The Microsoft / Yahoo! Search Business Case MERGERS
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Competition Policy Newsletter The Microsoft / Yahoo! Search Business case MERGERS Teresa Vecchi, Jerome Vidal and Viveca Fallenius (1) 1. Introduction (1) 2. The parties and the transaction On 18 February 2010 the Commission cleared the Microsoft Corporation (‘Microsoft’) is involved in acquisition of the Yahoo Search Business by Micro- the design, development and supply of computer soft (2). This was the first case of a concentration software and the supply of related services world- between two major search engines and one which wide. The transaction concerned its Online Services raised a number of interesting issues. Business segment and, more specifically, Microsoft’s on-line search platform, Bing, and its online adver- The first challenge concerning the transaction was tising platform, adCenter. to determine whether it fell within the scope of Council Regulation (EC) No 139/2004 (‘the Merger Yahoo is a global internet consumer brand and one Regulation’) (3). The structure of the operation was of the most trafficked internet destinations world- complex and it included a number of cooperative wide. The transaction concerned Yahoo’s web-wide features that made it a case between a concentration algorithmic search and search advertising business, and a commercial agreement. including Yahoo’s search advertising platform, Pan- ama (the ‘Yahoo Search Business’). This case was also noteworthy for the fact that the The transaction whereby Microsoft and Yahoo Commission had to analyse the functioning and the combined their online web-wide algorithmic search economics of the complex and dynamic market of and search advertising businesses had a complex online search, which is a relatively new market char- structure. The parties entered into a Licence Agree- acterised by the presence of two-sided platforms that ment and a binding Search and Advertising Services provide on one hand, free internet search to users and Sales Agreement (the ‘Agreements’) which pro- and, on the other hand, remunerate search advertis- vided for the transfer to Microsoft of the Yahoo ing to advertisers. In its competitive assessment, the Search Business through the transfer of relevant as- Commission had to consider and weigh up two as- sets (technology and customers relations) and also pects of the transaction. On the one hand, the two employees. companies involved had a small combined market share which was significantly lower than that of their More particularly, the Agreements provided that Mi- main competitor, Google, and historically these com- crosoft would acquire a ten-year exclusive licence to panies had encountered serious difficulties in compet- Yahoo’s core search technologies, that Yahoo would ing effectively against Google as separate entities. On exclusively use Microsoft’s search engine on Yahoo the other hand, the concentration was a merger from sites. Microsoft would therefore become the ex- three to two between the second and third players, clusive search advertising provider used by Yahoo. in a market where barriers to entry appeared to be While Yahoo would continue to independently de- high. For these reasons, the Commission conducted termine the content and user interface of its sites, a relatively extensive first phase market investigation. Yahoo’s advertising platform, Panama, would be dis- continued and Yahoo’s customers would be migrat- This article describes in details the Commission’s ed to Microsoft’s adCenter. Finally, Microsoft agreed assessment of this concentration. Another article to hire not less than 400 employees from Yahoo. published in this issue of the Competition Policy Newsletter offers an economic background for A peculiar aspect of the Agreements was the fact the analysis conducted by the Commission which that, under the Agreements, Yahoo would become can be read as a useful complement of the present the exclusive worldwide relationship sales force for article (4). the services provided by adCenter to so-called Pre- mium Direct Advertisers (‘PDAs’) (5). (1) The content of this article does not necessarily reflect the official position of the European Commission. Responsi- (5) PDAs purchase advertising space through Microsoft’s bility for the information and views expressed lies entirely and Yahoo’s advertising platforms, but in addition have with the authors. a contract with Microsoft or Yahoo’s sales force in which (2) http://ec.europa.eu/competition/elojade/isef/case_ additional services such as keyword optimisation and re- details.cfm?proc_code=2_M_5727. bates may be agreed. They oppose to self-served custom- (3) OJ L 24, 29-1-2004, p. 1. ers, which purchase advertising space on Microsoft’s and (4) Economic background of the Microsoft/Yahoo case by Yahoo’s search pages online via adCenter and/or Panama, Andrea Amelio and Dimitrios Magos. without interaction from a sales force. Number 2 — 2010 41 Mergers The coexistence of cooperative and