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In a move that should surprise no one, Google and Yahoo have “officially” abandoned their proposed Internet advertising partnership.

The proposal was laughable from the start, but the two firms took the public stance that the arrangement could somehow have been “pro-competition.” Antitrust regulators were having none of it. As it became clear that the proposal would not simply slide past regulators Google and Yahoo have likely determined that the façade was no longer worth the trouble and legal fees.

As previously noted, it seems unlikely that either party truly thought this would pass antitrust muster. There were potential latent benefits to each, however, which may have led to the proposal’s birth.

While there was little question the proposal had little chance of success, one might wonder if the Obama victory just hours before the firms’ announcement played a role. There was little hope that an Obama administration would be more willing to allow the deal than the outgoing Bush administration. The election may have been the final proverbial straw on the back of this failed-from-the-start alliance.

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The joint advertising deal between Google and Yahoo, previously discussed in CyberLawg, is being delayed as the U.S. Department of Justice Antitrust Division continues its review.

Both Yahoo and Google have correctly taken the “we’re happy to help and comply” public line. Still, there is no question that an antitrust review that needs more time is not good news for the potential bedfellows. The Google CEO’s previous suggestion that Google and Yahoo would move forward before the DOJ even completed its review looks pretty silly at this point.

Another concern: the Executive Branch will have a new leader come January. Regardless of the winner of the presidential election, it is hard to imagine that it will lead to an administration more likely to pass on comprehensive review than the current administration.

Of course, there is some question as to whether Google and Yahoo ever thought this would truly work or if they were both just looking to cool down the speculation that Yahoo would be acquired by Microsoft or another third party. Even in a circumstance where DOJ does block the deal both online ad firms do receive some benefit by maintaining their status quo as the two dominant online advertising firms even while the review is pending.

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The FCC, after being deadlocked along party lines, is expected to clear a merger between satellite radio providers XM and Sirius, so long as the firms meet certain conditions, reportedly the firms' payment of $20 million in fines for violations regarding tower locations and power limits.

The approval of the merger comes as a disappointment to consumer groups and Democratic FCC Commissioners, who had heavily opposed the merger based on monopoly concerns. These interests were of the opinion that the combination of the only two satellite radio providers would be the definition of a monopoly. Others, such as Republican FCC Commissioners and the firms themselves, felt that the varied choices in audio programming, such as HD Radio, analog radio, podcasts and similar alternatives were sufficient to restrict any potential price gouging by the new combined firm. The Department of Justice’s Antitrust Department had previously cleared the merger on similar grounds.

This was the classic “close call.” XM and Sirius have been struggling with profitability from the beginning of their existence and there were legitimate questions as to whether satellite radio would be viable at all. On the other hand, the technology is very new. There are equally legitimate questions as to whether allowing a merger of such new technology is a sound long-term choice.

All is not lost even if the DOJ and FCC’s decisions are proven to be wrong as the years pass The Federal Government has the power to break up monopolies when the need arises. While the “break up” process is substantially more problematic than the “prevention” powers, the option does remain. More likely, market powers will be sufficient to keep the XM-Sirius entity in check, at least in the short term.

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The deal that allows Google to provide some advertising for Yahoo searches has unsurprisingly attracted a formal antitrust probe from the Department of Justice. The fact that the Bush Administration’s Department of Justice, comfortably hands-off in recent years, has begun a formal investigation is not good news for the deal. As a report notes, attorneys for Yahoo and Google believe that the deal is “pro-competition.” Opponents feel that the deal will prevent Yahoo from wanting to compete with the hand that feeds it a portion of its advertisements.

This is a classic example of the adage “if you can’t beat ‘em, join ‘em.” Yahoo just failed to consummate a deal that was primarily designed to allow the firm to more fully compete with Google. Weeks later, both firms’ arguments that a combined deal is pro-competition is a tricky pill to swallow.

So why even try it? The two firms are unlikely bedfellows because each is able to use the other to its own ends at the present point in time. The Google deal provides Yahoo with an “out” from Icahn, Microsoft, and Yahoo shareholders all clamoring for a deal. The primary beneficiary of an independent Yahoo? Google. The search leader has little interest in anything but the status quo: Google dominance in search marketing. Keeping Yahoo independent helps to maintain that status quo. Adopting the famous quote from Sun Tzu, Google truly believes it is best to “keep its friends close, and its enemies closer,” at least until the Department of Justice has its say.

