Microsoft-Yahoo: Antitrust Hurdles Loom

The Microsoft-Yahoo search deal is no slam dunk, when it comes to antitrust matters. Check out my BusinessWeek story, out this morning.

Microsoft-Yahoo: Antitrust Hurdles Loom
The weak Web search-ad companies want to team up against No. 1 Google, but regulatory tradition and practice have long blocked such deals
By Spencer E. Ante

Don’t expect the Microsoft-Yahoo search deal to sail through a regulatory review. Sure, it’s tempting to think Justice Dept. officials won’t quibble much over a deal aimed at helping two struggling companies get a leg up against a market-leading competitor. That’s essentially the line taken by executives at Microsoft (MSFT) and Yahoo! (YHOO) to explain why their 10-year pact shouldn’t be held up by an antitrust review.

But legal experts say the deal is no slam dunk—especially with a new team of regulators in Washington eager to flex their antitrust muscles. Some lawyers and former regulators say the deal may even be quashed, or at least be subjected to revisions, before getting a green light. “Microsoft and Yahoo have a tough battle on their hands with the antitrust regulators,” says David Balto, former policy director of the Bureau of Competition at the Federal Trade Commission under the Clinton Administration. “We don’t want markets to become concentrated. It is like prescribing ice cream for someone who is overweight.”

The agreement is also likely to draw attention from European Union regulators who in recent years have been more aggressive than their U.S. counterparts in scrutinizing mergers and joint ventures. Google (GOOG) is the largest player in the search-ad market, with a 65% share. Together, Yahoo and Microsoft have about 28% of the market.

Under the pact outlined on July 29, Microsoft will provide the underlying search technology on Yahoo’s Web sites while Yahoo will take exclusive charge of search-related ads for both companies.

WALL STREET SEES “MATERIAL RISK”
Some legislators didn’t wait long before threatening to examine the deal closely. Senator Herbert Kohl (D-Wis.), who chairs the Senate antitrust subcommittee, said that the deal “warrants our careful scrutiny,” in a July 29 statement. “Our subcommittee is concerned about competition issues in these markets because of the potentially far-reaching consequences for consumers and advertisers and our concern about dampening the innovation we have come to expect from a competitive high-tech industry.”

Some Wall Street analysts are also sounding alarm bells. “We believe government approval is doable, but we continue to believe there is a material risk that the deal would be blocked or conditioned,” wrote Rebecca Arbogast, analyst with Stifel, Nicolaus (SF).

Microsoft and Yahoo are up against decades of antitrust policy and law that have rarely if ever allowed combinations of the No. 2 and No. 3 players in a given market. To win approval the companies will need to prove that eliminating one top player in the search-ad market will enhance competition and thereby benefit consumers and innovation. “The obvious fear of the antitrust guys is that instead of strengthening the runner-up, it reduces competition between No. 2 and No. 3, and that lessens competition,” says Lawrence J. White, a professor of economics at New York University who served as director of the Economic Policy Office of the Justice Dept.’s Antitrust Div.

Read the rest of the BusinessWeek story here, along with a video of me discussing the story with Peter Elstrom.

Top Venture 75 Blogs: Creative Capital Snags #7 Spot

Who publishes the top blogs on venture capital? It’s a good question–and an enterprising blog named VentureDig recently created a list that I just stumbled across.

I am proud to report that Creative Capital snagged the No. 7 spot, ahead of more well-financed and well-trafficked sites such as the Wall Street Journal’s venture blog, Paul Kedrosky’s Infectious Greed, Adeo Ressi’s TheFunded and Bambi Francisco’s vator.tv. Thanks for the shout out VentureDig!!!

Here is the top 20.

#1 http://avc.com
#2 http://pehub.com
#3 http://venturebeat.com
#4 http://techcrunch.com
#5 http://altos.typepad.com/ (Probably the most underrated venture capital blog. Ever)
#6 http://feld.com
#7 http://creativecapital.wordpress.com
#8 http://www.venturehacks.com
#9 http://thefunded.com
#10 http://blogs.wsj.com/venturecapital/
#11 http://vator.tv
#12 http://reiboldt.com
#13 http://earlystagevc.typepad.com/earlystagevc/
#14 http://dondodge.typepad.com/the_next_big_thing
#15 http://paul.kedrosky.com
#16 http://redeye.firstround.com
#17 http://www.thisisgoingtobebig.com/
#18 http://whohastimeforthis.blogspot.com/
#19 http://www.unionsquareventures.com/
#20 http://www.ocvcblog.com

I Told You So Department: Lazard Shares Rocking After Strong Earnings

A week ago I blogged about the rise of the boutique investment banks. Today, Lazard reported better than expected earnings and the stock is up 10% to $33.50. This blog can actually help investors make money!

Analysts were expecting 13 cents a share of earnings while the bank reported 34 cents, fueled by its strong business in advising companies on restructuring efforts.

Lazard is confident enough about its future that it also raised the company’s dividend by 25 percent to $0.125 per share.