concentrative On this basis, and taking into account that (i) search features in the transaction raised the question of and advertising platform technology, (ii) human cap- whether it amounted to a concentration. The Com- ital and (iii) advertising customers are the three most mission analysed each element of the transaction in essential elements for a search advertising business- line with the criteria laid down by the Merger Regu- es, the Commission concluded that the assets trans- lation and in the Consolidated Jurisdictional Notice ferred were a business with a market presence to (‘CJN’) (6). In particular, the Commission addressed which a turnover could be attributed. the following questions: (i) whether the technology, the customer relations and the employees of the Ya- 2.2. Lasting basis: the transaction hoo Search Business which would be transferred to Microsoft constitute a business to which turnover brings about a change of control could be attributed, (ii) whether a ten-year licence on a lasting basis agreement with early termination clauses and the In assessing whether the transaction was capable transfer of customers and employees could be con- of bringing about a change of control on a last- sidered as a way of bringing about a change of con- ing basis, the Commission took into consideration trol on a lasting basis, (iii) whether the entity would the fact that the industry involved is characterized indeed be solely controlled by Microsoft or whether by rapid, continuous developments in technology, Yahoo’s control over the customer relationship with and constant innovation. Consequently, a period of PDAs would involve Yahoo retaining joint control ten-years – a duration which is also in line with the over at least some parts of the new business. CJN (8) – was seen as a particularly long period in the field of internet search. 2.1. Object of control: the assets and The Commission also assessed the early termina- employees of the Yahoo! Search tion provisions in the agreement and concluded Business transferred to Microsoft that none of the events taken into account were constitute a business to which sufficiently likely and close in time as to deprive the transaction of its long-lasting character. Moreover, turnover can be attributed the Commission considered that, even if the According to the Merger Regulation and the CJN, transaction was terminated early, there was no the acquisition of control over assets can be deemed provision of forced return for the employees and to be a concentration, if those assets constitute the the customers transferred to Microsoft. Similarly, whole or a part of an undertaking, i.e. a business the technology licence would remain in effect and with a market presence to which a turnover can be become non-exclusive, which would still allow clearly attributed. The underlying idea is that the Microsoft to exploit it. transferred assets must allow the purchaser to at On this basis, the Commission considered that the least develop a market presence. In particular, ac- acquisition of control occurred on a lasting basis cording to the Commission’s practice, a concen- because the transfer of technology assets, employ- tration can be based on a combination of assets ees and customers was to be regarded as irreversible. containing the necessary elements for a business (such as production facilities, goodwill and market access) (7). 2.3. Sole control: the entity is solely controlled by Microsoft The Commission assessed all aspects of the transac- tion, including those that could militate against the As the Agreements did not create a joint venture in findings that the assets involved could constitute which the parties shared the voting rights equally, a business, such as the fact that not all the technol- the Commission considered whether joint control ogy licensed to Microsoft was licensed on an ex- could arise out of veto rights (or similar means) or clusive basis. With regard to this aspect, the Com- out of a commonality of interests. mission found that the granting to Microsoft of an In particular, the Commission assessed whether the exclusive, ten-year term licence for non-patent IP fact that Yahoo would become the exclusive sales rights (such as copyright as regards software code) force of the new business for PDAs would mean seemed to be sufficient to prevent both Yahoo and that Yahoo would retain control over this part of any other actors from using Yahoo’s core search the business. However, in the light of the industry- technology in competition with Microsoft. wide practice of rebates, Yahoo’s potential ability to decide on the commercial strategy in relation to (6) OJ C 95, 16-04-2008 p. 1. PDAs was not considered sufficient to be regarded (7) See, for example, Cases M.3583 Flextronics/Nortel at para- graph 4, M.3410 Total/Gaz de France at paragraphs 6 to 8, as a strategic decision conferring, per se, control M.890 Blokkers/Toys’R’us at paragraphs 6 to 11 and M.286 Zurich/MMI at paragraph 5. (8) Paragraph 28 and footnote 34.