Microsoft-Yahoo Deal Regulatory Update: "Eh"

Unlike the gripping back and forth of the fight over Yahoogle last year, the approval process for the search and online advertising partnership of Microsoft and Yahoo is chugging along slowly but surely as the Justice Department has deepened its investigation by reaching out to a broad range of publishers, advertisers, public interest groups and rivals for comment recently.

A month ago, the government agency lobbed in a “second request” for information about the deal the pair struck earlier this summer.

This kind of regulatory review is typical in deals of this magnitude.

But so far, there is no significant external challenge to the MicroHoo deal, even–according to many sources BoomTown has interviewed over the last week–from Google, the likeliest company to try to scuttle or, at the very least, slow down the deal.

“Is it worth fighting a big fight over?” asked one person close to the thinking of Google (GOOG). “Not really.”

Said another source, surveying the state of play: “It’s eh, kind of inevitable and not that interesting on a lot of levels.”

While none of the key constituencies wanted to comment or make predictions about the outcome of the regulatory scrutiny, most seem to agree that MicroHoo is more likely to be approved than not.

At the time the partnership was announced in July, execs at both Microsoft (MSFT) and Yahoo (YHOO) said a lot of investigation was likely from Justice, although they said they were also confident that it would be allowed go through by year’s end.

So far, several sources said, the key issue raised by the Justice Department has been whether the argument Microsoft and Yahoo are making–that they need scale to compete with Google–is valid or not.

Currently, Google has just under 70 percent of the search market in the U.S., while Microsoft and Yahoo together have about 28 percent.

Google has been arguing that huge scale is not necessary to be successful in the search ad market, although its execs have often said bigger is better when it comes to natural search and in spurring more clicks on ads.

Meanwhile, Microsoft and Yahoo have said they need all the firepower they can muster together to battle Google’s hegemony.

In a related concern, some regulators are worried–as they were when Google and Yahoo were trying to get approval for a similar deal last year–that any hookup of big players in the market will effectively take Yahoo out of the search business.

“With only three big players, going to two is not desirable to the government,” said one source. “Yahoo has to reassure everyone that it is focused on a sustainable business model beyond search.”

In a blog post yesterday, in fact, Yahoo said it was committed to search innovation.

In any case, most expect another month of investigation at least, although the lack of any loud voice in opposition could shorten that time frame.

And, added some sources, unlike with Yahoogle, there is not likely to be any kind of Congressional hearing on the deal.

Nonetheless, Microsoft, Yahoo and Google remain concerned that deals like this will lead to more focus on privacy issues, specifically around behavioral targeting.

That would be more a matter for legislators or the Federal Trade Commission and would probably come well after the deal is cleared and as part of a bigger topic.

Rep. Rick Boucher (D., Va.), who chairs the Subcommittee on Communications, Technology and the Internet, said he will consider consumer privacy legislation this fall.

Boucher led hearings on the subject this summer, and there might be more, especially as Web companies garner a lot of personal information from consumers with little oversight of what they do with those data.

If Boucher does call for hearings, he might want to replay this particularly boneheaded (but funny!) video from Yahoo’s U.K. ad staff, which classifies various Yahoo customer types–such as “disco-dancing heart surgeons from Nantwich”–as farm animals:

Please see this disclosure related to me and Google.