Blog Post

Why The Justice Department Approved The Yahoo-Microsoft Search Deal

Two main (and related) reasons, according to a statement the Justice Department put out this afternoon: 1) The search deal is “not likely to substantially lessen competition in the United States.” Specifically, the Justice Department says that both Microsoft (NSDQ: MSFT) and Yahoo (NSDQ: YHOO) have been more focused on competing with Google (NSDQ: GOOG) than with each other.

And 2) “The proposed agreement likely will enable more rapid improvements in the performance of Microsoft’s search and paid search advertising technology than would occur if Microsoft and Yahoo were to remain separate.” The Justice Department notes that the deal will provide Microsoft with a larger “set of queries” which will make it easier for Microsoft to serve more relevant results.

Definitely seems like the government — which approved the deal “without restrictions” — was won over by the two parties’ arguments.

Here’s the statement:

“The Antitrust Division obtained extensive information from Microsoft, Yahoo! and a wide range of market participants. Experience and expertise developed during our 2008 investigation of the proposed Google/Yahoo! search advertising agreement also informed our analysis. After a thorough review of the evidence, the division has determined that the proposed transaction is not likely to substantially lessen competition in the United States, and therefore is not likely to harm the users of Internet search, paid search advertisers, Internet publishers, or distributors of search and paid search advertising technology. In addition, the proposed agreement likely will enable more rapid improvements in the performance of Microsoft’s search and paid search advertising technology than would occur if Microsoft and Yahoo! were to remain separate.

“The proposed transaction will combine the back-end search and paid search advertising technology of both parties. U.S. market participants express support for the transaction and believe that combining the parties’ technology would be likely to increase competition by creating a more viable competitive alternative to Google, the firm that now dominates these markets. Most customers view Google as posing the most significant competitive constraint on both Microsoft and Yahoo!, and the competitive focus of both Microsoft and Yahoo! is predominately on Google and not on each other.

“The search and paid search advertising industry is characterized by an unusual relationship between scale and competitive performance. The transaction will enhance Microsoft’s competitive performance because it will have access to a larger set of queries, which should accelerate the automated learning of Microsoft’s search and paid search algorithms and enhance Microsoft’s ability to serve more relevant search results and paid search listings, particularly with respect to rare or “tail” queries. The increased queries received by the combined operation will further provide Microsoft with a much larger pool of data than it currently has or is likely to obtain without this transaction. This larger data pool may enable more effective testing and thus more rapid innovation of potential new search-related products, changes in the presentation of search results and paid search listings, other changes in the user interface, and changes in the search or paid search algorithms. This enhanced performance, if realized, should exert correspondingly greater competitive pressure in the marketplace.

“Although this particular transaction is not likely to cause harm, the department will continue to be vigilant in our enforcement of the antitrust laws in the search and paid search advertising industry.

“The offices of the attorneys general from California and Washington actively participated in the division’s investigation of the proposed transaction.”