• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Google, Yahoo Advertising Deal Awaits Justice Department Decision

Posted on: Tuesday, 21 October 2008, 13:20 CDT

The Justice Department is nearing a decision this week on whether to try to block an Internet advertising partnership between Google Inc. and Yahoo Inc.

Experts say government antitrust attorneys could either sue to stop it from taking effect or they could abandon a potential court challenge and allow the partnership to proceed.

The deal would allow Google to sell some of the online advertisements displayed alongside search results on Yahoo's site. Yahoo entered the partnership in June after rebuffing a $47.5 billion takeover offer from Microsoft Corp., angering many shareholders.

The Justice Department investigation has been kept secret and it is unclear when a decision could come. But Google and Yahoo agreed this month to briefly delay the launching of the deal to allow the government to complete its probe and perhaps to try to reach a settlement. Observers now expect an announcement by midweek.

The investigation by the Justice Department has pitted Google and Yahoo against not only their archrival Microsoft but also many of the advertisers that are their primary sources of revenue.

Last month, the Association of National Advertisers warned the Justice Department that the Google/Yahoo partnership would leave advertisers with fewer options for placing online ads, raise the cost of online advertising and further cement Google's control over the search advertising market. The Association of National Advertisers represents such large companies as Kellogg Co., Johnson & Johnson, American Express Co., Walt Disney Co., Kraft Foods Inc. and McDonald's Corp.

Yet Google and Yahoo say the deal will benefit both advertisers and consumers by delivering more targeted, more relevant ads.

Google also argues that its system for identifying and displaying ads is more lucrative than Yahoo's approach, the deal will generate additional revenue for Yahoo that will it make it a more formidable competitor to both Google and Microsoft. Yahoo projected the agreement would increase its operating cash flow by $250 million to $450 million in the first year when it first announced the deal.

The Justice Department’s decision could affect Google and Yahoo in one of several ways.

With a delayed decision, the two companies could simply move ahead with their partnership and wait to see whether the government acts. Some speculate that the Justice Department may just be bluffing in threatening to sue, as a court case would be unpleasant and cumbersome and there is no guarantee that a lawsuit would succeed.

And Google and Yahoo could fight the Justice Department in court or they could simply walk away from the deal.

Or the companies could avoid a possible lawsuit by offering up voluntary conditions such as limiting the volume of ads subject to the agreement.

But that could prove a risky approach for Google, as it would likely face accusations that the partnership would have in fact crossed the line into anticompetitive behavior. Industry experts are doubtful that the two sides can agree on concessions that would enable the deal to pass antitrust muster and still making the partnership worthwhile for Google and Yahoo and not taint the companies.

Justice Department attorneys must answer a series of critical questions in determining whether to intervene in a deal such as the Google/Yahoo partnership, said Melissa Maxman, head of the antitrust practice group at Baker & Hostetler LLP.

She said those questions include: How much market share does each party have? Would the agreement further concentrate the market? How would the deal affect consumers, competitors and other players, such as advertisers in this case?

Maxman said the challenge is applying standard antitrust measures to a deal like this. For example, the department will often measure market share geographically, but Internet companies have a global reach. And precisely delineating "product" market share is hard to do in online advertising.

Microsoft argues that the deal should be blocked because Google already controls more than 70 percent of the market for search-related advertising. Microsoft warned that if Google teams with Yahoo, which controls as much as 20 percent of the market, the two companies could together have a 90 percent share.

The volatile Internet advertising business also complicates things. Both Google and Yahoo use auctions to sell the ads that run alongside search results on their sites. The companies maintain that even if they partner, the marketplace will still determine online advertising prices through separate auctions.

However, the Association of National Advertisers sent a letter to the Justice Department warning that the agreement will effectively drive up prices for ads sold through Yahoo's auctions since Yahoo will have access to ads sold by Google at a higher price.

The Google/Yahoo partnership will greatly effect the survival of Yahoo as an independent company, and decide whether Microsoft or Google has more of a say in the future of the Internet and computing.

The Justice Department decision could help shape the outcome.

---

On the Net:

• Google
• Yahoo

Source: redOrbit Staff & Wire Reports

More News in this Category