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What 3Q earnings tell us about Google-Yahoo Antitrust Review; GOOG-YHOO earn ~100% of profits

With the 3Q08 earnings releases by Google, Yahoo and Microsoft in the last few days, DOJ antitrust investigators of the Google-Yahoo partnership now get their first fresh look at the most recent revenue and profit market shares for this market.

  • While many, including myself, have focused on the proxy market share measures of searches from ComScore, Nielsen and Hitwise to track Google's relentless taking of share on a monthly basis, antitrust investigators will likely look past proxy search shares and focus on the truer and more accurate measures of market share -- actual reported, revenues and profits.
  • There are strong reasons why antitrust investigators will shift from the market's obsession with the monthly search share proxy figures to real financial numbers. 
    • First, users do not pay for search, advertisers and website publishers do; this makes search share an indirect and less relevant measure of true market power. 
    • Second, all searches are not equal, some lead to clicks and some clicks are dramatically more valuable than other clicks.  
    • Third, the search shares are third-party proxy estimates based on samples; they are not auditable and accountable as publicly-reported financial data are; moreover, SARBOX requires CFOs/CEOs to personally sign that the finances are accurate, subject to severe penalties if they are proven to be fraudulent.
    • Fourth, the proxy search share data can prove misleading or just wrong about the real business story -- as the Comscore data proved in 1Q08 when investors who relied on the Comscore data were wrong because the proxy of clicks turned out not to be a good proxy for financial results. 

As antitrust investigators build their own models to determine real market share, they will discover several facts from the recently reported earnings.

  • First on raw absolute numbers:
    • Google's trailing 12 month revenues are $19.6B with $4.84 in net income.
    • Yahoo's trailing 12 month revenues are $7.2B with $.633B in net income. 
    • Microsoft's trailing 12 month revenues are $3.2B with a $-1.2B loss in net income.
  • Second, on revenue share:
    • When antitrust officials adjust the numbers to include the revenues of bit players, and AOL and then exclude the revenues from Yahoo, Microsoft, and AOL that are not associated with search advertising, Google will likely comprise around 75% share of search advertising revenues
    • When antitrust officials adjust the numbers to look at a combined partnership of Google and Yahoo, the #1 and #2 competitors will likely comprise around 90% of search advertising revenues. 
  • Third, on profit share:
    • Only two of the top five search advertising companies, Google and Yahoo are profitable, thus:
      • Google comprises ~89% share of gross internet advertising profits; and 
      • Yahoo comprises the other ~11% of gross internet advertising profits. 
    • When profits are adjusted to include only search advertising profits, Google's share alone will likely be well over 90% of the market
    • The stark reality is that in this highly concentrated market where scale is necessary to be profitable, #3 Microsoft is losing over a billion dollars a year and #4 and #5 AOL are losing hundreds of millions of dollars themselves in internet advertising per year. 

Bottom line: As antitrust officials devise their own market share models and estimates, it will become increasingly clear that Google is dominant in revenues and a near monopoly when measured by profitability. As for the "partnership" of Google and Yahoo -- that would comprise a monopoly (90% share) in either revenues or profitability. 

  • Antitrust is a fact-driven exercise because it must ultimately be provable in a court of law.
  • The facts in this case are not Google and Yahoo's friend.
  • If the facts and precedent drive the investigation of the Google-Yahoo partnership, and not ideology or politics, this proposed partnership is on very thin ice indeed.