Google says Microsoft-Yahoo deal threatens the Internet itself

The claim plays to a pair of common perceptions - that Microsoft often abuses its heft to control markets with dusty proprietary solutions while Google champions innovation open technologies.

It’s an image brought home by the Redmond giant’s antitrust struggles and the search engine’s successful lobbying effort to force open access provisions in a swathe of US spectrum currently on auction. “Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC?,” Drummond asked. 

But critics paint a different picture, noting Google has yet to clear its $3.1 billion acquisition of Internet ad firm DoubleClick on European antitrust concerns. Microsoft lobbied hard to get US regulators to torpedo that deal.

The stereotyped comments mark Google’s first public response to the Microsoft bid and suggest the top Internet ad seller is experiencing a rare moment of fear. That impression was augmented by a Wall Street Journal report indicating that Google CEO Eric Schmidt had personally called Yahoo CEO Jerry Yang in an effort to derail a sale.

Schmidt declined to counterbid but offered unspecified support believed to consist of either an ad partnership with guaranteed revenue or a promise to support an alternate bidder. A New York Times report estimated ad ad partnership could ad $40 billion to Yahoo’s bottom line across five years while enabling the portal to remain independent.

Yahoo said it would take “quite a bit of time” to consider the Microsoft offer, but insiders cited by Reuters claim it is entertaining a Google ad alliance instead as executives believe a play at $31 per share undervalues the portal.

A corporate memo urged employees not to react to media reports of a sale - a necessity given wildly disparate corporate cultures and a rash of blog posts by Yahoo employees claiming staff would jump ship rather than work for Microsoft. “We want to emphasize that absolutely no decisions have been made - and despite what some people have tried to suggest, there’s certainly no integration process underway.” 

But the analyst community widely believes Yahoo will ultimately accept the Microsoft offer. Its fortunes have faded significantly in recent quarters while efforts to turn around its Internet ad business are stalling. Yang took the helm with a promise to refocus but shareholders may not want to wait and see if those efforts pan out. A successful bid would give Microsoft a 16 per cent share of the global search market. That figure pales beside the 62 per cent commanded by Google, which lags both rivals in the email and IM sectors.

Microsoft meanwhile said it could borrow money for the first time in its history to make the acquisition. “We could fund most of that through our cash holdings, but it's likely we're actually going to borrow for the first time. It's going to be a mixture of the cash we have on hand and debt,” said CFO Chris Liddell. The offering is a 50:50 mix of cash and stock.

YAHOO DUMPS MUSIC SUB SERVICE: Yahoo is continuing with its own refocusing despite a potential sale, yesterday selling its online music subscription service to Rhapsody America for an undisclosed sum.

Yahoo Music Unlimited has just 400,000 customers despite an estimated 20 million monthly visitors to its music.yahoo.com music site. The portal said it would promote the Rhapsody service online but chose to shuck the Yahoo Music Unlimited subscription service to “focus on the mass audience.” Digital music subscription services have failed to gain much traction, with consumers preferring to own tracks rather than lease access to them. Market leader Rhapsody now has fewer than one million customers while the sector generated just $235 million last year - compared to the $1.1 billion spent on digital downloads.