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Yahoo, Google under pressure to make next move

Now that they know what it will take for their advertising deal to get approval from antitrust regulators, all Yahoo and Google have left to figure out is: Is it worth it?

Yahoo and Google are nearing a point where they'll have to decide whether to fish or cut bait on regulatory approval for their search advertising deal.

During the past two months, efforts to appease federal antitrust regulators have gotten bogged down with potential restrictions on the deal. As a result, the companies' enthusiasm for its search advertising partnership has turned into frustration, raising speculation that the parties might walk.

"I still like the concept of the (Yahoo-Google) deal," said one source familiar with the agreement, but who noted taking on a legal challenge by the Department of Justice is not a step the companies would likely entertain.

As a result, that leaves the companies with a decision to either accept a deal on the DOJ's terms or walk away altogether. One of the parties involved notes walking away is not such a bad option but, of course, it would sink the deal since it takes two to transact.

Under the terms of the deal, announced back in June, Google would run its paid advertisements on relevant Yahoo search pages. Yahoo, in return, expected to generate as much as $800 million in revenues from Google during the first year the partnership was in place. Both companies agreed to wait 100 days before implementing the arrangement, in order to give the DOJ time to review the deal.

But a major concern of the DOJ, as well as advertisers such as the Association of National Advertisers, is a possible hike in advertising rates and a possibility that Yahoo may find the Google partnership so lucrative that it might eventually outsource its entire search advertising business to its rival.

The main bone of contention between the DOJ and the companies has been over a cap that regulators want to place on the percentage of search ads that Google can place on Yahoo's search pages, according to sources familiar with the transaction.

"They think by keeping the percentage so low, it will force Yahoo to stay independent and continue to keep its search business alive," said another source familiar with the transaction.

This source added that the cap is so low it barely makes economic sense to move forward with the deal.

Nonetheless, representatives from both companies say the talks with the DOJ are ongoing.

"We are continuing to have cooperative discussions with the Department of Justice about this arrangement and agreed to a brief delay in implementing the agreement while those discussions continue. We are confident that the arrangement is beneficial to competition, but we are not going to discuss the details of the process," said Adam Kovacevich, a Google spokesman.

And Yahoo's spokeswoman echoed a similar view.

"We have been working with the Department of Justice regarding our agreement with Google and those discussions are ongoing. As we have said, 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," said Yahoo spokeswoman Tracy Schmaler.

Hammering out a resolution both parties could accept has lead to brief delays in implementing the deal, which one source noted is common in negotiations. The companies waived their prior October 8, and then October 22, deadlines by which the DOJ had to weigh in with its final decision on whether it would block the deal, require remedies, or allow it to pass through in its current form.

The DOJ is a breath away from making a decision, said one source familiar with the talks.

A DOJ ultimatum that calls for accepting the caps, or face a legal challenge, puts the onus on the companies to determine the timing of taking the next step. And depending on what that next step may be--walking away from the deal or accepting the caps--would affect the DOJ's final decision, sources said.

Another source familiar with the talks noted a resolution is expected soon and believed there was a good chance it would happen before Thanksgiving.

Meanwhile, an article in The Wall Street Journal on Friday cited sources who said the companies may walk away from the deal as early as the middle of next week.

One area that the companies apparently do not have to contend with is facing two major formal investigations simultaneously.

The European Commission, which is conducting an informal investigation into the North American Yahoo-Google partnership, has yet to decide whether there are enough jurisdictional issues to warrant its involvement in the transaction. If it determines to take action, it would file a formal inquiry.

"We are close to making a decision, but not very close," said one source familiar with the transaction.

In part, the European Commission is awaiting the DOJ's decision in order to avoid having any influence on their actions, noted the source, who also said the European regulatory agency does not want to appear as an interloper in a case that predominately affects U.S. companies.