I had an interesting call today with Brad Smith, the general counsel of Microsoft. I was eager to understand Microsoft’s position on the Google/Doubleclick deal, and to parse the issues swirling around the companies decision to, via the press, declare that the deal should be scrutinized closely by antitrust regulators here in the US.
The conversation started with Smith explaining why Microsoft sees this as worthy of a serious review. At its heart, he contended, this is about how one might define the market in which the combined company will operate. Antitrust law, he explained, takes a dim view of companies who buy their way to market domination using cash alone. It’s fine to gain market domination by having better products and service, but not by simply buying your way in. So, does buying Doubleclick mean market domination? That question turns on whether a market is narrowly defined – is the market in this case online display advertising and online contextual advertising, or is it more broadly defined – the entire advertising marketplace?
This is not a minor question. The former is a market in the tens of billions, the latter hovers at a trillion dollars. When I asked Eric Schmidt of Google this question onstage earlier this week, he was very clear in his interpretation. After rolling his eyes at the very idea of Microsoft – star of the antitrust stage in the late 90s – even playing the antitrust card, he very clearly stated that the combo of Google and Doubleclick was a tiny percent of the overall advertising world.
Smith, as one might imagine, doesn’t ascribe to that interpretation. The market should be narrowly defined, he stated. He then went into how antitrust regulators actually view markets. “There is a defined methodology,” Smith told me, for how antitrust review is done. “You look at who is participating in the market and ask if they will shift behaviors if prices change by five percent.” Also, will one company have the ability to control pricing and, also importantly, will it be difficult or impossible for any other company to enter that market? Smith believes that GoogleClick will have such market dominance in online advertising as to be able to force higher prices upon the world – online advertisers will not easily move their budgets to offline media like TV or print, they are too dependent on online channels. Hence, one should not view the market broadly.
This raises a very important question – why didn’t Microsoft match Google’s $3.1 billion offer. Smith would not comment on this, but I can report from very good sources that in fact the company did offer to match it, and was willing to pay even more to insure that Google did not corner the online ad market. But for whatever reasons, the private equity firm that owned the majority of DoubleClick’s shares decided to go with Google. I have more detail on how that deal went back and forth – it involves a no shop deal between Google and Doubleclick, for example, but I have heard strong assertions that the owners of DoubleClick did not get the highest and best price for their asset. But that is now history. In short, it’s clear Microsoft has the cash to match or even beat Google at this game, but did not in the end win the asset. Why? That’s for another post.
“The bigger question,” Smith asserted, “is what is the market share and will it be easy for others to enter this market once this deal is done?” He continues: “There’s a fixed cost to developing the technology, but that’s not the hard part.”
Indeed it is not. The hard part is getting the economies of scale and knowledge that come with having a massively scaled base of advertisers and publishers all using the system. That allows for maximum efficiencies in the market and maximum profits. Google already has this in the contextual advertising space. With DoubleClick, it will have it in the display ad space as well, Smith points out. That means it’s very hard for anyone else to enter the market.
That may well be. It’s hard to say what the government will do with this case, but under the HSR antitrust act, it has 30 days to decide. It will take one of three approaches, Smith told me. One, it will, after a 30 day review period, simply decline to investigate further and allow the transaction to continue. Two, it might decide early that this is not a material issue, and approve it before the 30 day period. Or three, it will make a “second request” for more data, which can take months for the companies to respond to. Once that response has come in, the government will make its final ruling – block or allow – in another 30 days.
Clearly, Microsoft wants to see a second request. I asked Smith about the irony of Microsoft asking the government to support it on antitrust. His response was interesting. He pointed out that Eric was never shy about asking for the government’s help against Microsoft when he was at Sun, Novell, or even Google (remember the browser issues?) . “I think regulators take competitors (in this case, Microsoft’s) views with a grain of salt, and they should,” Smith said. “I would point out that over the years our competitors have been raising a number of antitrust issues that they want regulators to review, and I don’t think it’s ironic that we ask for the same thing.”
In the end, the matter is in the government’s hands. If the deal does go through, it will create an entirely new landscape for Google’s competitors, one that will require, in my mind, that Yahoo, Microsoft, and other large players consider moves that previously were unsavory. To my mind, the most obvious of these moves is a strong partnership or even merger between Yahoo and Microsoft (remember Soverture?). To that end, what Yahoo’s Jeff Weiner had to say on stage, at the end of our discussion at Web 2 this week, is both timely and very pertinent. I asked him about Yahoo’s view of Microsoft, given the state of the chess match as it currently stands. His response was direct: Yahoo would be very open (scroll to bottom) to discussions with Redmond. After all, it wasn’t that long ago that Microsoft was running Yahoo search (via Inktomi), and monetizing using Overture.
Wow, I love this business. It’s such a great story. Happy Friday…..
Updated: I have not had time to review this, but Gary has the merger docs filed with the SEC. And I have a few more thoughts on this topic. The more I think about it, the more the fact that DBCLK went to Google strikes me as a seminal moment in the history of this industry. Microsoft could not win it, despite the cash it was willing to spend. Why?!