All Things Digital

Yesterday, BoomTown wrote a piece about Yahoo’s worries about the scrutiny that the monopolistic combination of Yahoo Mail and Microsoft’s Hotmail would get if it merged with the software giant.

The issue–which has not gotten a lot of attention–is actually a major sticking point in the price negotiations going on this weekend between the companies, as Yahoo (YHOO) seeks solid downside protection, if the deal becomes mired in approval issues by governmental authorities due to email and instant messaging dominance on the Web.

But Microsoft (MSFT) does not want to pay more, of course. And so the legions of minions under increasingly-under-pressure–translation: more yelling than ever this week–CEO Steve Ballmer are hard at work this weekend on all-nighters to solve the problem, said several sources.

One solution is to spin off all the communications assets, said sources, into a separate company. In that case, the two brands would remain, so as not to inconvenience consumers, although all the back-end technologies to run the services would be merged.

The more drastic step is for Microsoft sell Hotmail to a third party, especially given that Yahoo Mail is considered a stronger brand. Hotmail has already been in the midst of a transition, including a recent name change to Windows Live Hotmail.

Microsoft’s mail offerings now include Hotmail and also Windows Live Mail. The latter offering would presumably remain at the merged company with its @live.com address.

But Hotmail is the candidate to be sold off (with the requisite marketing to try to port its users over to @live.com first).

And potential buyers? Well, not Google (GOOG), but there are many, including AOL (TWX), Comcast (CMCSA) and AT&T (T), as well as IAC/InterActiveCorp (IACI). As to price, that’s unclear, but it could be in the billions of dollars.

That’s another plus for Microsoft, which will obviously have to fork over more money if it wants to acquire Yahoo.

And, it is also priceless if Microsoft can minimize government interference in the deal, most especially any antitrust investigations related to its powerful email assets.

That must be a worry, since Microsoft and Yahoo completely dominate all email 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 Gmail is a distant third with about 92 million users and AOL has about half that at 49 million.

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

Please see this disclosure related to me and Google.

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.

Calling Dick Tracy! Guess what the U.S. Department of Justice noticed yesterday?

Google is really, really big and powerful.

Thus, the Feds are casting a gimlet eye on an online ad partnership Google (GOOG) is considering with Yahoo (YHOO), which is trying to goose its value in the face of an unwelcome takeover bid from the last century’s monopolist Microsoft (MSFT).

It was widely reported yesterday that the Justice Department was looking into the recent outsourcing ad sales test by the search giant and No. 2 Yahoo, to see if it squares with antitrust law.

According to both Yahoo and Google, they lobbed in a call to regulators in advance of starting the test of a possible partnership, just to give them a heads-up, so this look-see was fully expected.

How nice that the two dominant companies, whose share together closes in on 80% of the market in search, can police themselves.

Is everyone relieved? We thought not.

While BoomTown has now moved on to figuring out if Google will become self-aware in 2012 and begin building Terminators to take out the future leaders of the human race, we would like to reiterate what we noted in a previous post:

And while it might be a long-cherished dream of Google’s to take over Yahoo search–and also get the chance to return to the scene of the crime, since Google got its first big push from doing Yahoo search, before Yahoo wised up too late–there is simply no way this will be allowed by regulators nor should it.

Still, you have to almost admire the chutzpah of the search giant in making this move, if the sheer and unadulterated arrogance of it wasn’t so distracting.

Because, while Google has almost none of the obvious menacing aggression that characterized Microsoft when it thoroughly dominated tech (although all those beach bikes on its campus inexplicably creep me out a little bit), the company still cannot be allowed to have a monopolistic share of the market.

It is bad for advertisers, it is bad for consumers, it is bad for innovation, no matter how well-intentioned Google is.

And no matter how many flashy moves Google and Yahoo make, it is flat-out wrong for one player to so dominate such an important sector.”

And whether the Feds decide if a union between Google and Yahoo is legal or not, let me repeat: It is dangerous and anticompetitive.

Please see this disclosure related to me and Google.

Which is just what I–the Amazing Kreskin–predicted would happen in a post on Yahoo on Monday.

“At least Yahoo shares, which have remained lackluster, are not likely to be impacted, as the disappointment is already baked in, ” I wrote. “In Google’s case, most are waiting to see if it blows away estimates–which would not necessarily give a bump to its high-flying stock–or just meets them, which could clip the wings of its shares.”

Snip, snip then–after the search giant fell short of expectations due to burgeoning costs of making all that money. Even though revenue was up 58% (which was actually a lower rate of revenue growth from previous quarters), Google’s unexpected and aggressive spending sent its shares down in after-hours trading, dropping almost $35 to close at $514.

And more good news for the do-no-wrong company, which can allegedly do wrong: a subcommittee of Congress has opened a preliminary antitrust investigation linked to its $3.1 billion offer to purchase of the online advertising company DoubleClick. Given the dominance in the online ad market gained by Google with the deal, this move comes as little surprise.

Here’s another obvious prediction: CEO Eric Schmidt has his hands full in the coming year. And if you want to know a lot more about how he is looking at that responsibility, here’s Walt’s interview with him in its entirety at D5 in late May:

Please see this disclosure related to me and Google.