Antitrust concerns kill Yahoo-Google ad deal

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

"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," said David Drummond, Google's chief legal officer in a blog post Wednesday. "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."

Updated at 7:35 a.m. PST: Yahoo isn't happy with the outcome.

"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," the company said in a statement. "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 DOJ's concerns."

The deal's demise is a new blow to the struggling Internet pioneer, whose stock has plunged since Microsoft offered as much as $33 per share just months ago in an unfriendly acquisition attempt. Yahoo shares closed at $13.35 Tuesday, but rose 57 cents, or 4 percent, to $13.92 in trading Wednesday morning.

When Yahoo and Google announced the search-ad deal in June, Yahoo said it would generate $800 million and $250 million to $450 million 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 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.

Watch this: Daily Debrief: After Google, what's next for Yahoo?

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Updated at 7:51 a.m. PST: 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.

"The companies' decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action," said Assistant Attorney General Thomas Barnett, who leads the Justice Department's antitrust division, in a statement. "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 still is interested in a Microsoft transaction and many observers believe it possible, the Microsoft threat to Google is much diminished.

Also, from a raw financial perspective, Google would 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.

Updated at 8:30 a.m. PST: Also, it's easy to see why Google might not want to fight this particular fight. No doubt Google, 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.

And 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.

Updated at 9:17 a.m. PST: Yahoo and Google had lobbied hard to bring their partnership to fruition, trying to explain the deal to Congress, the public, and regulators. Schmidt professed confidence in the deal, saying the companies had structured it to satisfy antitrust concerns.

But the companies weren't even close, as it turned out. The Justice Department remained unmoved, saying it would file an antitrust lawsuit to block the agreement, even after a recent proposed revision that would have limited the deal's scope.

Here's how the regulators saw the deal, according to the Justice Department's statement:

"The agreement would have enabled Yahoo to replace a significant portion of its own Internet search results advertisements with search results advertisements sold by Google.

After an extensive investigation that was facilitated by the companies' cooperation and agreement to provide the department time to investigate prior to implementation, the department concluded that Google and Yahoo would have become collaborators rather than competitors for a significant portion of their search advertising businesses, materially reducing important competitive rivalry between the two companies.

Although the companies proposed various modifications to their original agreement in an effort to address the Department's antitrust concerns, the Department determined that such modifications would not eliminate the competition concerns raised by the agreement.

The Center for Digital Democracy applauded the outcome. "Today's announcement in its own way underscores what we have been telling officials: that a very tiny handful of global digital giants--particularly Google--is increasingly dominating the most prevalent way online publishing is financially supported," said Executive Director Jeff Chester. "The future diversity of online content--including news--is ultimately connected to the key question of whether one or two companies globally control the flow of most ad dollars tied to our use of broadband to PCs, mobile devices, and perhaps even digital TVs."

Yahoo, which doesn't have to pay any termination penalty, now says it's moving on.

"While the implementation of the services agreement with Google would have enabled Yahoo to accelerate its investments in its top business priorities through an infusion of additional operating cash flow, this deal was incremental to Yahoo's product roadmap and does not change Yahoo's commitment to innovation and growth in search," the company said in its statement. "Going forward, Yahoo plans to continue to provide the cutting-edge advances in products, platforms and services that the industry needs and expects, and intends to be the destination of choice for advertisers and publishers who want to reach one of the largest and most engaged populations of consumers on the Web."

Updated at 10:43 a.m. PST: Microsoft, which fought its own war with antitrust regulators, expressed predictable pleasure about the news--and the regulatory conclusion in particular.

"The Department of Justice's finding is significant for advertisers, publishers, and consumers, who voiced overwhelming concern about this illegal deal to law enforcement and policymakers," Microosoft said in a statement.

And advertisers who opposed the deal applauded the decision by the companies to step away from the agreement.

"The proposed deal was anticompetitive and would have given Google too much power over online advertising," said Larry Kilman, a spokesman for the World Association of Newspapers, which in September announced its opposition. "It's clear from the announcement that government competition authorities were receptive to the concerns raised by the advertising and media industries. We're delighted that Google and Yahoo decided to drop it."

The Association of National Advertisers, which raised its objections in September and updated its concerns this week with a letter to the Justice Department, breathed a sigh of relief.

"We knew some decision was coming soon and are grateful that the parties agreed to discontinue their agreement. It's an important step for the industry to move forward...it will stimulate the level of innovation," ANA Chief Executive Bob Liodice said.

And a proposed modification of the terms didn't satisfy him.

"When the fundamentals don't change--concerns of pricing and concentration of power--then the fact that it's a 2-year deal or a 10-year deal doesn't matter," Liodice said. "If a deal can't stand up on its own under the longer terms, then it shouldn't stand up at all under shorter terms."