MicroHoo: Hasta La Vista, Hotmail?

Yesterday, BoomTown wrote a piece about Yahoo’s worries about the scrutiny that the monopolistic combination of Yahoo Mail and Microsoft’s Hotmail would get if it merged with the software giant.

The issue–which has not gotten a lot of attention–is actually a major sticking point in the price negotiations going on this weekend between the companies, as Yahoo (YHOO) seeks solid downside protection, if the deal becomes mired in approval issues by governmental authorities due to email and instant messaging dominance on the Web.

But Microsoft (MSFT) does not want to pay more, of course. And so the legions of minions under increasingly-under-pressure–translation: more yelling than ever this week–CEO Steve Ballmer are hard at work this weekend on all-nighters to solve the problem, said several sources.

One solution is to spin off all the communications assets, said sources, into a separate company. In that case, the two brands would remain, so as not to inconvenience consumers, although all the back-end technologies to run the services would be merged.

The more drastic step is for Microsoft sell Hotmail to a third party, especially given that Yahoo Mail is considered a stronger brand. Hotmail has already been in the midst of a transition, including a recent name change to Windows Live Hotmail.

Microsoft’s mail offerings now include Hotmail and also Windows Live Mail. The latter offering would presumably remain at the merged company with its @live.com address.

But Hotmail is the candidate to be sold off (with the requisite marketing to try to port its users over to @live.com first).

And potential buyers? Well, not Google (GOOG), but there are many, including AOL (TWX), Comcast (CMCSA) and AT&T (T), as well as IAC/InterActiveCorp (IACI). As to price, that’s unclear, but it could be in the billions of dollars.

That’s another plus for Microsoft, which will obviously have to fork over more money if it wants to acquire Yahoo.

And, it is also priceless if Microsoft can minimize government interference in the deal, most especially any antitrust investigations related to its powerful email assets.

That must be a worry, since Microsoft and Yahoo completely dominate all email on the Internet. According to the most recent comScore (SCOR) figures, for example, Yahoo has 256 million users, while Microsoft has 255 million.

Google’s Gmail is a distant third with about 92 million users and AOL has about half that at 49 million.

The same domination is true in the instant messaging market, with Microsoft and Yahoo holding an 80% to 90% market share together.

Please see this disclosure related to me and Google.