SOFTWARE

The war between Google and Microsoft spilled over on to Capitol Hill yesterday as the internet and software groups staked out their rival positions over the future of Yahoo at separate Senate and House hearings.

The committee hearings, called to consider a proposed advertising alliance between Google and Yahoo that was struck last month, marked the most direct showdown yet in the political battle between the two companies.

With Microsoft angling to secure a deal of its own with Yahoo, the hearings quickly turned into an argument over whether Yahoo's users and advertisers would be better served by a link with Google or Microsoft.

Google was pushed on to the defensive as its dominant share of the search advertising business was subjected to close scrutiny.

Brad Smith, Microsoft's general counsel, said Google could end up dominating the "critical gateway" of internet search, creating "the very real prospect that we would regress to the days when information and communications were in the hands of a few national broadcast television companies".

But Microsoft was also thrown on to the defensive over its own efforts to buy Yahoo's search business. Mr Smith conceded that "this hearing must strike some as ironic, given our own anti-trust history".

David Drummond, Google's chief legal officer, warned that the alternative to a Google alliance could be for Yahoo to be "gobbled up by Microsoft, eliminating them from the playing field".

Yahoo's general counsel, Michael Callahan, accused Microsoft of joining forces with Carl Icahn, the activist investor, to try to force a fire sale of Yahoo's most valuable assets. Microsoft's most recent offer was rejected by Yahoo's board over the weekend.

Lawyers for the rivals argued over the extent to which a Google-Yahoo alliance would give rise to higher prices for advertisers and lead to a slippery slope eventually involving Yahoo handing all of its search business to Google.

While the deal only calls for Yahoo to let Google supply some of its search ads, Mr Smith claimed there were overwhelming incentives for Yahoo to source more of its advertising from Google and for prices to go up. "The reality is, when Google's prices rise, Yahoo makes more money," he said. "It constitutes an effective floor on prices."

But Mr Callahan said Yahoo had strong reasons to continue running its own advertising system.

Credit: By Richard Waters in San Francisco