Trustbusters should call off fishing expedition in Microsoft-Yahoo deal

In today’s Seattle Times, CEI Information Policy Analyst Ryan Radia and CEI Policy Fellow Jonathan Hillel talk about the U.S. Senate Antitrust Subcommittee’s threat of “careful scrutiny” over the recent Microsoft-Yahoo deal.  Read the piece here or see below.

MICROSOFT and Yahoo want to join forces in Internet search to better compete against Google. But first, they need the blessing of government antitrust enforcers. Senate Antitrust Subcommittee Chairman Herb Kohl, D-Wis., already has threatened “careful scrutiny” of the deal. But trustbusters should not go fishing for problems in the Internet search market. In the relentlessly fast-moving digital economy, government intervention contorts the market and ultimately harms consumers.

Under their proposed decadelong pact, Yahoo searches will be powered by Microsoft’s Bing search engine, which launched this June. The two search firms will maintain separate Web sites, but Microsoft will administer the technical side of both. Microsoft will also gain access to Yahoo’s vast volume of searches and query data. In exchange, Yahoo will receive 88 percent of ad revenues from searches performed on its own site.

As Steve Lohr of The New York Times noted recently, the scale advantages resulting from the arrangement will be significant. By teaming up with Yahoo, Microsoft will gain a much larger share of Internet searches, helping it attract a bigger slice of the $11 billion search advertising market.

An equally important benefit of the deal is “data scale.” Search engines are forever tweaking their underlying algorithms using complex statistics and machine learning. More searches mean more data can be mined – and, therefore, more accurate results. This, too, can fuel ad sales by making targeted placements more attuned to user preferences.

Both Yahoo CEO Carol Bartz and Microsoft Chief Steve Ballmer have admitted that scale is the driving force behind the deal. To antitrust enforcers, however, “scale” is often a major red flag. This is because the Justice Department assumes that in markets where competitive advantage stems from firms’ size and market share, the consolidation of existing competitors thwarts the entry of newcomers.

Scale may make Microsoft and Yahoo more competitive, but it hardly guarantees them success. Indeed, history tells us that innovation, not scale, is the one true silver bullet in Internet search. Google earned its crown nearly a decade ago by revolutionizing search technology, devising the revolutionary PageRank system for indexing the Web and toppling AltaVista in the process. More recently, Microsoft’s Bing has made inroads by combining a clever cataloging system with alluring design.

In the same way, the firm that ultimately dethrones Google will likely do so by offering superior search technology, not simply more of it.

The Microsoft-Yahoo deal has also raised concerns over “network effects.” This refers to the phenomenon whereby a technology becomes more valuable to its users as the size of its user base grows. Concerns over network effects were at the center of Microsoft’s antitrust woes beginning in the late 1990s.

Yet online search is not a network market. The reason Google attracts so many users is not because it already has lots of them, but because it gives the best search results. Once again, innovation, not scale, is the real trump card in the Internet search market.

Farhad Manjoo of Slate recently observed that search engines including Cuil, Wolfram Alpha, Topsy and Bing all emerged as viable players in Internet search despite Google’s supposed dominance. To be sure, none of these search engines have yet threatened Google. But since Web users can switch search engines with a few clicks of the mouse, sustaining market share over time is impossible without continual innovation.

Antitrust policing lags far behind the rapid-fire evolution of dynamic Internet markets. It is no accident that Web search depends on innovation; rather, this is the very nature of the modern information economy. The Justice Department should stop worrying about scale and keep its hands off the Internet search market.