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Yahoo takes defense of Google ad deal to Capitol Hill

Politicians questioned Google, Yahoo, and Microsoft over the antitrust implications of an advertising deal, which would make a purchase of Yahoo up to $250 million more expensive.

Yahoo defended its planned advertising deal with Google at a U.S. Senate hearing on Tuesday, while Microsoft assailed it as anticompetitive and perhaps even "illegal."

The hearing before an antitrust panel replayed arguments that the three companies have made before: Microsoft is trying to raise antitrust objections as a way to derail the deal, and the two Silicon Valley firms say it's perfectly fine and a boon to competition.

One reason Microsoft is so irked is that the ad deal amounts to a poison pill that would raise the price of buying Yahoo by as much as $250 million. That's the so-called termination fee that Yahoo would owe Google if an acquisition ended the ad relationship, though it can be reduced by 50 percent of the revenue Google earned. A lawsuit (PDF) against Yahoo claims that "Microsoft could not swallow a Google-encumbered Yahoo due to antitrust implications" and undoing it would prove a formidable barrier to an acquisition.

Senators' remarks on Tuesday seemed mixed, with little to no outright condemnation of Yahoo and Google's new friendliness, but little enthusiasm for it either. (The Justice Department, not the Senate, is reviewing the deal on antitrust grounds before it goes into effect; Congress has no formal role to play.)

Sen. Arlen Specter, a Pennsylvania Republican, seemed to view it in terms of the takeover bid that now involves activist investor Carl Icahn. "Icahn wants Microsoft to acquire Yahoo. Apparently Yahoo is worth more money in Microsoft's hands than in Yahoo's hands," Specter said. "That adds another dimension to an already extremely complicated picture."

About the only surprise at the hearing was Microsoft general counsel Brad Smith's description of a closed-door June 8 meeting in San Jose, Calif., between executives from his company and their counterparts from Yahoo.

He said that Yahoo CEO Jerry Yang looked across the table and described the search market as bipolar, with one pole dominated by Google and the other led by Yahoo and Microsoft. "If we do this deal with Google, Yahoo will become part of Google's pole," Smith quoted Yang as saying. And Microsoft "would not be strong enough in this market to remain a pole of its own."

If that quotation is accurate, it would amount to a red flag waving at the Bush administration's antitrust bureaucrats (and the state attorneys general that are also investigating).

"I don't recall that comment, sir," Yahoo general counsel Michael Callahan replied, under questioning from Specter.

Sen. Orrin Hatch, a Utah Republican, reserved his sharpest questioning for Microsoft--perhaps showing that his decade-old enmity from Redmond's own antitrust case has not entirely faded.

Hatch noted that Microsoft used Yahoo's Overture Services to place ads on its Web sites until 2006--and now is complaining about a similar Google-Yahoo deal. "If the Microsoft-Overture contract did not amount to price-fixing, how can you argue now that the Google-Yahoo agreement amounts to per se price fixing?" he asked.

Making the hearing somewhat confusing, or perhaps confused, was the politicians' lack of understanding of the online advertising market and how prices for ads are established. That led the Los Angeles Times' Jim Puzzanghera to write, delicately, that the politicians "by and large didn't know much about how search advertising works."

The combination of the politicians' confusion and criticism led one witness, Tim Carter of ad-supported, to express astonishment that marketplace success would be penalized by Washington.

"I'm on my way to being the most popular home improvement Web site," Carter said. "Are you going to say, 'Tim, sorry, you can't do Google ads anymore?' Sorry, that's un-American."