Analyzing decision of the European Commission

Microsoft | Yahoo! Search Business

Competition, Strategy, and Institutions Yulia AN | Yulia MIRONOVA

Decision of European CommissionMarket overviewPositive effectsNegative effectsPost-transaction analysisConclusion

European Commission

Parties

Microsoft Yahoo!

Online web-wide algorithmic search

Search advertising businesses including online search advertising platform Panama.

Internet search platform, Bing. Online search advertising

platform, adCenter.

Online Services Business division

European Commission

Subject 10-year exclusive license to Yahoo's search technologies.

Yahoo internet search and search advertising staff.

Microsoft as the exclusive internet search and search advertising provider used by Yahoo.

12% of the search revenues generated on Yahoos and its partners' websites during the first five years of the agreement will go to Mirosoft.

Rest 88% will go to Yahoo as a traffic acquisition cost.

European Commission

Decision

Horizontal Merger approved

European Commission

Market overviewPositive effectsNegative effectsPost-transaction analysisConclusion

Organic web search

Search-based advertising

Non-search-based advertising

Contextual

Text

Contextual Non-context

Text Display Display

Adapted from European Commission (2008)

Market overview

010

20

30

40

50

60

2010 2011 2012 2013 2014

Paid search Display Classified

Source: ZenithOpen

Market overview

Advertisers

Users

Market overview

AUZero-price consr

aint

Auction bidding:

Generalized Second-Price

Market overview

AU~ Single-homing

~ Multi-homing

Market overview

Market overview

Production costs Switching costs

Market overview

Production costs Switching costs

Highly specific fixed costs Negligible variable costs Sunk

Market overview

Hardware (USD 1 000 mln) Human capital (USD 1 000 mln) Server infrastructure IP patents Algorithm development Algorithm update R&D

Production costs Switching costs

Highly specific fixed costs Negligible variable costs Sunk

Market overview

Production costs Switching costs

High Low Highly specific fixed costs Negligible variable costs Sunk

Market overview

One click away

Production costs Switching costs

High Low Highly specific fixed costs Negligible variable costs Sunk

Credence good

Market overview

One click away

Production costs Switching costs

High Low Highly specific fixed costs Negligible variable costs Sunk

Credence good

Network externalities

Market overview

One click away

Production costs Switching costs

High Low Highly specific fixed costs Negligible variable costs Sunk

Credence good

Network externalities

High entry barriers

Market overview

One click away

Production costs Switching costs

High Low Highly specific fixed costs Negligible variable costs Sunk

Credence good

Network externalities

High entry barriers

High market concentration

Market overview

GoogleYahoo! BingOther

UK France Germany

Ireland Italy SpainDigital Clarity. (2011). Yahoo & Bing Search Engine Merger. Available at http://www.digital-clarity.com/blog/search-engines/yahoo-bing-search-engine-merger/

92% 94,76% 95,69%

94,67% 97,54% 96,96%

European Commission Market Overview

Positive effectsNegative effectsPost-transaction analysisConclusion

Microsoft Yahoo!

Economies of scale Reduction of costs

Positive effects

Microsoft Yahoo!

Economies of scale Reduction of costs

Rationalisation of operational costs Stronger competitor to Google Greater value to advertisors

Positive effects

European Commission Market overview Positive effects

Negative effectsPost-transaction analysisConclusion

Merger

Advertisers

UsersPublishers

Distributors

Merger

Advertisers

Merger

Advertisers

Increased cost per click (CPC) increased bidder density for

particular keywords

Merger

Users

Merger

Users

reduction of variety of choice degradation of organic search unilateral effect

Merger

Publishers

Merger

Publishers

increased competition among publishers reduced competition between the remaining

advertising platforms lower prices paid for publishers web space

MergerDistributors

MergerDistributors

reduced competition between search platforms for distribution agreements

increased Microsofts ability to leverage its market power in areas other than online advertising

European Commission Market overview Positive effects Negative effects

Post-transaction analysisConclusion

0,00%10,00%

20,00%30,00%40,00%50,00%60,00%70,00%80,00%90,00%

100,00%

July 2009 April 2014

AOL, Inc.

Ask Network

Microsoft sites

Yahoo! sites

Google sites

Post-transaction analysis

64,7% 67,6%

19,3% 10%

8,9% 18,7%

Total U.S. search market share Home & Work Locations (2009, 2014). ComScore Explicit Core Search Share Report. comScore qSearch

Post-transaction analysis

10%13%

22%

37%

-10%

14%

-20%

-10%

0%

10%

20%

30%

40%

Impressions ClickthroughRate

Cost-Per-Click

Yahoo! Bing Network Google

U.S. Percentage change of the main search market indicators of Yahoo! Bing Network and Google on a year-over-year basis (Q4 2011 Q4 2012)

Marin Software. (2012). Online Advertising Report, October-December 2012

Post-transaction analysis

Consumer surplus under normalized network benefit parameters

Iurkov, V. (2013). Competition, mergers and exclusive dealing in two-sided markets with zero-price constraints: The case of search engines. Universita CaFoscari Venezia.

Post-transaction analysis

Total welfare under normalized network benefit parameters

Iurkov, V. (2013). Competition, mergers and exclusive dealing in two-sided markets with zero-price constraints: The case of search engines. Universita CaFoscari Venezia.

Post-transaction analysis

A merger between two platforms leads to a slight decrease in consumer surplus and total welfare, but to an increase in total platform profits.However, as t , consumer surplus and total welfare tend to be equal under no merger and merger configurations.

Iurkov, V. (2013). Competition, mergers and exclusive dealing in two-sided markets with zero-price constraints: The case of search engines. Universita CaFoscari Venezia.

European Commission Market overview Positive effects Negative effects Post-transaction analysis

Conclusion

Discussion

ReferencesPhotography of Microsoft Office by Jeff Wong, www.jeffwongdesign.com/2013/10/microsoft-office-interior