Online advertising is crucial to Microsoft’s burgeoning “software-plus-services” initiative – it’s the fuel for all the free services the company is bringing to market.
It is no surprise then, that the approval earlier this month of the merger of Google and DoubleClick by a 4 to 1 vote of the U.S. Federal Trade Commission (FTC) was bad news for Microsoft — not that it didn’t try to derail the deal.
A blogger for the New York Times last week obtained three confidential Microsoft documents that the software behemoth had provided to the FTC this fall. They were prepared in support of Microsoft’s arguments that the merger would harm competitors’ ability to compete in emerging online advertising marketplaces.
Microsoft officials independently confirmed the documents are bona fide.
“We believe this merger raises serious questions about the future of competition in the online advertising market, as well as about consumer privacy and copyright protection,” Jack Evans, a Microsoft spokesperson, said in an e-mail to InternetNews.com.
The leaked documents go into more detail.
“By combining the dominant network for sales of online advertising with the dominant provider of ad-serving tools (which are the advertiser and publisher ‘portals’ to the online advertising market), Google will obtain dominant control over the ‘pipeline’ for online advertising,” the introduction to the main document, titled “Summary of Antitrust Analysis,” states.
The company’s high-level analysis?
“The transaction will put Google in a position to extract an increasing portion of the money flowing between advertisers and publishers through the pipeline. It will also enable Google to use its access to, and control over, a predominant share of publisher ‘inventory’ (the ad space on a Web page available to be seen by users) and valuable user information to impair its rivals’ ability to compete to sell and serve ads,” the document continues.
The other two documents include a PowerPoint slide deck illustrating the state of the online advertising business today and what Microsoft purports it would look like if the merger goes through. It also includes a document containing proposed alternative remedies that the FTC could have taken.
Obviously, the documents didn’t carry the weight with the FTC that Microsoft’s legal and public relations teams had hoped. However, all is not lost – not yet, at any rate.
That’s because the European Commission (EC) is holding a meeting regarding the proposed merger on January 21. The EC announced last month that it would take a deeper look at the proposed $3.1 billion deal, after a preliminary evaluation found that the combination would raise competition concerns.
While Microsoft officials would not confirm that the same or similar documents will be or have been already filed with the EC, it seems apparent that will be the case, with some tweaking to reflect differences in the EC’s laws and markets.
One of the lingering questions is whether the EC is still so ticked at Microsoft for having dragged its heels for three years over the 2004 antitrust ruling against Microsoft that the company’s arguments won’t hold much weight.
That question is counterbalanced by another: whether the perceived threat of another emerging potential monopoly will get the EC riled up enough to block the merger outright.
Microsoft, of course, hopes that its arguments will resonate more clearly with the EC than they did with the FTC.
“Google’s acquisition of DoubleClick would result in Google controlling a virtual monopoly share of the ad-serving capacity currently available to third-party publishers and thus would raise barriers to entry/competition to insurmountable levels (and require competitors to confront a rival that is dominant in every component of the pipeline and that can manipulate network effects to make entry even more difficult),” the documents state.
In its best “Help, I’m drowning” voice, the company warns that even the all powerful Microsoft has been blocked from Google’s main market – search advertising.
“One need look no further than search advertising to see that despite Microsoft’s size, technical prowess, and strong incentives, it has been unable to compete effectively with Google in search and that Google’s lead in search advertising has continued to grow because of network efforts.”
In its pitch to the FTC’s commissioners, Microsoft didn’t just shoot for an “all or nothing” approach, however. If the merger isn’t blocked outright, the company has several fallback positions it recommends, none of which were chosen by the FTC, by the way.
Here Microsoft’s documents echo some of the same concerns as European consumer groups that argue the combination of the two online advertising giants, along with their huge databases of users’ behaviors, would not only threaten users’ privacy, but also drive up advertising rates for European companies, and thus artificially raise consumer prices.
One of Microsoft’s recommendations would be to force Google to divest itself of key ad publishing tools it is acquiring with DoubleClick.
“Unless and until Google’s competitors are able to obtain access to competitively neutral and unbiased ad-serving tools like those currently provided by DoubleClick, the ability of Google’s rivals to create viable alternative pipelines will be very difficult, if possible at all,” Microsoft’s analysis document states at one point.
Under other recommendations, in the remedies document, Microsoft calls for “open access for competing ad networks,” as well as prohibiting Google from “discriminating in favor of DoubleClick in terms of the access that Google affords ad-serving tool vendors to its networks.”
These arguments did not sway the FTC. However, the EC has proven it takes a different view of competition than U.S. governmental bodies, so the decision could go either way.
Microsoft, meanwhile, has not been frugal about trying to compete head-to-head with Google and DoubleClick. Last summer, it spent $6 billion on ad giant aQuantive. As one sign of some success, Microsoft also this month inked a deal valued at $500 million with cable giant Viacom, formerly a DoubleClick customer, to serve ads on its content Web sites and to sell left-over online advertising inventory.
This article was first published on InternetNews.com.