Thursday, November 6, 2008

Google-Yahoo: Unintended Consequences

Google-Yahoo: Unintended Consequences

Opponents of a planned search advertising deal between Google and Yahoo! may have little cause to celebrate the proposal's demise. Advertisers fretted the alliance, announced in June, would make Google even more dominant in the most lucrative corner of online advertising. The deal unraveled Nov. 5 after Google retreated under the threat of a Justice Dept. lawsuit to block it.

Yet, advertisers still face what they feared in the first place: an even stronger Google (GOOG).

The paradoxical outcome highlights the difficulty of applying traditional antitrust doctrine to swiftly innovating technology markets. The Google-Yahoo deal would have netted Yahoo up to $450 million a year in operating cash in return for running Google ads on some of its pages.

Justice Dept. Wasn't Mollified

As Justice reviewed the plan to ensure that it wouldn't violate antitrust rules, advertisers and rivals such as Microsoft (MSFT) quickly objected, saying it would give Google too much control of search-related advertising.

Google has upwards of 70% of the market, and Yahoo (YHOO) has at least 10%. Advertisers were afraid search ad prices would rise and that Yahoo ultimately would find Google ads so much more profitable than its own that Yahoo would ultimately cede control of its search operations. According to sources close to the deal, the latter was the key concern of antitrust officials.

To assuage government concerns, Google and Yahoo offered concessions that included a cap on revenue Yahoo would get from Google and a shortening of the term of the deal from 10 years to two. None mollified Justice. And Google had no desire to fight a lawsuit. "We're not going to let the prospect of a lengthy legal battle distract us from our core mission," Google Chief Legal Officer David Drummond said Nov. 5. "That would be like trying to drive down the road of innovation with the parking brake on."

For its part, Yahoo argued that the search ad market isn't as distinct from other forms of online advertising as Justice assumed. "The government in this case does not understand our industry," said Yahoo CEO Jerry Yang, speaking at the Web 2.0 Summit in San Francisco. "They have a definition of the marketplace that's too narrow."

Time Warner Deal Unlikely

The result: By most accounts, the status quo will leave Google an even more dominant force in the search ad market. Without the additional hundreds of millions of dollars, Yahoo—whose search market share has fallen in the past year—presents even less of a competitive foil to Google. And Microsoft has been losing ground to Google even faster. "Google will continue to grow market share," says Edward F. West, CEO of LookSmart (LOOK), an advertising network that runs ads on search results at other sites, such as CNET (CNET) and, owned by IAC Interactive (IACI).

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