Google's Playing With Antitrust Fire If It's Courting Yahoo

A rumored move by Google to possibly finance a buyout of Yahoo’s core business so that it can A) sell ads across Yahoo’s websites or B) raise the purchase price for its rivals would be recklessly incendiary — the functional equivalent of Google playing with matches in a fireworks factory. To understand how reckless this behavior would be for a major publicly-traded company under antitrust investigation around the world for monopolistic abuses, let’s examine the behavior (the matches) and the context (the fireworks factory) involved. First, it would be anti-competitive for #1 Google to buy part of #2 Yahoo to gain business leverage over Yahoo and to extend Google’s dominant advertising service to Yahoo’s audience, because the Google-Yahoo cross-ownership would undermine Yahoo’s ability to compete with Google. Google supplying advertising for Yahoo also would make Yahoo dependent on Google and reduce its incentive to compete with Google over time. Google’s efforts also could be perceived as a deceptive back-door scheme to break up the Yahoo-Microsoft search advertising agreement, which was approved by the Department of Justice in 2010 in a last-ditch effort to create at a viable competitive alternative to Google’s dominant online advertising platform. Second, it would be anti-competitive if Google were involved in the bidding for Yahoo not because it was interested in owning part of the company but instead in order to drive up the costs of its rivals. Using market power to collude to manipulate an informal auction of a public company that is Google’s leading competitor, with the purpose of driving up acquisition costs to make it harder for rivals to successfully compete, would be classic Sherman Act illegal monopolistic behavior. A Google representative declined an offer to comment on this piece. The Context (the fireworks factory): First, if the WSJ’s report were true, Google would be thumbing its nose at the DOJ, which officially warned Google to tread carefully less than three years ago. In 2008, the U.S. DOJ threatened a Sherman Act Section 1 and 2 monopolization case against Google in order to block the proposed Google-Yahoo Ad Agreement. A Sherman Section 2 is the most severe antitrust action the U.S. Government can take, because it involves potential criminal felonies carrying a potential 10-year sentence. Google’s largest advertising customers strongly opposed the proposed ad agreement between Google and Yahoo in 2008 as collusive and anti-competitive. One can assume major advertisers would oppose another attempt at a Google-Yahoo mashup given that Google now has about 80% of U.S. search revenues, per eMarketer, and 97% of mobile search share, per Statcounter, and is quickly approaching control of over half of all U.S. online revenues per IAB. Simply, Google would be blowing off the DOJ’s most serious warnings to not collude with its largest direct competitor by essentially re-proposing to accomplish the previously-blocked 2008 Google-Yahoo ad agreement via different means. To make matter worse, this would not be Google’s only recent run-in with law enforcement. Just two months ago, Google admitted to criminal felonies in the DOJ-Google Non-Prosecution Agreement and paid a near-record $500 million criminal forfeiture for aiding and abetting illegal prescription drug imports and sales despite being warned several years ago by law enforcement. The U.S. Attorney also made it clear that Google CEO Larry Page was aware of the criminal activity for years and did not stop it. Second, Google would be recklessly pushing the antitrust envelope at the same time it is under serious antitrust investigations around the world. Currently, Google’s business practices are under antitrust investigation by the FTC, DOJ, Texas, California, New York, European Union, and Korea. Enforcement action by the EU is most likely and most imminent, given that: Google’s market share in Europe is 90+%; there are at least nine antitrust complaints against Google pending there; the EU’s monopoly law is tougher than the U.S.; and the EU investigation is approaching the one-year mark. Third, Google would be reckless to incite further investigation given that it already has the worst antitrust track record of any major public company over the last three years. In 2008, DOJ blocked the Google-Yahoo ad Agreement. In 2009 and 2010 the DOJ twice opposed the Google Book Settlement for trying to establish an ill-gotten monopoly. In 2009, the FTC forced then Google CEO Eric Schmidt off of Apple’s board as an anti-competitive arrangement. In 2010, Google and other companies settled with the DOJ over illegally and anti-competitively colluding to keep competitors from poaching Google’s employees. And in 2011, Google entered into a court-supervised consent decree to mitigate the anti-competitive effects of the ITA acquisition. In sum, Google is playing with antitrust fire. Just last month, a bipartisan Senate antitrust oversight subcommittee strongly urged Google to recognize that Google’s market dominance carries special responsibility to not act anti-competitively. In this context, Google’s reported efforts to co-opt its leading competitor Yahoo are at best provocative, and at worst a catch-us-if-you-can taunt to law enforcement. Most curious is why private equity firms would consider working with Google to raise capital for a joint bid for Yahoo. Google’s involvement would raise their acquisition costs and lower their potential returns by pumping up the deal price, while also dramatically increasing deal risk and time to close. What might they be thinking?