, and unregulated monopolies are always dangerous to the health of competitive markets. I also believe that the combined company will be good for Microsoft (although Microsoft's shareholders evidently do not agree with me: the stock is down more than 4 points since last Friday's announcement).

But I also must acknowledge that the MS-Yahoo merger, if it goes through, will lead the entire industry into uncharted territory where the kind of openness that we have taken for granted on the World Wide Web may not apply, especially in the mobile and post-desktop environments that clearly represent the future of interactivity.

If any one company is allowed to exert unrestricted control over these new conduits, the result will certainly be fewer choices, not more, and it remains to be seen whether Microsoft (which has staked out positions in each of these areas) or Google (which is attempting to gain influence there) can be trusted not to favor its own vested interests.

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