All Things Digital

We see little to stop Google from reaching 70% market share eventually; the question, really, comes down to, ‘How long could it take?’ ”

–RBC Capital Markets analyst Jordan Rohan, March 2006

Not long at all, really.

They’re not the competition; they’re the environment in which you compete. The IT industry used to say that about IBM, but today the adage seems equally applicable to Google (GOOG), which dominates the search market just as IBM (IBM) once dominated the computer industry.

According to new metrics from Hitwise, Google’s share of the U.S. Internet search market grew to 67.9%–a 4% increase year-over-year. Google’s growth apparently came at the expense of rivals Yahoo and Microsoft. Though it claimed the second-largest share of the search market, Yahoo (YHOO) slipped to 20.28% from the 20.73% share it held a year ago. Microsoft’s (MSFT) Live Search, ranked third behind Yahoo, fell to 6.26% from 7.77% in that same period.

Seems the two companies’ recent efforts to differentiate their search offerings from Google’s haven’t done much to boost their respective market shares. Nor will they ever if the Google juggernaut continues as it has. As Credit Suisse analyst Heath Terry once noted, search is a natural monopoly business and there’s a decent chance that over time, Google will continue to gain share until it’s claimed most of the market.

And that may happen sooner than we think. Google’s closing in on 70% market share already. “By this time next year,” Silicon Alley Insider’s Henry Blodget writes, “Google’s search business will be larger and more profitable than the most profitable and legendary monopoly in history–Microsoft Windows.”

The U.S. Justice Department has managed the impossible. It’s brought Howard Stern and Oprah Winfrey together under a single aegis.

This morning the DOJ approved the merger of satellite radio companies Sirius Satellite Radio (SIRI) (home to Stern) and XM Satellite Radio (XMSR) (home to Winfrey), a move that will create a satellite radio company with about 14 million subscribers.

In a statement, the DOJ said it found no reason to think that combining the only two satellite radio players in the market would create a pay-radio monopoly. “After a careful and thorough review of the proposed transaction, the division concluded that the evidence does not demonstrate that the proposed merger of XM and Sirius is likely to substantially lessen competition, and that the transaction therefore is not likely to harm consumers,” the DOJ explained.

“The Division reached this conclusion because the evidence did not show that the merger would enable the parties to profitably increase prices to satellite radio customers for several reasons, including: a lack of competition between the parties in important segments even without the merger; the competitive alternative services available to consumers; technological change that is expected to make those alternatives increasingly attractive over time; and efficiencies likely to flow from the transaction that could benefit consumers,” said the DOJ.

Oh, it’s on now, boy. It’s on.

Google has finally made an official comment on Microsoft’s unsolicited $44.6 billion bid for Yahoo and, as one might imagine, it’s not a ringing endorsement. In a statement yesterday posted to the company’s blog, Google’s chief legal officer, David Drummond, argued that a Microsoft-Yahoo merger “raises troubling questions” and would pose significant competitiveness issues.

“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. “While the Internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies–and then leverage its dominance into new, adjacent markets. Could the acquisition of Yahoo allow Microsoft–despite its legacy of serious legal and regulatory offenses–to extend unfair practices from browsers and operating systems to the Internet?”

Then, noting that Microsoft and Yahoo operate the two most widely used Web portals, he asked if a merged company might limit the ability of consumers to freely access competitors’ email, IM and Web-based services. “This is about more than simply a financial transaction, one company taking over another,” he concluded. “It’s about preserving the underlying principles of the Internet: openness and innovation.”

And remember kids, you can make money without doing evil–especially if you have more than 70% of paid search revenues worldwide …

Quite a letter, and one full of the sort of FUD (fear, uncertainty and doubt) and faux altruism normally associated with Microsoft missives. The software giant, of course, was quick to take exception. The company issued a terse statement yesterday refuting Google’s protests, arguing that a merger of Yahoo and Microsoft will create a stronger rival to Google. “The combination of Microsoft and Yahoo will create a more competitive marketplace by establishing a compelling No. 2 competitor for Internet search and online advertising,” Brad Smith, Microsoft’s general counsel, wrote. “The alternative scenarios only lead to less competition on the Internet. Today, Google is the dominant search engine and advertising company on the Web. Google has amassed about 75% of paid search revenues worldwide and its share continues to grow. According to published reports, Google currently has more than 65% search-query share in the U.S. and more than 85% in Europe. Microsoft and Yahoo, on the other hand, have roughly 30% combined in the U.S. and approximately 10% combined in Europe. Microsoft is committed to openness, innovation and the protection of privacy on the Internet. We believe that the combination of Microsoft and Yahoo will advance these goals.”

Looks like Microsoft CEO Steve Ballmer may have a shot at a second dinner date with EU Competition Commissioner Neelie Kroes.

Less than three months after agreeing to comply with key elements of the European Commission’s 2004 antitrust order against it, the company is facing new accusations of monopoly abuse. Norway’s Opera Software ASA said today it has filed an antitrust suit against Microsoft in the European Union, accusing it of stifling competition by tying its Internet Explorer Web browser to Windows and hindering interoperability by not implementing widely accepted Web standards.

“We are filing this complaint on behalf of all consumers who are tired of having a monopolist make choices for them,” Opera CEO Jon von Tetzchner said in a rather here-I-come-to-save-the-day statement. “In addition to promoting the free choice of individual consumers, we are a champion of open Web standards and cross-platform innovation. We cannot rest until we’ve brought fair and equitable options to consumers worldwide.”

And reminded the world that Opera is not just a drama set to music, but an unpopular Web browser, as well.

Opera asks that the EC’s competition division force Microsoft to unbundle IE from Windows and require the company to follow fundamental and open Web standards, which is an interesting twist on the old antitrust classic. And one that may have some legs, given IE’s inability to pass the Web Standards Project Acid2 test. “Microsoft often participates and even promises to support these standards, but we find it often isn’t the case,” Opera CTO Håkon Wium Lie told ZDNet. “We find bugs and programmers have to code around (Microsoft).”

What a surprise. Microsoft is calling for regulators to scuttle Google’s proposed acquisition of DoubleClick (see “Hello, Office Depot? Mr. Ballmer needs a new chair … yes, again.“). Apparently, forcing Google to overpay for the online advertising company didn’t quite take the sting out of losing the bidding war to its rival.

On April 15, Brad Smith, Microsoft’s general counsel, urged regulators to stop Google from buying DoubleClick, arguing the acquisition would hurt competition in the online advertising market. “By putting together a single company that will control virtually the entire market … Google will control the economic fuel of the Internet,” he said. “This merger deserves close scrutiny from regulatory authorities to ensure a competitive online advertising market.”

It’s worth noting that Microsoft is not alone in calling for regulatory intervention here. Joining Redmond in its calls to halt the merger are consumer advocacy group Center for Digital Democracy and AT&T, which knows a thing or two about monopolies. “We think antitrust authorities should take a hard look at this deal and the implications,” Jim Cicconi, senior executive vice president for external affairs at AT&T, told the New York Times. “If any one company gets a hammerlock on the online advertising space, as Google seems to be trying to do, that is worrisome.”

Google executives dismiss such concerns. Said Google Chief Executive Eric Schmidt: “We’ve studied this closely, and their claims, as stated are not true.”