Mulling the Merger

In the fall of 1997, I was interviewing Bill Gates at a conference in Scottsdale, Ariz. Suddenly the door to the boardroom we were using sprung open, and Bill Neukom, then Microsoft's general counsel, rushed up to Gates and pulled him from the room. Five minutes later, Microsoft's leader returned and we finished the interview. I later learned what the urgency was about: a federal judge had ruled that Microsoft violated a consent decree concerning its anticompetitive behavior in promoting Windows. That interview was the last that Gates would ever grant without the cloud of government action hanging over him; that ruling was the first volley in a series of events that would shape the company's psyche.

The next year, Microsoft had to defend itself in a full-blown antitrust case, one that dragged on for years and wound up with a judgment against the company, and an eventual settlement. Microsoft still must submit to federal oversight of its practices, a condition recently extended until 2009. The company has also been stung by a series of judgments from the European Union--and has been forced to pay out more than a billion dollars to settle lawsuits from Netscape, Sun Microsystems and Real Networks, as well as many millions more to various states and consumers that joined in the litigation.

Considering this, you would think that Microsoft would do anything to avoid a similar imbroglio.Yet in the wake of the company's attempted hostile takeover of Yahoo!, the ringtones of experts in antitrust and technology are singing once more, as reporters explore the competitive implications of such a takeover. After all, if Microsoft combined its Internet assets with Yahoo's, the combined companies would have an 85 percent share of portal front pages, an 80 percent share of Web mail, almost a 90 percent share of Web-based instant messaging, and by far the largest sites in business, music, sports and many other areas.

Presumably, the Internet behemoth formed by the alliance could be a staging ground to further embed Microsoft's dominant products--Windows and Office--on the screens of an already semicaptive public. The antitrust division of the Department of Justice has expressed interest in the deal. Congress is readying itself for hearings. And the European Union, which seems to relish slapping down Microsoft on competitive abuse issues, is undoubtedly salivating at another chance to poke CEO Steve Ballmer. "The EU almost always scrutinizes Microsoft to distraction," says Carl Tobias, a professor at the University of Richmond School of Law.

Microsoft does believe there are antitrust issues involved in its takeover--a serious tilt in the marketplace where customers' choices are limited. But the dominance that the Microsoft forces refer to is Google's, not its own. When I spoke to Microsoft's general counsel, Brad Smith, last week, he instructed me that the proper way to view the potential takeover was not as the creation of an Internet giant, but the combination of two also-rans in the search field trying to slow the runaway devastation caused by the Godzilla of search. "Google has a superdominant market in the areas of search and advertising," he says. Regulators, he says, will greenlight the takeover because it is the only way that a credible competitor can emerge to fight Google's advantage in selling ads alongside search results. Furthermore, he says that advertisers are rooting for Microsoft to combine its lowly third-place search site with Yahoo's only slightly less lowly search site so Google will not be so powerful that it can raise ad rates at will. "Regulators look to what [customers] say," says Smith.

Google, for its part, tries to keep the focus on how Microsoft might abuse the mightiest online assemblage ever formed. In a blog posting last week, Google's chief legal officer, David Drummond, wrote that the takeover raises "troubling questions" about whether Microsoft could stack the Internet deck in its favor. "Could a combination of [Microsoft and Yahoo]," he wonders, "take advantage of a PC software monopoly to unfairly limit the ability of consumers to freely access competitors' email, IM, and web-based services?"