Microsoft: Yahoo's Yang admitted a Google ad deal would hurt competition

Executives from Yahoo, Google and Microsoft went to Capitol Hill this morning to argue about Yahoo’s proposed ad deal with Google. And the hearing before the Senate’s antitrust subcommittee was going largely as expected -– Yahoo and Google saying their deal would be good for Internet advertisers, Microsoft saying it would be a catastrophe –- when Microsoft general counsel Brad Smith delivered a curveball that could change the dynamics of the dispute.

Smith (pictured during a press conference last year) testified about a meeting at the San Jose airport last month involving Microsoft Chief Executive Steve Ballmer, Yahoo CEO Jerry Yang and other company executives during which Yang allegedly said a Google-Yahoo deal would be anticompetitive. Smith said:

On June 8, we met with Yahoo in San Jose, and Jerry Yang, the CEO of Yahoo, looked across the table, looked us in the eye and said, "Look, the search market today is basically a bipolar market." He said, "On one pole there’s Google, and on the other pole there are Yahoo and Microsoft both competing with Google." He said, "If we do this deal with Google, Yahoo will become part of Google’s pole." And Microsoft, he said, would not be strong enough in this market to be a pole of its own.

The pronouncement exploded in the ornate Senate hearing room like a small bombshell. Sen. Herb Kohl, the Wisconsin Democrat who was chairing the hearing and who already had expressed reservations about the Yahoo/Google ad deal, reminded Smith that he was under oath. Kohl then turned to Yahoo general counsel Michael Callahan, who was also testifying. Callahan at first said he wouldn't address any comments Yang made and reiterated that Yahoo's board of directors had made the decision to continue competing against Google.

"Clearly what you're saying contradicts what your boss said," Kohl told Callahan. "That's pretty explosive stuff, and we'll have to consider that."

Congress does not have a direct role in approving the Yahoo ad deal with Google, which the Department of Justice is reviewing to determine if it will harm competition and increase prices. But public opposition from lawmakers could cause problems for the deal, and today's testimony could reverberate at the Department of Justice. State attorneys general also are probing the proposed deal. The states' investigation was first reported by the Washington Post.

Sen. Arlen Specter, a Pennsylvania Republican and former prosecutor, didn't let Callahan off as easily as Kohl did. After Callahan said he couldn't recall whether Yang had made the comments, Specter asked, "Does that mean Mr. Smith could be right?" Callahan replied that he couldn't comment on the accuracy of Smith's testimony and couldn't recall Yang making such a comment. Smith said he "absolutely" stood by his testimony.

The hearing added to the tensions among the three companies, which are battling intensely over the increasingly lucrative Internet search market. Senators struggled to grasp intricacies of that market today to determine if Yahoo's deal to outsource some ad services to Google would harm competition. Executives from all three companies are scheduled to testify about the deal at a House subcommittee hearing later today.

-- Jim Puzzanghera

Puzzanghera, a Times staff writer, covers tech and media policy from Washington, D.C.

Photo credit: Paul O'Driscoll / Bloomberg News