DOJ lays out concerns to Yahoo and Google, no lawsuit threats yet

Federal antitrust regulators have clearly laid out their concerns to Yahoo and Google regarding their controversial search advertising agreement, but discussions of potential remedies have yet to come up, according to a source familiar with the discussions.

Antitrust regulators with the Department of Justice have largely narrowed their concerns into two buckets, one centering on the potential affect on advertising pricing in the short run and to what extent there would be a negative impact on the industry, and the second being will the agreement eventually lead to Yahoo exiting the search advertising business altogether, the source noted.

Currently, the parties are discussing those concerns, but the conversations have not yet migrated to a point where the DOJ is saying they are illegal and the agency is contemplating filing a lawsuit to block the partnership, the source said.

In most cases, once the DOJ indicates it may file a lawsuit, the agency leaves it up to the companies to suggest possible remedies to mitigate regulators' concerns, said the source. Yahoo and Google have not offered up any potential remedies to mitigate the DOJ's concerns, according to the source.

Within the coming weeks, it will be clear whether such action is needed. The DOJ and a multi-state task force are rushing to come to a conclusion on whether they will oppose the Yahoo-Google search advertising deal, which the companies hope to launch by mid-October. Earlier this month, the DOJ hired antitrust litigator Sandy Litvack as a consultant in its networking and technology unit. Litvack was hired to weigh whether the DOJ's case could be won at trial, say sources.

A spokeswoman for the DOJ declined to comment, other than to note the investigation is ongoing.

Meanwhile, the American Antitrust Institute, a nonprofit think tank, announced Tuesday that the Yahoo-Google deal should be viewed as "presumptively anticompetitive" but may also contain some possible pro-competitive benefits. The group released a white paper on the topic.

The group, which tends to be viewed as pro-antitrust enforcement, took a slightly different view on the Yahoo-Google deal and did not come out with a blanket opposition to the agreement. The group, however, offered up several recommendations to regulators on how the Yahoo and Google agreement should be retooled:

The pro-competitive potential of the arrangement depends on Yahoo remaining in paid search.

The government cannot compel Yahoo to do this, however, the government can insist on legally enforceable requirements that will ensure that Yahoo has an incentive to continue to develop.

The AAI offered up four key recommendations:

• Prohibit Yahoo from using Google ads on organic search results outside North America and on any third-party Web sites.

• Prohibit Google and Yahoo from setting minimum bid or reserve prices.

• Prohibit Yahoo from using Google ads when Yahoo has a sufficient number of ads of its own to fill the white space surrounding an organic search result on Yahoo's site.

• Require the share of revenue that Yahoo receives from each click be constant, (for example), that the agreement does not reward Yahoo with a higher share of revenue for using more Google ads.

The AAI, however, further noted:

The AAI also found that the publicly available data, including briefings provided by Yahoo and Google, do not rebut the concerns that the alliance as proposed is anticompetitive.

Such concerns would arise in any case where the top two firms in a highly concentrated market reach an agreement that potentially gives the dominant firm a market share in excess of 90 percent. The parties' statements of good intent cannot be relied upon to override the economic incentives that may be generated by this agreement to engage in what may turn out to be anticompetitive conduct.

But Google and Yahoo differ on the AAI's conclusions that the deal would be anticompetitive without instituting the organization's recommended changes.

"While we disagree with AAI's conclusions, it is noteworthy that even a group that has opposed most deals acknowledges the pro-competitive elements of our agreement with Yahoo. We believe strongly that this deal is good for competition and will benefit advertisers, Web site publishers, and consumers," according to a statement from Google.

Yahoo made a similar statement, saying, "We believe strongly that this agreement will strengthen Yahoo's competitive position in online advertising and will help to drive a more robust, higher quality Yahoo marketplace for our advertisers, publishers, and users."

In sizing up the four key recommendations issued by the AAI, one source familiar with the deal noted the agreement between the two companies involves only North America, making the first suggested workaround irrelevant.

And in prohibiting a minimum bid, or reserve price, the issue it could create may be one where cheap, irrelevant ads begin showing up on search pages, since the bar would be set low, added the source.

The third recommendation would require the DOJ to monitor Yahoo as to whether its ad inventory was low enough to warrant allowing Google to place its ads on its search pages--a move that would amount to micromanaging for the agency, said the source.

And finally, the fourth recommendation is one that, in essence, prohibits allowing volume incentives with higher revenues. But the source noted such practices are common in a number of industries and are not anticompetitive.

But a spokesman for the AAI noted the organization is not married to its bullet points but wanted to illustrate some ways the companies could mitigate potential antitrust concerns.