Google dumps Yahoo ad deal

By Stephen Shankland on 06 November 2008, 10:34am

Google has pulled the plug on a search-ad partnership with Yahoo that would have given Yahoo major new revenue but that raised monopoly concerns.

David Drummond, Google's chief legal officer said in a blog post on Wednesday: "After four months of review, including discussions of various possible changes to the agreement, it's clear that government regulators and some advertisers continue to have concerns about the agreement.

"Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn't have been in the long-term interests of Google or our users, so we have decided to end the agreement."

Yahoo isn't happy with the outcome.

The company said in a statement: "Yahoo continues to believe in the benefits of the agreement and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court."

"Google notified Yahoo of its refusal to move forward with implementation of the agreement following indication from the Department of Justice that it would seek to block it, despite Yahoo's proposed revisions to address the [Department of Justice] concerns."

The deal's demise is a new blow to the struggling Internet pioneer, whose stock has plunged to under $14 (£9) since Microsoft offered as much as $33 per share just months ago in an unfriendly acquisition attempt.

When Yahoo and Google announced the search-ad deal in June, Yahoo said it would generate $800m, and $250m to $450m in incremental operating cash flow in the first 12 months of operation.

Under the deal, Yahoo would have placed Google ads on some Yahoo search results, and the companies would have shared the resulting revenue. The deal would have let Yahoo show ads on pages where its own technology, called Panama, wasn't able to provide results, the company said.

But the deal ran into objections, and the biggest was from the Justice Department's antitrust regulators. Today, those authorities expressed satisfaction with the demise of the deal.

Assistant attorney general Thomas Barnett, who leads the Justice Department's antitrust division, said in a statement: "The companies' decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action. The arrangement likely would have denied consumers the benefits of competition -- lower prices, better service and greater innovation."

Other objections came from Microsoft, which runs in third place in search queries and search advertising after Google and Yahoo, and, perhaps more notably, from the Association of National Advertisers.

It's not surprising that Google and Yahoo didn't see eye to eye about how hard to fight for the deal. Google voiced its willingness to help out its chief business rival during a time when Microsoft was trying to acquire Yahoo and later, its search assets. Now, even though Yahoo's new board member Carl Icahn is still interested in a Microsoft transaction and many observers believe it possible, the Microsoft threat to Google is much diminished.

From a raw financial perspective, Google would also have benefited directly much less than Yahoo from the search-ad deal. Chief executive Eric Schmidt said in October that Google typically gives the bulk of revenue to advertising partners that carry its ads.

It's easy to see why Google might not want to fight this particular fight. No doubt the company, which already had a hard time pushing through its acquisition of display-ad powerhouse DoubleClick, doesn't want any more regulatory ill will than necessary.

Given Google's trajectory, more government scrutiny seems inevitable. Google's dominance over the Internet continues to grow in its first two priorities, search and advertising, and it clearly has high hopes for its third ambition, Web-based applications.