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A topic that is garnering increased interest in recent years, particularly in the age of substantial media consolidation, is the “local role” of broadcasters in servicing their communities. The FCC continues to mandate that broadcasters meet certain standards of community service, such as providing programming of interest to local audiences, playing local artists, and otherwise “being a part of the community.”

Broadcasters, who believe that market forces should dictate their local programming, are generally opposed to mandates, arguing that the bureaucracy of organizing community boards of meeting certain minimal requirements is a “feel good” ideal that may or may not lead to any true benefit to communities. Broadcasters also argue that they already meet local standards, shown by airtime donated for public service announcements and similar community efforts.

Advocates of “local standards” feel that broadcasters can easily comply with any FCC mandate, particularly given the broadcasters’ argument that such standards are already being met. Advocates also point out that broadcasters pay nothing for their broadcasting licenses, suggesting that reasonable efforts to meet local standard are not a serious burden.

Both sides have valid arguments. Broadcasters are correct that the mandates are a bit broad, particularly when only broadcasters, as opposed to cable or satellite provider, are subject to the regulations. Public interest advocates also have valid points, most notably the argument that news and cultural programming is becoming homogenized. With so many media outlets owned by large firms that want to cross-promote and otherwise create efficiencies in programming, there is little question that local coverage has taken a back seat in recent years.

While regulations on broadcasters should be strictly tailored, the FCC requirements regarding community standards are hardly a crushing burden. Indeed, broadcasters should probably be thankful that the FCC has chosen this route of regulation as opposed to taking a stricter stance on media consolidation and license renewals in media markets.

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The winners of the auctioned spectrum were announced today. As expected, Verizon Wireless and ATT were the big winners. While billions of dollars were spent on this spectrum by the firms, there is little question that the investment was a good one. Rights to this resource will position both ATT and Verizon as long term wireless powerhouses for years to come.

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The FCC’s auction of spectrum being vacated by analog television netted the agency $19.6 billion that will be used to help with the transition to over-the-air digital television. This amount represented more money raised that all previous spectrum auctions combined. The winner of the auction will not be named for some time, but most followers expect to see Verizon Wireless or AT&T Wireless eventually announced as the winner. The “commercial” block sold for the $19.6 billion will be the first nationwide network that would be open to all devices and software. Lobbying from public interest groups and firms such as Google led to this “open restriction” on the spectrum.

While the commercial portion was successful, the “D Block,” designed to be a network developed privately but employed by public services such as emergency responders, did not receive a bid high enough to meet the reserve price. This sends the FCC back to the drawing board to reconsider some of the restrictions and costs involved in developing that block.

It will be interesting to see how the winner of this spectrum will implement its services on this newer open network. It will be surprising if there are not some early disputes about how “open” the spectrum remains. The winner of the spectrum will want to limit encumbrances, and open-access proponents will want to mandate that regulations are followed. While hopefully minimal, it is wishful thinking to suspect that these regulations will not lead to a few minor spats between the interests.

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The bidding war for radio spectrum that is being freed up by the elimination of analog television broadcasting continues to attract attention by major technology firms. You can see a map of the spectrum range here.

Several blocks of spectrum in the 700-MHz range have to date attracted bids of $18.9 billion, well in excess of the FCC’s goal of $10 billion. Of particular note, the C Block, the largest swath of airwaves up for auction reached its minimum reserve price of $4.6 billion. This now means that the airwaves must be used to build an open network, allowing the operation of numerous devices and applications, compared to the current method of wireless providers defining the types of phones used and the services provided.

While the bidders are anonymous, speculation indicates that Google and Verizon Wireless are the primary players, though few expect Google to invest enough to win. Google may have posted the minimum bid for the C block to ensure the open network, which the firm heavily supported.

The money invested in this spectrum is certainly not a lost investment. Regardless of the final price, winners of this band of spectrum will easily recoup their investment and then some as higher bandwidth mobile applications begin to explode.

Google is also a likely winner here. While we don’t know if it placed the minimum bid to ensure open access or not, it is very likely that there will be an even higher bid submitted by a player other than Google. In that scenario, Google get what it wants while avoiding actually making any investment at all. This is a shrewd move that would position it in future battles with the proposed Microsoft/Yahoo conglomerate.

