October 7, 2008

Google-Yahoo Alliance Faces Sharper Resistance

By Miguel Helft

The U.S. Justice Department's antitrust investigation of the advertising partnership between Google and Yahoo has revealed the growing resentment and fear of Google's power among some of the biggest players in the advertising industry - the very customers that Google needs to keep expanding its business.

Some of the leading industry associations and advertising agencies that have come out against the deal have raised concerns that prices will rise. Their anxiety over Google's increasing dominance of the lucrative and fast-growing search advertising business, and the very fairness of Google's auction system for pricing search ads, could lead to growing confrontations. But some large online advertisers, like Avis Budget Group and Buy.com, said they supported the agreement.

"Google and Yahoo claim these are auctions," said Robert Liodice, chief executive of the Association of National Advertisers. "Many of our marketers don't necessarily believe that these are real auctions."

The association, which represents many of the largest advertisers in the United States, as well as its Canadian counterpart and a group representing newspapers worldwide, has asked the Justice Department and regulators in Europe and Canada to block the partnership. Several other industry groups have criticized the deal but have stopped short of asking that it be blocked.

The Justice Department's review is expected to conclude soon, perhaps before the end of this month. Meanwhile, analysts who follow Google worry that the agreement puts the company on a course to more frequent collisions with government regulators. That could slow its growth prospects, much as Microsoft's clashes with the government were perceived as making it more difficult for the company to focus on innovation.

"All of this government and legislative friction is our biggest concern with Google moving forward with its business," said Christa Quarles, an analyst at Thomas Weisel Partners.

The sentiment in the advertising world is not unanimous. Some advertisers and agencies have said the deal could benefit them and their customers and could turn Yahoo, the No.2 company in search advertising, into a stronger competitor to Google, the market leader. But even some of the deal's defenders said they were uneasy about Google's growing power and what they described as its inscrutable auction for pricing ads.

"What I like about this deal is that it makes Yahoo more viable," said David Kenny, managing partner of VivaKi, the digital and media division of the advertising giant Publicis Groupe. "We absolutely want competition. But we are also pretty clear with Google that we want their algorithms to be more transparent."

Google and Yahoo have vigorously defended the deal, saying it would benefit users and advertisers. They have said the agreement, under which Yahoo can choose to place ads sold by Google on some of its search queries in the United States and Canada, would make Yahoo more viable. Yahoo signed the deal after its merger talks with Microsoft broke down in June.

Microsoft has since lobbied against the deal and raised antitrust questions. Google accounted for 62 percent of searches in the United States in July, and Yahoo had a 20.5 percent share, according to comScore. But Google dominates the associated search advertising business by an even larger margin.

Eric Schmidt, Google's chief executive, said Google had anticipated many of the objections but decided to pursue the agreement anyway.

"The deal was designed precisely to meet the terms of antitrust law in the U.S.," he said last month during a meeting with reporters. When a large company tries to innovate, some of the initiatives it takes on will be unpopular or lead to criticism, he said.

"The guidance that we use is: What is going to be beneficial to the end user?" Schmidt said. "To sit there and say, because we anticipate stress, we are not going to do what we think is the right thing, that is not a good way to run the business."

Google and Yahoo have created Web sites intended to answer concerns raised by marketers and regulators, and their executives have met with marketers to seek their support. On Friday, the companies said they had agreed to a brief delay in the planned start of the deal to give regulators time to complete their investigations.

The Association of National Advertisers said it had not found the companies' arguments persuasive.

"We have not changed our opinion," Liodice said in an e-mail message Friday.

Another source of concern is whether the deal amounts to an attempt by the No.1 and No.2 competitors in the search market to fix prices for ads. The two companies reject that notion.

"We keep hearing this argument that Google is going to somehow raise prices by doing this," Larry Page, a Google co-founder, said last month. "But we don't set the prices."

Originally published by The New York Times Media Group.

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