Google on Search: Size Doesn't Matter That Much

Web Giant Has Launched a Low-Key Effort to Stall Microsoft-Yahoo Deal

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NEW YORK ( -- You didn't think Google was going to take the Microsoft-Yahoo search deal lying down, did you?

The Mountain View, Calif.-based giant hasn't taken an official position on the proposed deal, but it is quietly disseminating a view to regulators, politicians, analysts and journalists: that the need for scale is not a valid case for approving Microsoft's search deal with Yahoo.

This, of course, is the core argument in favor of the deal: that Microsoft and Yahoo cannot compete effectively against Google in search on their own and that their deal would make the search market itself more competitive.

But Google is doing its best to poke holes in that notion as Department of Justice staff conducts its investigation. "Scale helps you, but past a certain point, when it comes to advertising there are diminishing returns," a Google executive said. "Most of our competitors have reached that point."

'Actively' lobbying

Another executive close to the process described Google as "actively" lobbying against the deal, but Google said it is just responding to a Justice Department requests for its opinion.

In public, Google's message is being carried forth by top Google executives such as last month when Google chief economist Hal Varian told CNET he thinks the scale argument is "bogus."

"People keep talking about how more data gives you a bigger advantage," he said. "But when you look at the data, there's a small statistical point that the accuracy with which you can measure things as they go up is the square root of the sample size. So there's a kind of natural diminishing returns to scale just because of statistics: you have to have four times as big a sample to get twice as good an estimate."

Mr. Varian added that overall search query growth is scaling at 40% a year -- for everyone. Add to that another, more recent argument: Thanks to improvements to Microsoft's search, and to its deep pockets, Bing has actually gained search share, a signal that yes, Microsoft can compete in search with or without Yahoo.

It's unclear how far Google's argument is resonating within the department, whether it will become a snag or even a speed bump in the review process. The Justice Department does not generally comment on the specifics of an investigation and didn't respond to an Ad Age query.

"DOJ is still soliciting input for its investigation of the deal," said Jeff Chester, executive director of the Center for Digital Democracy. "Not surprisingly, it appears very few advertisers and marketers have raised any objection."

A parallel investigation is being conducted by the staff of Sen. Herb Kohl (D-Wisc.), who will soon decide whether to hold hearings on the proposed deal. Initially, Mr. Kohl said the deal "warrants our careful scrutiny," but no hearings have yet been scheduled.

Google's pricing power

Ben Edelman, an assistant professor at Harvard Business School and paid Microsoft consultant, believes Mr. Varian, a University of California-Berkeley professor on leave, is missing the point on scale. He argues Google enjoys huge scale benefits besides the ability to sample, including pricing power. He analyzed the search spending for an agency that uses all three top search engines and found prices 30% lower on Yahoo than Google and 27% lower on Microsoft.

"To me, this seems like an incredibly easy call that they would accept a reduction in the number of competitors from three to two in order to increase the likelihood of the number two actually remaining a viable option," he said.

Google has taken pains not to overtly lobby against Microsoft-Yahoo search deal; it has plenty of other concerns, including a pending book settlement with authors and publishers that was opposed by the Justice Department, plus possible congressional hearings on privacy. That, and it's hard for the company with scale to argue that scale isn't determinate.

The Justice Department has already determined "search" to be a discrete market when it considered Google's attempt to forge a joint venture with Yahoo. So now it has to decide whether the merger of the Nos. 2 and 3 players will make the market more competitive.

"The law doesn't prohibit that kind of a merger but there is a very strong prejudice about allowing it to go through; the pro-competitive justification would have to be fairly overwhelming," said Albert Foer, president of the American Antitrust Institute. That advertisers don't seem to be opposing it will also be an important factor. "If the guys who have a lot at stake say they won't be hurt and even desire it, then that is a heavy token on the table."

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