Regulatory obstacles for the Microsoft-Yahoo search deal

After all the excitement and press releases about the search deal between Microsoft and Yahoo, the serious market analysis is now beginning. US regulators have decided to scrutinize the deal, to understand if the reduction of the number of major search providers, from three to two, will hurt competition in the search market.

Regulators will likely first look at if this reduction will hurt advertisers, since there will be fewer search advertising options. Google’s advertising prices have soared as search advertising has become a basic part of general advertising campaigns, and fewer competitors could leave advertisers with few options and an extreme price increase in the market. Further, Google may not feel the need to innovate if Microsoft’s search technology does not turn out to be effective and successful.

Some analysts feel that the US regulators will require the companies to sell Yahoo’s search technology and infrastructure, so that a new competitor come into play and preserve competition. As the search market has matured, it has developed high barriers to entry, and the likelihood of new significant competitors is becoming more unlikely. Serious technological innovation and infrastructure investment are now required to be a player in the market. However, with Yahoo’s assets, a new provider might have a better chance at getting a hold in the market.

During the review process, Microsoft will likely argue that the merger is necessary for them to stay competitive with Google. Google’s market share has been steadily increasing, and it would still be much larger than Microsoft/Yahoo after the deal. However, because of Microsoft’s significant resources, this may be a hard argument to sell, particularly since they were able to create Bing on their own, and since they have been fairly successful in gaining search market share since Bing’s introduction.

If the regulators do force the sale of Yahoo’s search assets, the big question will be whether Microsoft will accept the entry of a new major player that uses Yahoo’s technology. This could lower the value of Yahoo and cause Microsoft to reevaluate the deal.