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Why the DOJ wants more on Yahoo search deal

Microsoft and Yahoo's move to condense the number of serious players in the search market could prompt the Department of Justice to impose conditions on the deal.

The long road toward Microsoft and Yahoo's search deal could be set to get a little longer, or fall off a cliff.

Both companies have long expected the U.S. Department of Justice to scrutinize the deal to install Microsoft as the exclusive search provider for Yahoo's Web pages, which would also see Yahoo end its time as a search company. Microsoft and Yahoo confirmed Friday that the Justice Department has asked the two companies for more information about their deal, which is a step beyond taking a mere interest in the proceedings.

In this case, the Justice Department is likely looking at two different aspects of the deal. On one hand, regulators are expected to probe whether advertisers will be harmed by the loss of an outlet for their ad dollars, as well as whether Google has less incentive to compete for searchers now that there's only two fish in the pond.

In some ways, it's almost a reflexive action. When there are three major companies in a market, and two of them decide to join forces, that almost automatically provokes a review, said Matthew Cantor, an antitrust lawyer with Constantine Cannon in New York.

"This deal is going to eliminate a competitor in search in a market that has high barriers to entry and only has three players," Cantor said. He compared it to the reaction that would have arisen in the 1960s if two of the three major television networks had decided to merge amid a far-smaller media landscape.

But the deal--years in the making--could have arrived at a time when the DOJ is more interested mergers and acquisitions than under past administrations.

After years of a largely hands-off approach toward intervening in mergers, the Justice Department is likely to increase its scrutiny of merger activity, said Donald Russell, a partner with Robbins Russell in Washington. The poor state of the economy has decreased merger activity, but things are starting to pick up and the Justice Department under President Obama could begin to assert itself more strongly than it did under the Bush administration.

Cantor thinks the Justice Department will force Microsoft and Yahoo to put Yahoo's search technology assets up for auction to let the deal go through. That would allow a third major player to enter the business, although that new entrant would still have the burden of attracting searchers: Yahoo has said that an overwhelming majority of the people using Yahoo search are already doing so from a Yahoo Web page, the combination of which are among the most visited pages on the Internet.

However, that might not be as appealing to Microsoft and would at least throw the deal into question. The company has spent millions on the development and launch of Bing, but it likely is interested in retaining certain aspects of Yahoo's search technology, not to mention some of its engineers.

Given that Microsoft and Google have been fighting behind the scenes in Washington all year as scrutiny of Google ramps up, you might think Google had decided turnabout was fair play. Google declined to comment on the circumstances that have led to the Justice Department's review, other than to say in a statement "there has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. We're interested to learn more about the deal."