A proposed online search advertising deal between Yahoo and Google came under fire at a US Senate hearing as Microsoft claimed that Yahoo CEO Jerry Yang had himself admitted that the agreement would hurt competition.
Speaking before the Senate's Judiciary Committee, Microsoft's general counsel Brad Smith recounted a June 8 meeting at the San Jose airport involving Microsoft CEO Steve Ballmer, Yahoo CEO Jerry Yang and other company executives during which Yang allegedly said a Google-Yahoo deal would be anti-competitive.
"Yahoo chief executive, Jerry Yang looked at us across the table and said, 'Look, the search market today is a bipolar market,'" said Smith.
He further added, "On one pole is Google and on the other pole are Microsoft and Yahoo! competing with Google. If we do this deal with Google, Yahoo! will become part of Google's pole, and Microsoft will not be strong enough in this market to remain a pole of its own."
Senator Herb Kohl, the subcommittee's chairman, then asked Smith if he was recalling the meeting correctly and reminded Smith that he was under oath.
"I just stated exactly what Mr Yang said and it made such a strong impression," Smith responded to the amazement of Microsoft executives.
He added "Steve Ballmer turned to me and said, 'Think about that, there's only going to be one pole in the market.' I guess that would be a monopole, wouldn't it?"
Google announced a non-exclusive agreement with Yahoo last month that will allow the Internet company access to Google's AdSense for search and content advertising programmes in the US and Canada. Microsoft argued that the agreement will give Google an unprecedented level of control over advertising for search on the Internet, up to 90 per cent potentially of all search ads.
Google and Yahoo, however, defended the alliance as positive for consumers and businesses.
Yahoo's executive vice president and general counsel, Michael Callahan, said, ". . . while I'm not going to address Smith's characterization of Mr Yang, I will say that our board has made a conscious decision to stay in search to compete against Google and Microsoft; and this agreement will enable us to do that."
However, the response failed to satisfy Senator Arlen Specter, who continued to pursue the question and told Callahan, "I didn't hear you contradict Smith's testimony."
Specter responded that he didn't ask about Smith's characterisation. He just wanted a straight answer as to whether Yang made the comments about the three poles.
"I don't recall that Mr Yang said what Mr Smith said. I don't think it would be appropriate to comment further on the meeting," Callahan said.
"This is a commercial arrangement between two companies who will remain autonomous and compete aggressively in search and display advertising, mobile, news, e-mail, finance and you name it," Callahan told the lawmakers.
"Yahoo is here to stay and we intend to compete across countless platforms, including search, for years to come. Supplier arrangements are commonplace in many industries," said David Drummond, senior vice president of corporate development and chief legal officer at Google.
He then gave the example of Cannon which supplies laser printer engines to Hewlett Packard, while also competing in the sale of laser printers.
However, Smith said search is the gateway to the Internet and the deal will put Google in a position to own that gateway and the information that flows through it.
Never before in the history of advertising has one company been in the position to control prices on up to 90 per cent of advertising in a single medium. Not in television, not in radio, not in publishing, Smith said.
It should not happen on the Internet. When Yahoo talks about this deal generating up to $800 million in additional revenue, that's money out of the pockets of American businesses, big and small, who will pay higher prices for the very same ads they buy from Yahoo today, he said.
Google maintained that the deal will actually help Yahoo compete.
An independent Yahoo is "going to lead to better ads for consumers so they get better information than they had before," Drummond said.
"Advertisers are going to get more leads than they had before."
Yahoo will get the "lion's share" of the growth generated by the deal. Yahoo "re-invests that in the rest of their business and stays an independent competitor in this market," he said.