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Talk about a big deal. Microsoft has offered to purchase Yahoo for $44 billion. If completed, the monstrosity would be an instant Google competitor, combining the forces of two firms that alone have not been able to compete with Google.

While the deal is a long way from coming to fruition, this seems to make sense at first glance. Both Yahoo and Microsoft have had their various struggles over the recent years. Yahoo has had a hard time focusing its business on a core group of services, and its attempt to be all things to all people has not been successful.

Microsoft’s attempts to enter the search market have been lackluster at best, and there are more and more challenges to its core software business coming from maturing open source programs, online applications by Google and others, and Apple’s rise in popularity. The Vista operating system is another example of a recent failure that has not earned the public’s continuing trust.

Of course, the potential deal would have to clear antitrust conflicts, but if Google & DoubleClick was not a problem for the government, it seems unlikely that these two firms, both primarily in separate industries, would create much trouble.

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A recent bill introduced in the house, entitled “Prioritizing Resources and Organization for Intellectual Property Act of 2007,” or PRO IP for short, casts an eye towards improving international cooperation and enforcement of IP rights.

The bill, introduced by John Conyers of Michigan, proposes that the United States Patent and Trademark Office appoint 10 intellectual property attachés to serve in United States embassies or other diplomatic missions. Their mission would include assisting “United States persons holding intellectual property rights, and the licensees of such United States persons, in their efforts to combat counterfeiting and piracy of their products or works within the host country, including counterfeit or pirated goods exported from or transshipped through that country.”

International infringement of American works has become a more salient issue in recent years, as previously discussed in CyberLawg. Appointing these additional attaches is a low-cost but potentially high reward arrangement. By educating developing countries about IP protection the United States has opportunity maintain its citizens’ IP interests while similarly working to build better overall political relations with developing nations.

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Federal regulators plan to throw out exclusive cable television service contracts with apartment buildings and open up competition to phone companies, according to a published report. Under FCC Chairman Kevin Martin's proposal, cable companies, such as Comcast and Time Warner would no longer have exclusive deals with apartment buildings and other multiunit dwellings to provide cable TV to building residents, who usually have no other choice for such services.

Bottom Line: This is excellent news for consumers, who are often faced with higher prices and poorer service in buildings with exclusive contracts. Data providers know that moving an entire apartment is much more difficult than simply switching providers in a competitive environment, and service priorities are allocated accordingly. This is particularly good news for minority groups, which disproportionately represent a larger share of apartment dwellers than non-minorities.

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The U.S. House of Representatives has voted to extend an Internet tax moratorium for four years, despite calls from the tech industry to permanently bar state and local governments from taxing Internet access. The House voted to extend the moratorium on taxes on Internet access fees and “other taxes unique to the Internet” until November of 2011. Senate and Presidential action on the bill is still pending.

This ban can best be described as much ado about nothing. Since its passage in 1998, Congress continues to waffle on the issue, reenacting the moratorium several times since its inception. You can read more about the history and current status of Internet tax issues in Taxing the Internet: Analyzing the States’ Plan to Derive Online Sales Revenue, written by CyberLaw’s Principal Attorney Eric Menhart.

Bottom Line: While the moratorium is a fun issue to discuss and debate, its real world importance is not impressive. It is primarily a tool to impress the voters.

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A new legal article, entitled “An Antitrust Analysis of Google’s Proposed Acquisition of DoubleClick” takes a look at the relevant product markets necessary to evaluate the potential merger.

Proponents of the acquisition argue that the two firms do not compete because Google primarily provides search and text based advertising, while Doubleclick provides graphic-based advertising. Thus, the merger would not lead to higher prices.

The authors, taking the opposite view, propose that suppliers of online advertising provide three primary inputs: (a) advertiser tools, (b) intermediation services, and (c) publisher tools. The authors go on to explain that the integration of such services is a key point in evaluating potential deals. Furthermore, the authors argue that product markets are best defined by the response of buyers to relative changes in prices.

Based on a survey of online retailers, the authors conclude that a significant share of online advertisers would substitute among the three inputs in response to relative changes in prices, and  significant share of DoubleClick customers would turn to Google before any other supplier in response to an increase in the price of DoubleClick’s advertiser tools.

Bottom Line: This interesting article provides a good discussion of the various issues involved in online advertising competition. Rather than relying on the method of displaying advertisements to customers, the authors correctly consider the method via which advertising purchasers are served. Because, the buyers and advertisers are the market that matters this is a more appropriate manner via which to evaluate the deal.

