Google Should Be Allowed To Buy Yahoo

| About: Yahoo! Inc. (YHOO)

Summary

Antitrust concerns mean Google is unlikely to be able to buy Yahoo's business.

Economic efficiency concerns suggest Google should be allowed to buy Yahoo.

We should thus be changing our antitrust concerns.

I've mentioned here before that I think that the US has its position on antitrust, anti-monopoly law wrong and that this could use changing. The current shopping around of Yahoo's (NASDAQ:YHOO) core business underlines this point. For the people who would do most to improve the business in terms of economic efficiency, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) (or have we all started calling them Alphabet yet?) are precisely the people that antitrust law is likely to ban from doing so.

This points up our conflict within this system of regulation: we don't like monopoly because of the inefficiencies that result, but here we're not going to allow efficiency by not allowing monopoly. We need to square this circle somehow. The way to do that is by changing the antitrust rules.

It's a standard criticism of monopolies that they use that market power to gouge consumers. Here, in internet advertising, the consumers are the people who are buying the ads of course, a nice example of the Nobel Laureate Jean Tirole's work on dual sided markets, that other side being the provision of the content which brings the eyeballs the advertisers are paying to show stuff to. So, if we allow that market of selling ads to become too concentrated we think that advertisers might get ripped off.

All of which is entirely fine but the issue here is a little more complex. Because we can see that one likely bidder, Verizon (NYSE:VZ) would indeed be bringing economic efficiency to the table:

Any buyer, including a private equity firm, could cut about 1,000 jobs -- on top of the 1,600 Yahoo has pledged to eliminate by year's end -- and reap savings that add about $750 million to the core's value, Peck said. A company such as Verizon that's in the Internet and telecommunications business and already has staffing and infrastructure for functions such as management, administration and sales could slash around 40 percent of the workforce, adding about $2 billion in value to the core, Peck said.

Being able to produce the same output with fewer people is exactly the very definition of economic efficiency. And we like economic efficiency and so allow them to bid. But what holds for Verizon holds even more strongly for Google:

The same could be true of Google, which Bloomberg said is mulling a bid. Imagine if Google took its substantial ad prowess and applied it to Yahoo's content and audience, eliminating a lesser rival in the process. But for those precise reasons, Google would likely face stiff scrutiny from antitrust regulators who have eyed the company suspiciously in the past, said Kimmelman. "That's a huge antitrust issue," he said. "There would be an enormous red flag."

And there's our problem. We can see the combination of Yahoo's internet properties with Google's advertising prowess would be hugely economically efficient. Given that that is so we would also therefore expect Google to be the highest bidder: at least some of those efficiency gains would go to current Yahoo shareholders, which we generally think to be a good thing.

But that's also the one bidder most likely to be blocked on those competition and antitrust grounds. And the two companies have been barred from even cooperating before now, let alone one owning the other.

All of which leads to the same point I made in that earlier article. Which is that we should be changing our definitions of monopoly. Currently we simply look at market shares. If they're high we shout monopoly and do something about it. But we almost certainly shouldn't be doing that. For what should concern us is not market share or position, but the ability to exploit that. That is, we shouldn't be measuring the action or no action decision by market share, but by how contestable said market share is. That is, not are there competitors today, but would competitors arise if that market share, that monopoly, was being exploited?

The answer here is that in internet advertising there's more potential competition than anyone could shake a stick at. If Google starts ripping off advertisers there will very soon be people stealing that advertising from them. There's no shortage of capital out there for new such businesses. And there's no shortage of companies that would love to get their fangs into Google's hide. Thus, we should conclude (and I certainly do) that if Google were to try to exploit its market position then competition would arise. That is, whatever Google's position it is contestable.

And thus Google should be allowed to bid for Yahoo. In terms of actually trading on this I doubt very much that my analysis is going to change US law. Thus I expect Google to be barred (to the point that they might not bother to bid at all) leaving Verizon as my most likely candidate for the winner. Good for Verizon stock and bad for Yahoo for I would expect Google, if it were allowed to bid, to offer rather more simply because it would gain more economic efficiency.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.