Lazard Vice Chairman Steven Golub told Reuters he expected a “gradual rebound” in the M&A market, but was optimistic about the gains in restructuring.

“It is a great business for us,” Golub said, adding that Lazard is advising on more than 100 restructuring assignments worldwide. “We absolutely love the business.”

Attention Startups: President Obama Wants to Know What You Think About Health Care Reform

Facing growing resistance to his efforts to reform the health care industry, President Obama on Saturday July 25 asked the small business community what the most important issues are when it comes to health care.

In a nifty use of social media tools, the White House is using LinkedIn to gather feedback from entrepreneurs. LinkedIn founder Reid Hoffman sent out an email today to a number of his “social media friends” announcing the effort (including me).

“Sending a note to my social media friends, ” wrote Hoffman “…. up to you if you want to participate. Good cause. (Have to sort out the small business and health stuff; get good direction to Washington.)”

A new report from the Council of Economic Advisors, also released July 25, analyzing the impact of health insurance reform on small businesses is prompting the request for feedback. The Council is asking entrepreneurs to read the report and offer the White House your comments, questions and objections.

I’ve been one of many folks calling for the White House to pay more attention to the needs of small businesses–in addition to the giants of the economy. I am glad to see they are doing more on this front. So startups–now is the time weigh in!

To spur even more interest, CEA Chair Christina Romer will be answering some questions, chosen by LinkedIn, in a live video online discussion at WhiteHouse.gov on Wednesday, July 29th, at 3:00 PM EDT.

I just checked out the site. Interestingly, the survey is being done through LinkedIn’s new Answers service, in which members post a question on their network. There are already 29 thoughtful responses.

Congrats on a clever and important experiment Reid!

Boutique Investment Banks Continue to Grab Share

Earnings season in the summer of 2009 had made it clear that Goldman Sachs and JP Morgan are emerging as the two giants of the banking world.

But there is another trend in banking that’s gaining steam: Boutique investment banks are continuing to snatch market share in the aftermath of the Wall Street implosion that destroyed giants such as Lehman Brothers, Merrill Lynch and Bear Stearns.

According to the latest figures from Dealogic, Lazard and Evercore Partners seem to be emerging as big winners on the new Wall Street. In the first half of 2009, Lazard ranked as the 7th biggest bank in the global mergers and acquisitions deal market, up from the 11th spot in 2008. In addition, Evercore took the 11th spot, up from the 15th spot last year.

Read of the rest of the post here on BW’s new blog about the Reset Economy.

BW Exclusive: Verizon Wireless: An App Store to Take On Apple

Check out the top of my BusinessWeek scoop on Verizon’s new wireless application store.

Verizon Wireless: An App Store to Take On Apple
The carrier is joining with Vodafone, Japan’s SoftBank, and China Mobile to grab a piece of the mobile-software market from the phonemakers

By Spencer E. Ante

In a move that could rattle the wireless industry, Verizon Wireless is gearing up to challenge Apple (AAPL) in the market for software applications that are downloaded to cell phones. Verizon, the top U.S. wireless operator, plans to preview its software store on July 28 and is pouring substantial resources into the effort. But it will be a struggle to catch up to Apple, which has built broad support among software developers and customers in the year since it launched its App Store.

Software apps are all the rage in wireless these days. Customers are flocking to devices such as the iPhone that offer myriad programs, and developers are cooking up software to meet the demand. You can use an iPhone to look for jobs, read golf greens, tune into digital radio, or play games. Juniper Research estimates sales of mobile applications could hit $25 billion in 2014, up from $5 billion this year.

What’s yet to be decided is who will control this market. Wireless carriers have long been the gatekeepers for what people do with their phones. But phonemakers, led by Apple and Research In Motion (RIMM), have grabbed an early lead by creating software stores that are easy for customers to use and profitable for developers. Apple says 100,000 developers have created more than 65,000 iPhone applications so far, and customers have downloaded those applications more than 1.5 billion times. “It is going to be very hard for others to catch up,” boasted Apple CEO Steve Jobs in a July 14 press release.

To get into the game, Verizon is crafting a strategy that’s more open and global than it has ever used in the past. It is teaming up with Vodafone (VOD), Japan’s SoftBank, and China Mobile (CHL) to create a common software foundation. Developers will be able to write applications for the standard, which the carriers are calling the Joint Innovation Lab (JIL). When the store launches in the fall, it could reach as many as 1 billion customers, the combined total for the four operators. “I am not here to bash anybody, but if I could write one application that could touch every iPhone customer or one billion customers, who am I going to write for?” says Verizon Wireless CEO Lowell McAdam.

Click here to read the rest of the story, along with a video.

New Customer Review: 5 Stars!

This week, Kathleen McKeon posted a review of my book that I wanted to share with you all. She says Creative Capital is a great read about an inspirational Frenchman that is good for “economy shapers, history buffs, and those needing a little inspiration through the power of perseverance.”