Finally, it is worth noting that the authors mostly ignore the numerous market alternatives available “offline” in their analysis. While fine for an academic discussion, any true antitrust analysis has to consider the numerous advertising opportunities available offline, as well.

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The Unlawful Internet Gambling Enforcement Act (UIGEA), a bill passed last year in an 11th hour port security bill, is being challenged as unconstitutional by a gambling trade group. The federal government is arguing for UIGEA’s constitutionality, holding that Congress has the right to make such laws to regulate interstate commerce.

Despite already missing its deadline to provide regulations required by the law, the federal government will have little problem winning this battle. First, never a good sign, the gambling group must first show that it even has standing to bring the suit.

Even if the group prevails on that point, there is little legal ground on which to stand. There are no free speech issues. There are no true privacy issues. The only small chance the group has is to somehow show that online gambling is outside the purview of subjects that federal legislators may regulate. The federal government may regulate any “interstate commerce.” It is  difficult to believe that online gambling transactions, involving banking institutions, international wire transfers and national advertising are not interstate commerce. The gambling group’s chances at prevailing, however, likely depend on that argument.

Bottom Line: There is little question that the policy the gambling industry proposes is correct, as previously discussed in CyberLawg. There are better legal opportunities in international law, but the gambling group’s legal likelihood of prevailing in this federal suit is slim.

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The European Commission found in 2004 that Microsoft had abused its market dominance by making it difficult for its products to interoperate with those of its rivals. Specifically, Microsoft’s tying of the Windows Media Player to the Windows operating system attracted the ire of the EU. The Commission ordered Microsoft to offer a version of Windows without the Media Player and also fined Microsoft $613 million. A European appeals court upheld that decision on Monday.

The list of parties disappointed in the decision does not begin and end with Microsoft, however. US lawmakers on both sides of the aisle have come out in opposition of the ruling. Lawmakers contend that the ruling is more economic protectionism than law and contend that the ruling is designed to artificially reduce Microsoft’s legally-earned market power.

The US has shown a recent propensity to become more “hands off” in IP and technology regulation. In addition to more stringent patent standards recently provided by the Supreme Court, the US government has stepped back from regulation such as its own antitrust suit against Microsoft in the 1990s. The EU, however, appears to be headed the other direction. The ruling upholding the previous fines and injunctive relief is rather strong, considering that the media player was substantially less of an antitrust concern than the web browser wars.

Bottom Line: As previously discussed, the software industry is one of the least likely to need regulation, particularly given the current competitive environment. The EU may get one “free pass” given that this was simply an affirmation of a previous ruling. Looking forward, however, the EU would be wise to begin to follow the United States’ lead in allowing free markets to handle the competitive balances in the software industry.

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The antitrust decree issued against Microsoft in 2002 is schedule to expire in November of 2007. Several states and the District of Columbia are attempting to extend the decree beyond its current expiration date, to 2012.

The states argue that the decree has not been effective in reducing Microsoft's market share. Microsoft opposes any extension, arguing that the decree has nothing to do with market share, but with regulating the software firm's competitive practices. Particularly, Microsoft was held accountable for its "tying" of the Internet Explorer web browser to the Windows operating system.

There is no question that Microsoft is still dominant in the web browser and operating system markets. However, open-source products and Apple have also made headway into that dominance. The Firefox web browser has been a success and APple is making a new push with it's Safari web browser. In operating systems, some Linux distributions are making headway, led by some "user-friendly" distributions, such as Ubuntu. Apple has also been aggressively competing for additional market share in the OS market, particularly among home users.

Bottom Line: In the five years since the consent decree the software industry has changed radically. While Microsoft continues to be dominant in the market there is little question that reasonable software alternatives are available. There is little reason to extend the decree when the market has changed so dramatically, particularly given that Microsoft will remain under an "unofficial" watch by business and consumers.

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Microsoft has joined the fray in the battle for new uses of spectrum scheduled to be vacated by analog television signals in 2009. Microsoft wants to use the vacated airwaves, known as white space, to provide free high speed internet access to people not on networks owned by wireless providers like Verizon, ATT and Sprint. TV-spectrum-based Internet service has the potential to be less expensive and more accessible than current phone and fiber-optic lines, particularly in rural areas, which would force other high-speed Web service providers to lower their prices. Plans similar to Microsoft’s proposed method have been supported by Google, among others.

