Analysis of Yahoo search business acquisition by Microsoft from the economic view.

1. Analyzing decision of the
European Commission
Microsoft | Yahoo! Search Business
Competition, Strategy, and Institutions Yulia AN | Yulia MIRONOVA

2. Decision of European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

3. 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

4. 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 Yahoo’s 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.

5. European Commission
Decision
Horizontal Merger approved

8. European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

9. 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

10. 0
10
20
30
40
50
60
2010 2011 2012 2013 2014
Paid search Display Classified
Source: ZenithOpen
Market overview

11. Advertisers
Users
Market overview

12. A
U
Zero-price consraint
Auction bidding:
Generalized Second-Price
Market overview

13. A
U
~ Single-homing
~ Multi-homing
Market overview

14. Market overview
Production costs Switching costs

15. Market overview
Production costs Switching costs
−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk

16. 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

17. Market overview
Production costs Switching costs
High Low−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk

18. Market overview
−− One click
away
Production costs Switching costs
High Low−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk
−− Credence
good

19. Market overview
−− One click
away
Production costs Switching costs
High Low−− Highly specific fixed costs
−− Negligible variable costs
−− Sunk
−− Credence
good
Network externalities

20. 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

21. 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

22. Market overview
Google
Yahoo! Bing
Other
UK France Germany
Ireland Italy Spain
Digital 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%

23. European Commission
Market Overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

24. Microsoft Yahoo!
−− Economies of scale −− Reduction of costs
Positive effects

25. Microsoft Yahoo!
−− Economies of scale −− Reduction of costs
−− Rationalisation of operational costs
−− Stronger competitor to Google
−− Greater value to advertisors
Positive effects

26. European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

27. Merger
Advertisers
Users
Publishers
Distributors

28. Merger
Advertisers

29. Merger
Advertisers
−− Increased cost per click (CPC)
−− increased bidder density for
particular keywords

30. Merger
Users

31. Merger
Users
−− reduction of variety of choice
−− degradation of organic search
−− unilateral effect

32. Merger
Publishers

33. Merger
Publishers
−− increased competition among publishers
−− reduced competition between the remaining
advertising platforms
−− lower prices paid for publishers’ web space

34. Merger
Distributors

35. Merger
Distributors
−− reduced competition between search platforms
for distribution agreements
−− increased Microsoft’s ability to leverage its market
power in areas other than online advertising

36. European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

37. 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

38. Post-transaction analysis
10%
13%
22%
37%
-10%
14%
-20%
-10%
0%
10%
20%
30%
40%
Impressions Clickthrough
Rate
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

39. 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
Ca’Foscari Venezia.

40. 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
Ca’Foscari Venezia.

41. 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 Ca’Foscari Venezia.

42. European Commission
Market overview
Positive effects
Negative effects
Post-transaction analysis
Conclusion

43. Discussion

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