A Microsoft, Yahoo Deal Won't Get a Free Pass from Privacy Watchdogs

By Clint Boulton  |  Posted 2009-07-22

A Microsoft, Yahoo Deal Won't Get a Free Pass from Privacy Watchdogs

If Microsoft and Yahoo do get in bed together on some sort of search and online advertising deal, it should boost the competition quotient as the companies seek to challenge goliath Google, whose 65 percent of the search engine market share makes it a world beater.

While a Microhoo combination could be better for competition doesn't mean that consumer and privacy watchdogs will give the companies the rope to do what they like, Jeffrey Chester, executive director for the Center for Digital Democracy, said.

No deal has been announced, but much has been speculated. Microsoft is reportedly set to pay Yahoo $3 billion or so upfront, along with 11 percent of the revenue that its searches provide after traffic acquisition costs in each of the first two years. That figure would go to 90 percent in the third year.

That would provide some financial relief for Yahoo, whose second quarter earnings were less than stellar. Yahoo's revenue declined 13 percent for Q2, though cost-cutting moves by Yahoo CEO Carol Bartz, who took over for Jerry Yang six months ago, helped profits rise 8 percent.

Moreover, the promise of a search ad deal with Microsoft looked brighter during the Yahoo earnings conference call, when Bartz had nothing but good things to say about Bing, Microsoft's new search engine:

I think actually Bing is a good product. It extends sort of the experimentation around search and how people use it instead of just taking like a standard blue link, so I think they've done a good job. You know unfortunately it's only a month into it so it's pretty hard to understand whether it's just curiosity driving what's happening or they're actually going to gain share, but I think Microsoft should be given kudos for Bing.

That's not the type of talk you'd expect to hear from a CEO about a rival that is trying to overtake it in search. It's also a big change from Bartz's comments about Bing even when it launched in June. Bartz's change in tone about Microsoft led some watchers to speculate that a search ad deal may be in the works.

Indeed, Bartz also noted that scale matters in search: "I think the interesting issue is even though there's a lot of volume, if you have scale and you have a longer tail, you get to monetize more. Our search volume is holding fine; we have to convince buyers to get off the chair and push buy."  

CDD Not Giving Microhoo a Pass

This leads us to the issue of how consumer watchdogs will receive a Microhoo partnership designed to improve market competition versus Google.

Chester told eWEEK Microsoft's elaborate data collection services across platforms and applications pose a concern for consumers. His Center for Digital Democracy is treating it much the same way the group scrutinized Google's acquisition of DoubleClick, which CDD argued would enable Google to have a treasure trove of data on consumers all over the world.

"[Microsoft and Yahoo] have competing ad targeting businesses in search, display and mobile, for example," Chester said. "They also have now competing ad targeting research and development efforts. Beyond the U.S., there are important competition and privacy issues for the EU as well. EU-based consumer groups will work closely with colleagues here, as we did in the Google/DoubleClick deal."

He added that Microsoft and Yahoo should expect privacy and consumer groups to "vigorously press" regulators to closely examine the deal and at the very least impose a series of tough conditions on data collection practices, including making their online marketing systems more transparent. He also warned:

Privacy groups, such as my CDD, have been collecting 'string' on both companies, in expectation of a deal. We will provide this information to the FTC or DOJ and the Congress. A merger that further concentrates control by a very few over the digital marketing and advertising business illustrates how quickly consolidation has emerged as a principal and worrisome feature of the Internet era.

Charlene Li, analyst for The Altimeter Group, noted that privacy is a passionate issue, particularly "when giants and oligopolies are involved."

Despite the efforts of the CDD and other consumer interest groups, Li said she doubts that the FTC and Justice Department would object strenuously based on the privacy issue because they are eager for there to be a strong competitor to Google.

Instead, they will ask Microsoft and Yahoo to ensure appropriate safeguards are in place to protect personal information exchanged between the two companies.

"I'm also being realistic -- Yahoo couldn't get search and display advertising data integrated when it was in-house," Li said. "Search today doesn't have persistent session data being collected to inform better ad targeting either (although Google is collecting all search results for personalized search history, they aren't doing this to inform ad placement). So while it's possible to merge search and display ad data to create a warehouse of personally identifiable information, it's not likely." 

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