Jerry Yang Comments Bolster Microsoft's Opposition to Google-Yahoo Deal

Microsoft claims Yahoo CEO Jerry Yang told Microsoft officials that the Google-Yahoo partnership would eliminate both Yahoo and Microsoft as serious players in the online advertising market. Jerry Yang's comments then were about eliminating competition, Microsoft told a Senate hearing examining the anti-competitive nature of the Google-Yahoo deal.

Microsoft came out firing July 15 at a Senate hearing looking into the proposed Google-Yahoo advertising deal, claiming Yahoo CEO Jerry Yang told Microsoft officials that the Google-Yahoo partnership would eliminate both Yahoo and Microsoft as serious players in the online advertising market.

Google and Yahoo announced June 12 they had reached a nonexclusive deal to run Google's search and contextual advertising technology through its AdSense for Search and AdSense for Content advertising programs on the Yahoo search engine. Both Google and Yahoo, the nation's top two search engines, maintain the deal will not impact the competiveness of the online advertising market.

But, according to Microsoft General Counsel Brad Smith, Yang and other Yahoo officials met with Microsoft officials June 8 at the San Jose airport to discuss the deal and Yang's comments then were about eliminating competition.

"Jerry Yang said the search market today is basically bi-polar - on one pole there is Google and on the other pole is Yahoo and Microsoft, both competing with Google," Smith said. "If we do this deal with Google, Yahoo will become part of Google's pole" and Microsoft, he said, "would not remain a pole on its own."

Reminded that he was under oath, Smith said, "I just stated exactly what Mr. Yang said."

Yahoo General Counsel Michael Callahan, who was part of the June 8 meeting, called Smith's comments a mischaracterization of Yang's comments. When Sen. Arlen Specter pressed Callahan as to what Yang actually said, Callaghan said, "I don't recall that remark."

Smith insisted that Yang "absolutely" made the comment.

Whatever Yang said, Callahan insisted, "Yahoo is not exiting the [search] business."

Callahan told the lawmakers Yahoo felt compelled to accept the Google partnership "to help make our company an even stronger competitor to Google, to Microsoft and to others in the dynamic and rapidly growing online advertising world."

He also noted the agreement is non-exclusive and gives Yahoo "complete discretion over if, how, where and when we will choose to use some of Google advertising on sites."

Callahan also pointed out that Yahoo has outsourced its search before. Prior to 2000, Yahoo used a number of different companies to run its search business. From 2000-2004, Yahoo outsourced its algorithmic search to Google and its sponsored search to Overture.

"In 2003 and 2004, our company made a strategic decision to bring search and sponsored search in house," Callahan said. "We bought Overture and proceeded to incorporate sponsored search into our own company. And we bought Inktomi and did the same with algorithmic search."

Sen. Herbert Kohl, chairman of the Senate Antitrust Subcommittee, pushed Microsoft on its own well publicized efforts to acquire Yahoo.

"Is it not true your opposition is highly motivated by the fact that Microsoft wants to acquire Yahoo itself?" Kohl asked. "Wouldn't that [deal] be just as anti-competitive as the deal we're talking about this morning?"

Smith replied that it was a matter of scale.

"If you combine a small No. 2 [Yahoo] and an even smaller No. 3 [Microsoft], we would have a critical mass to balance the gigantic No. 1 [Google]. That would bring more competitive balance to the market," Smith said.

David Drummond, Google's chief legal officer, countered it was important to look at the two scenarios facing Yahoo.

"Which is better? A Yahoo that makes an arrangement with Google and keeps the lion's share of revenue and re-invests in its company or a situation where Yahoo is gobbled up by Microsoft, eliminating Yahoo from the competitive playing field?" Drummond asked.