Kara Swisher

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MicroHoo: Mail Monopoly Part of Yahoo’s Price Holdout


Let’s move this back-and-forth- wrangling aspect of the story forward and get to the real issues in the Yahoo-Microsoft takeover battle, shall we?

So why is Yahoo’s board holding out for a higher price than Microsoft wants to offer to raise it?

From numerous reports, Microsoft (MSFT) seems willing to go to $33 a share, up from its original $31, while Yahoo (YHOO) and its shareholders are looking for from $35 to $37.

Are they simply looking for a bigger payday? Do they believe it is worth more, in spite of recent mismanagement? Do they want to save face, given the Internet company once had a $41 offer from the software giant? Is this just a big game of digital chicken?

Yes. Yes. Yes. And definitely.

But, according to sources close to Yahoo, one of the more important reasons Yahoo wants a higher price has a lot to do with worries about the domination of the email and communications market if a merger with Microsoft took place and the threat of regulatory action that would force the companies to divest those assets.

Sources said that Yahoo wants a large cushion in case the government finds the combination of Yahoo Mail and Hotmail too much.

It is.

That’s because Microsoft and Yahoo completely dominate all mail on the Internet. According to the most recent comScore (SCOR) figures, for example, Yahoo has 256 million users, while Microsoft has 255 million.

Google’s (GOOG) Gmail is a distant third with about 92 million users and AOL (TWX)–which kind of started off the whole email craze among consumers–has about half that at 49 million.

The same is true in the instant messaging market, with Microsoft and Yahoo holding an 80% to 90% market share together.

Calling David Boies! It all smells like antitrust investigation to me!

A high-ranking Yahoo source agrees. “We need a lot of reason to do the deal, because it could be very bumpy once we agree,” said the source. “How damaged would Yahoo be if it did not go through, or if important pieces of Yahoo had to be separated from the company?”

Some close to the company, though, would prefer a spinoff of its powerful communications products and services, in the case of a Yahoo-Microsoft union. “We could be the Google of communications,” said one source.

Of course, Google does not want this to happen. In a recent CNBC interview, Google CEO Eric Schmidt signaled the search giant’s intentions related to this thorny communications domination with a loaded quote:

“If they go ahead and the merger’s ultimately successful, it would be possible for Microsoft to integrate some of the properties and essentially eliminate consumer choice, particularly in electronic mail, instant messaging, the things where they have 80% or 90% market share, and that’s a sweet spot for Microsoft in its ability to eliminate choice.”

And, in fact, Yahoo CEO Jerry Yang and Chairman Roy Bostock raised the issue in a letter on April 7 to Microsoft, rejecting Microsoft CEO Steve Ballmer’s letter threatening to go hostile if talks did not proceed.

The Yahoo leaders wrote:

“As to antitrust, we have discussed with you our concerns. Any transaction between us would result in a thorough regulatory review in multiple jurisdictions. As a follow-up to a recent meeting among our respective legal advisers we had on this topic, and at your request, we provided to you on March 28 a list of additional information we would need to further our understanding of the regulatory issues associated with any transaction. To date, you have still not provided any of the requested information.”

According to one source, the antitrust concern that was not named was related entirely to email and instant messaging.

“Bring together our content and search is not an issue,” said the source. “But mail is a real problem.”

Please see this disclosure related to me and Google.