Tech Industry

Microsoft's D.C. lobbying sank Google-Yahoo deal, Jerry Yang

Yahoo CEO Jerry Yang hoped an advertising deal with Google would boost revenue and keep Microsoft at bay. Instead, he ended up resigning soon after the Justice Department, thanks to Microsoft lobbying, blocked the deal.

In theory, antitrust law helps foster competition. In reality, politically connected companies sometimes use it to bludgeon competitors and boost their own bottom line, as soon-to-be former Yahoo CEO Jerry Yang learned the hard way.

Yang had lent his prestige and the weight of his position to the proposed Google-Yahoo advertising deal, in part as an alternative to being gobbled up by Redmond, and in part as a way to get an easy $800 million a year in additional revenue.

When that proposed deal unceremoniously ended earlier this month--thanks to Microsoft's take-no-prisoners lobbying efforts in Washington, D.C., and a credulous Justice Department--Yang's time as CEO did too.

What a change. Back in the late 1990s, when Microsoft was busy fending off hordes of government antitrust lawyers, the company took a remarkable step: it actually asked Congress to reduce funding for the Justice Department's antitrust division.

That was then. Now, Microsoft has realized that spending money on antitrust lobbyists can pay off handsomely. Morality aside, that's an ROI that Warren Buffett would envy.

Consider the numbers: from February 1, 2005, and November 17, 2005, Microsoft spent $11.99 million on lobbyists, according to financial disclosure documents filed during that time. During that same period in 2006, the figure was $13.95 million. In 2007, it was $13.8 million.

But between the announcement of the Yahoo deal on February 1, 2008, and Monday, Microsoft's lobbying spending zoomed upward to $24.72 million.

Not only would that be a remarkable increase in any year, but it's especially notable during a time this year during which Congress has been quiescent on technology-related legislation. The figure also doesn't include money spent on public affairs firms and lobbyists who don't fit the relatively narrow legal definition and are not required to register with the government. (The numbers do include some spending that took place earlier than the February-November date range and was reported during that period.)

In return for millions of dollars distributed to Washington insiders, Microsoft could save billions on an eventual Yahoo purchase. Yahoo shares closed at $28.38 on February 1, the day the bid was announced, and at $10.63 on Monday. Even taking into account the market's overall fall in share prices, Microsoft may save billions by shoving Yahoo into a corner and eliminating its options.

One Redmond technique involved what's called astroturfing. CNET News reported in August about how anti-Google coalitions-one example was the American Corn Growers Association's sudden interest in the intricacies of online advertising and competition policy appeared immediately after Microsoft hired a secretive lobby firm called the LawMedia Group. Because LMG specializes in faux grassroots lobbying efforts, its efforts to sink the Google-Yahoo deal are not subject to disclosure requirements. Neither are funds spread around through trade associations.

(To be sure, Google is no saint. It tried to hamstring its Washington state rival by lodging a fanciful antitrust complaint about Windows Vista desktop search and tossed around terms like "illegal influence" when Microsoft was courting Yahoo earlier this year.)

What's odd is that the Bush administration took Microsoft's arguments about Yahoo's partial outsourcing seriously. This is the same group of antitrust bureaucrats who, along with President Bush's appointees over at the Federal Communications Commission, approved a long list of actual mergers with nary a word: XM and Sirius; Sprint and Nextel; AT&T and SBC; Verizon and MCI; and AT&T and BellSouth.

"The Bush administration has apparently never seen a telecommunications merger it didn't like," Rep. Edward Markey, a Massachusetts Democrat who leads the House Energy subcommittee on telecommunications, said earlier this year, according to the International Herald Tribune. Yet the Justice Department threatened Google and Yahoo with a lawsuit and even hired an outside attorney to run the show.

Another option for the Bushies would have been encouraging a kind of legal self-help. If Microsoft had truly believed that the Google-Yahoo deal was dodgy, it didn't need to run to Washington. It could have filed a private antitrust lawsuit instead. Redmond knows firsthand how this works: Sun Microsystems filed a private antitrust suit that Microsoft settled for $1.95 billion in 2004.

While that's not a perfect solution, it does force businesses to foot the bill for their own lawsuits, as opposed to pressuring the Justice Department to spend taxpayer dollars on a trial that could take years to resolve.

All of this should be a lesson to President-elect Barack Obama, whose campaign platform pledged to "reinvigorate antitrust enforcement" and "step up review of merger activity." He once complained to the American Antitrust Institute that "the current administration has what may be the weakest record of antitrust enforcement of any administration in the last half century."

If a supposedly weak Republican administration is so antitrust-hostile to business deals in Silicon Valley, imagine what a "reinvigorated" Obama administration will be willing to do.

Disclosure: the author is married to a Google employee.

See also:
• Yahoo CEO Yang to step down
• Yahoo's ultimate search: A new CEO
• Yang's travails: A Yahoo timeline
• A pity for Yahoo that John McCain didn't win
• Jerry Yang memo to staff about stepping down
• Microhoo revisited: Would it be a search-only deal?