Google Plays The Anti-Competitive Card

Burlingame -Since about late December, more people have been searching on Google for "Steve Ballmer" than they have for "Eric Schmidt."

Don't count on that continuing.

On Sunday, news began to leak out that Schmidt, Google's chief executive, had put in a call to the doubtlessly miserable Jerry Yang of Yahoo! offering his help in warding off the barbarian at the gate--namely Steve Ballmer of Microsoft.

Google had also issued on Sunday a suitably pious press release from its general counsel: "The openness of the Internet is what made Google--and Yahoo!--possible. ... So Microsoft's hostile bid for Yahoo! raises troubling questions. This is about more than simply a financial transaction, one company taking over another. It's about preserving the underlying principles of the Internet: openness and innovation."

Make no mistake: This isn't about the Internet. It's hardly about Yahoo!. Instead, Yahoo! has become a football in an epic battle between Microsoft and Google--and, between their team captains, Ballmer and Schmidt.

Both Google and Microsoft will try to claim the moral high ground by asserting that their actions will enhance competition in the Internet industry. Like seasoned politicians, no two other high-tech titans have had more experience debating "competitiveness" than this pair.

And both have tasted the sweetness of monopoly profits--and crave more.

First a bit of history: Both Yahoo! and Google were founded during the height of Microsoft's monopoly power--Yahoo in 1994, Google in 1998. Hatred of Microsoft, particularly in Silicon Valley, ran deep during those years. The Redmond software giant commanded fat margins for its operating system and office productivity software.

Microsoft Co-Founder Bill Gates was savvy enough to know even then that Microsoft was most vulnerable to what it didn't expect. He used to like to joke that Microsoft's toughest competitor was probably some tiny start-up no one had ever heard of.

Silicon Valley pundits, by contrast, warned darkly that the days of innovation were over. Microsoft's shadow was enough to frighten entrepreneurs away from whole areas of software. Just look, they charged, at the fact that no company dared try to build an operating system or even a new word processor.

Leading many of those assertions was Scott McNealy at Sun Microsystems, ably supported by his chief technology officer, Eric Schmidt. In April 1997, Schmidt left Sun to become chief executive at Novell, a network software company that had been seriously bruised by its battles with Microsoft.

Much of the personal animosity against Microsoft was directed against Bill Gates. But Microsoft also had a relentlessly aggressive sales force, encouraged to push for the best price and the most favorable contract terms. The tone of that sales force was set by the company's No. 1 salesman, Ballmer.

Schmidt, whose technological specialty was networking, tried unsuccessfully to rekindle Novell's fortunes around its directory services. The effort petered out. Schmidt jumped to Google in 2001.

Had Microsoft truly "chilled" competition? Commercial efforts to build conventional operating systems certainly had poor results. Sun continued to develop its operating system, Solaris. Apart from Apple's operating system, which limped through the mid 1990s, no other significant operating system for PCs emerged. Microsoft squashed enthusiasm for one pen-based operating system called Go. Another, Be, fizzled.

Microsoft then poured its energy into battling Internet browser pioneer, Netscape Communications, ultimately to the detriment of both. Netscape closed up shop and sold the remnants to AOL. Microsoft wound up tied up in antitrust litigation and penalties that continue still.

Outside the areas that Microsoft dominated, innovation flourished.

Gates was ultimately right: His company overlooked the importance of the emergence of the open source (not-for-profit) operating system, Linux. Palm Computing came out with an operating system for handhelds--leaving Microsoft to scramble in its dust to develop its own mobile operating system. And most critically, even after Gates announced that Microsoft was set on understanding the Internet, the packaged software company couldn't spot the need for search engines for sifting through all the data--leaving a big opening for what became Google.

Thank heavens none of those companies thought it would be a good idea to simply build another PC operating system.

Now the tables are oddly reversed: Google commands 75% of search-ad revenues worldwide. It carried out more than 65% of all the Internet searches done in the U.S. during the first four weeks of January, according to market research firm Hitwise. Combining Yahoo! Search and MSN Search would amount to 28%.

Both Microsoft and Google, as well as other industry titans, have flirted with Yahoo! for years. Yahoo! turned out to be its own most devastating competitor: It tried to doll itself up as a Hollywood company. It was slow to build an effective back-end system to monetize advertising. Yahoo! drifted.

Among the deals that have been considered in the past: breaking Yahoo! into chunks, including selling its search advertising business to Google.

That move would leave Microsoft even further out of the online ad business.

Ballmer--the salesman and long-time basketball fanatic--pulled the best lever he saw by offering a sizable premium over Yahoo's! current--and dwindling--share price. Expect to hear him bang the table for a fast decision from the company's board.

Schmidt, who knows Ballmer and Washington, D.C., better than any other high-tech executive, will play a different hand. To buy time, he has set his general counsel beating out the familiar rhythm of "anti-competitive" charges. He will try to round up allies. They will white board a dozen ways to slice and dice Yahoo! to keep it out of Microsoft's hands. Just as Microsoft dragged Google through anti-competitive hearings in Washington, D.C., over the search engine's proposed acquisition of ad company DoubleClick, so, too, will Google call in all its favors and demand that the antitrust busters scrutinize this deal. Schmidt's Washington ties run deep: He currently sits on Apple's board alongside former Vice President Gore.

Both Schmidt and Ballmer know it's easier to delay a multibillion-dollar deal than it is to speed it up. Expect to see this contest go into overtime.

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