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

Microsoft and Yahoo may well tie the knot this week in search and online advertising. If they do, consumer groups will be ready to pressure the DOJ and FTC to make sure the search engine providers maintain user privacy as they put Google in their sights. The Center for Digital Democracy is watching. Analyst Charlene Li said regulators want to see Microsoft and Yahoo take on Google.

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."