5.0 out of 5 stars
Venture Capital started on the East Coast, July 16, 2009
By kathleen mckeon

Creative Capital develops the frame of mind that was necessary to ultimately launch the venture capital world in the US. That VC was encumbered by political and corporate realities is entirely the point. As you hear those outside of the money world (journalists, academics, regular folk) talk of VC, you may wonder if it really is so free wheeling. No, it is not and Creative Capital makes that abundantly clear.

The historical context of Georges’ life and even his father’s was helpful and instructive. What was most powerful was the discussion of later years when Georges’ firm struggled to retain talent and to place investments. An argument is made that essentially tax code crippled the firm – my over simplification for review purposes. For students of politics and how politics shapes economies, this is an excellent resource.

At no point is any character in the book beatified. This is not a sing-songy congratulatory book. It is a solid look at the conditions that led to early VC on the East Coast and eventual dominance by VC on the West Coast . . . it wasn’t the trees, running trails and views that pulled people West. You will get a much better feel for the forces that pushed VC out of the East as well as the forces that drew VC West.

It is a great read about an inspirational Frenchman who was thoroughly American. American spirit at its best.

1 part history, 1 part politics, 2 parts economics, 3 parts clever

Good for: Economy shapers, history buffs, and those needing a little inspiration through the power of perseverance.

Innovation During a Downturn

Here’s an Adobe PDF of a charticle I created for this week’s issue of BusinessWeek. It’s titled, “Creative Beginnings in a Downturn” and highlights lessons from four companies that took advantage of bad times–Hewlett Packard, Digital Equipment, Genentech and Google–to improve their business.

Over the last six months, I’ve written about this issue a few times. But this chart provides a good encapsulation of the idea, as well adding some new information about Genentech and Digital Equipment–all in a easily digestible and handy chart form!

View this document on Scribd

What Arthur Rock Looked for in Entrepreneurs

Here’s a story published recently in Investor’s Business Daily about legendary investor Arthur Rock. One of the pioneers of the venture capital industry, Rock famously put together the deals to found Fairchild Semiconductor and Intel, two of the most important startups in the history of Silicon Valley. Rock later invested in Apple, capping off his incredibly successful career. The investment landed him on the cover of Time magazine, a story that I discuss at length in my book. In fact, Rock was a student of Georges Doriot at Harvard Business School.

Rock and Doriot actually had many things in common. They were both investment bankers who became successful venture capitalists. They both understood the importance of technology. And they both believed that people, more than ideas or markets, were the most important ingredient of success in a business venture. Doriot’s famous saying was, “I’ll take an Grade A individual with a B idea over a Grade B individual with an A idea.”

The writer Reinhardt Krause interviewed me for the profile and kindly included a quote from me in the story. It’s an interesting profile that tries to explain Rock’s investing philosophy. Among the most important traits Rock looked for in an entrepreneur? Intellectual honesty. Rock knew that a new business would face many challenges and that in order to succeed entrepreneurs needed to be honest about the state of their business. Or as Rock rhetorically asked: “Do they see things the way they are, and not they way they want them to be?”

View this document on Scribd

Google: A Healthy Respect Towards Microsoft

The latest news out of Sun Valley, reported by the Wall Street journal’s Julia Angwin, is that Google CEO Eric Schmidt was cool to the idea of building its Chrome Web browser. Schmidt, a veteran of several wars with Microsoft, resisted the project for six years before a demo of the browser changed his mind.

This minor revelation says a lot about Google, I believe, and reflects a new more healthy attitude towards Microsoft–and perhaps a sign of maturity for Silicon Valley. Ever since Microsoft took over the market for PC operating systems and business software, Silicon Valley companies have generally assumed one of two positions towards Microsoft: abject fear (as evidenced by any startup) or loathsome obsession with taking it down (best embodied by Sun Microsystems’s former CEO Scott McNealy).

Schmidt’s position on Chrome reflects a new attitude toward the Redmond giant that I would characterize as healthy respect. Schmidt did not want to rush into a fight with Microsoft over the browser because he knew, having lost many battles with Microsoft as an executive at Sun and Novell, that it was an unwise and potentially distracting move for the company.

“At the time, Google was a small company,” Mr. Schmidt said. “Having come through the bruising browser wars, I didn’t want to do that again.”

Since then, Google has gotten much much bigger and much more powerful. The Chrome project, both the browser and the operating system, has evolved to a point where it was good enough to fight for consumer’s attention in the marketplace. And Microsoft, though it remains arguably the most powerful tech company in terms of its financial heft, is no longer the pole star around which the entire technology universe revolves.

Even so, Schmidt is still wide enough to not pull a McNealy and stick a finger in Microsoft’s eye, antagonizing the giant and attracting more attention from regulators poking around its business. Schmidt and Google cofounder Page, says Angwin, were careful not to position Chrome as a competitor to Microsoft Windows. They argued that Chrome will expand the market for netbooks, rather than eating into Windows’ share of the netbook market.

I doubt they really believe that. But it’s a much smarter move to play down expectations of this effort.

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