• by Diane Mermigas , November 5, 2008

Google and Yahoo radically revised their proposed search advertising alliance on election eve in a bid for regulatory approval before deal-averse Democrats storm Washington D.C.

As if the recession was not enough of a deterrent, more stringent regulatory reviews and restrictions expected with a Democratic administration will slow mergers, acquisitions and partnerships, which could be critical to some tech and media companies hoping to weather a prolonged recession. How draconian the regulations will become is anyone's guess. President-elect Barack Obama has said he would pursue a vigorous antitrust policy, singling out the media as a consolidation-prone industry that would require close regulatory scrutiny.

The compromise from Google and Yahoo came earlier this week as regulators prepared to block their originally proposed alliance. The modified pact for just two years caps Yahoo search revenues at 25% and does not oblige Google advertisers to participate. Some regulators and advertisers call the proposed arrangement anti-competitive. Yahoo needs the deal to boost its struggling search business, boost investor support and stay out of Microsoft's clutches. The Department of Justice could still nix the deal.

Many media and Internet companies will seek financial relief from the recessionary storm through asset sales and alliances. A Yahoo acquisition of AOL and partnership with Microsoft are among such rumored deals; a clearer picture could emerge today during Time Warner's earnings call with investors. Late Tuesday, some analysts were betting that a collapse of a Google alliance would most certainly make Yahoo the target of a $20-per-share takeover bid by Microsoft that could succeed this time. These are trying times for companies that are dependent on advertiser and consumer spending.

General Electric may yet resort to selling NBC Universal, along with other assets. Viacom and CBS chairman and majority shareholder Sumner Redstone has hinted that he may have to sell all or some of the movie theaters owned by his privately held National Amusements to make payments on a $1.6 billion loan that he is working to restructure. The payment was triggered by the precipitous drop in price of the media company stocks used as collateral. Confronted by a similar bind, John Malone's Liberty Media has so far relied on cash reserves to meet its loan covenants. Other companies may not be as lucky as their cash flow and earnings decline; the economy may force some distressed broadcasters out of business.

New appointments early next year to the Federal Communications Commission will be telling. Believing that the current FCC has been too partisan and big-business friendly, Obama nominees for chairman could include law school crony and former FCC chairman advisor Julius Genachowski, Obama policy director Karen Kornbluh, FCC veteran Donald Gips, former FCC chief Larry Strickling and Democratic FCC commissioners Michael Copps and Jonathan Adelstein.

The new FCC will be strapped with management of the aftermath of the mandated February analog-to-digital switch. Even under the best of circumstances, it's expected to cause distressing disruption. The agency will also have to live with the fallout of the existing FCC's approval Tuesday (Nov. 4) to open the "white spaces" between TV channels for unlicensed Internet access by companies such as Google and Microsoft. The controversial move has been opposed by broadcasters, mobile rivals and others who collectively spent $19 billion on the federally auctioned wireless spectrum earlier this year. Heads also could turn over the FCC's approval Tuesday of two major wireless powerplay deals (Verizon's acquisition of Alltel and the merger of Sprint Nextel's WiMax unit with Clearwire).

An Obama administration will seek to advance, integrate and monetize technology, the Internet and all media in new and innovative ways-- some of which were brilliantly reflected in the campaign's skilled use of the Internet to attract, organize and utilize voters. Obama's historic election was, perhaps, the best evidence that America can learn, self-correct and change in response to the most formidable challneges. A platform published earlier this year supports the principle of network neutrality, deployment of a ubiquitous modern communications infrastructure, and improving America's global competitiveness. It also promises to use interactivity to make government more transparent and accountable. It vows to support innovation by making R&D tax credits permanent, further protecting American intellectual property abroad, and investing in university-based research.

Obama's intentions to use broadband as "an economic catalyst" are evident in his platform and his well-regarded group of advisors. The new president, backed by a Democratically controlled Congress, may also seek to make media and technology part of the solution to nursing the nation back to fiscal health. Obama has proposed creating America's first cabinet-level chief technology officer. Candidates for the job include Google CEO Eric Schmidt, who personally campaigned for him. Others include Amazon founding chairman Jeff Bezos, Microsoft CEO Steve Ballmer, Google executive and Internet creator Vint Cerf and Princeton University's Ed Felten. The new tech czar would have an interesting juxtaposition to--and possible oversight of--the FCC as he develops national broadband policy.

In a sweeping assessment of Obama's proposed comprehensive telecommunications, media and technology policy, industry consultant Andrew Lipman, senior partner of Bingham McCutchen, says the clear winners would include Internet portals and application providers, Hollywood and media content companies, music labels, public interest groups and unions, equipment manufacturers, and Silicon Valley.

More specifically, many experts expect Democrats to leave the business of fairness and decency to the marketplace. The focus will be on assuring universal access and diversity of voices as well as preserving localism and stricter ownership limits. Some have voiced concern that the new public-interest mandates and personal data privacy safeguards (that could extend to targeted online advertising) could cause a negative backlash with free speech and markets. A new administration, charged with creating regulation for the country's battered financial system and getting capital flowing again, must also get technology oversight and innovation just right. That means the celebration ends--and the heavy lifting begins today.