The FCC rejected Microsoft’s initial attempt to harness the white space as defective. The FCC ruled that Microsoft’s processes interfered with TV signals or could not detect such signals to avoid interference. Microsoft says that the problems have now been resolved and is appealing the FCC’s decision.

The battle for the free-airwave-provided Internet access plan has the potential to become inense. Wireless providers, who depend more and more on the revenues of their data networks, have a lot to lose if the Microsoft/Google proposal is implemented. On the other hand, consumers and a broader range of information services have much to gain if the white space proposal is successful.

Bottom Line: The proposal has substantial potential benefits. Even before a decision on availability is made, however, the technology must be widely accessible, virtually fail-proof, and highly interoperable. Microsoft, in particular, had not been an industry leader as to any of those elements in its past business practices with Internet Explorer, Windows and productivity software. It will have to change its stripes if it wants its proposal to pick up steam.

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Arbitration clauses in consumer, employment, and franchise agreements may soon be absolved in most cases. The US Congress is currently considering the Arbitration Fairness Act of 2007 (AFA), which declares that no arbitration agreement in place prior to an arising dispute shall be valid or enforceable if it arises under any statute intended to protect civil rights or other contracts between parties of unequal bargaining power. The validity of such agreements shall be determined by a court under federal law, not by an arbitrator. Collective bargaining agreements are exempt from AFA’s auspices.

Consumer groups note many problems with arbitration. Particularly, consumer advocates argue that arbitration is often biased in favor of the larger corporations that routinely hire the arbitrators, because the arbitration boards want repeat business. Costs are also higher to consumers, who must pay for arbitrators, compared to lower costs in small claims courts. Arbitrators are also not subject to judicial review like small claims or district courts. Finally, arbitration almost always precludes class actions, which are a very efficient way of addressing consumer matters without burdening every consumer to handle an individual civil action to address inadequate service.

Business interests argue that arbitration is generally a faster, less formal and less expensive process to resolve disputes than litigation. This is occasionally true of very large actions, but in consumer matters, almost always amounting to less than a few thousand dollars, arbitration can often be much more expensive compared to already-efficient small claims courts.

The act is of particular interest to consumers of wireless phone services, internet access providers, and similar technology services targeted at consumers. A classic example of provider arbitration tactics was recently seen in Comcast’s decision to mandate arbitration for consumers in Maryland. Montgomery County, Maryland officials immediately spoke out against the change. One council member described the change “simply anti-consumer."

Bottom Line: Arbitrations clauses are less worrisome in very competitive markets. In technology services, however, where there tend to be two or three dominant firms, these types of clauses leave consumers with virtually nowhere to turn. The AFA of 2007 is very good legislation that does little more than solidify the already-present rights of consumers to seek redress in the judicial arena. It may not be the preference of technology providers to defend the occasional consumer suit, but the omen of having to answer for truly inadequate service serves as motivation to maintain acceptable levels of technical and consumer service. It is hard to argue with the pursuit of such a goal, unless you happen to be Comcast.

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The FCC will rule on the upcoming auction of spectrum being vacated by air-borne television signals tomorrow. The guidelines for the auction are being carefully watched by numerous wireless providers, as well as some newcomers, such as Google, who has offered to spend billions of dollars on the spectrum, assuming that some of the spectrum is “open source” available to any wireless network user.

Bottom Line: The rules for the auction will provide some initial signals as to the FCC’s philosophy for future spectrum use. If the proposal for the “open source” spectrum is granted, it will create significant buzz in the wireless industry for both providers and consumers.

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As recently discussed in the CyberLawg, wireless spectrum bidding is heating up. The FCC today announced its support for open bidding on a certain range of spectrum expected to fetch approximately $15 Billion, which will primarily benefit the federal government. The plan supported by a majority of FCC commissioners would include an open-access requirement that would give consumers more choices for wireless phone devices and services. Specifically, the open-access measure would require the highest bidder to use a third of the airwaves to build a network that is available to all wireless devices and services.

Bottom Line: While still making the spectrum available to business interests, the FCC’s proposal also takes into account consumer interests by providing “open source” spectrum not tied to any particular network. The FCC’s support of the open-access requirement for a big-ticket bidder is an interesting compromise, accounting for several interests, that may appear in similar forms in future spectrum wars.

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