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FAQ: Antitrust eyes on Yahoo-Google ad deal

Wondering about the repercussions of the Justice Department's scrutiny of Yahoo's search-advertising deal with Google? Here are some answers.

Correction July 7 at 7:42 a.m. PDT: This article misstated the name of Jonathan Gleklen's law firm. It is Arnold & Porter.

Nobody, least of all Yahoo and Google, doubted that the two companies' search-advertising deal would escape any antitrust scrutiny.

But now some details are starting to emerge about just what form the Justice Department's investigation of the Yahoo-Google deal will take. The agency is expected to send civil investigative demands, or CIDs, within the next week not just to the two Internet powers, but also to competitors, advertisers, and potential partners.

At this stage, there are more uncertainties than certainties. But here are some answers to try to help get a handle on the situation.

Q: What is a CID, anyway?
A civil investigative demand lets the Justice Department compel companies or others to share information for an investigation. It's comparable to a subpoena in a criminal case, though it is reserved for civil cases.

Q: What could the DOJ investigation lead to?
It could be anything from no action at all to a lawsuit. In between is the possibility for discussions with the companies to modify the deal in some way that would address concerns that it hurts competition. With that route, the companies would sign a consent decree overseen by a court. If it does come to a lawsuit, it's a civil case, so nobody at Yahoo or Google would be going to jail, if they lost the case.

Q: Is it a big deal that the Justice Department is sending out CIDs?
It's an indication that the regulators have moved beyond the preliminary stage, but it's relatively routine for that follow-up phase. "In any investigation, they would seek info not just from the main parties (but also) from people who are affected, such as customers," said Jonathan Gleklen, a partner in the antitrust practice of law firm Arnold & Porter and the editorial chairman of the Antitrust Law Journal.

Q: Should we be surprised the Justice Department is investigating?
No. When Google and Yahoo announced the search-advertising deal, they said they'd wait up to three and a half months for regulators to review the deal before starting the partnership.

"We agreed with the Department of Justice on a voluntary basis to have them review this deal," Yahoo Chief Executive Jerry Yang said when announcing the partnership. So company executives knew that there would be attention, even as they argued that the deal would help, not hurt, competition.

Q: Why are regulators looking at the deal?
Google dominates not just search but, more to the point, the market for the text ads that appear next to search results. It's these ads that, for some searches conducted in the United States and Canada, Yahoo expects Google to supply at times.

Yahoo maintains a lot of control over just what ads Google will supply and when, but it's clear that it expects the deal to be significant; Yahoo expects up to $800 million in new revenue and $250 million to $450 million in incremental cash flow.

Google is No. 2 in the market, with Microsoft third. So one possible concern is that people who bid for search ads will have fewer viable places than Google to place them. Google doesn't set ad prices, but if there's only one place to advertise, advertisers could have to bid higher to ensure that anyone actually sees the ads.

Q: Wow, so Yahoo clearly is handing the reins to Google. Slam-dunk antitrust case, right?
Not so fast. For one thing, Yahoo stands to make a fair amount of money out of this, and that's money that can be invested in search, search advertising, display advertising, and any number of other businesses in which the Internet giant is involved. Yahoo has been losing ground to Google overall, and it's certainly possible that strengthening the company overall could help keep the company healthy so that advertisers have choices. And remember that keeping Yahoo healthy could help it remain competitive against Google in another advertising area: display ads.

Q: How do Yahoo and Google make the case that there's no antitrust problem from their deal?
Google has argued that the online-ad marketplace is broader than just search ads, and that cooperation in one domain between rivals doesn't preclude competition overall, citing as an example of Toyota supplying hybrid motor technology to General Motors.

"Google and Yahoo will continue to be vigorous competitors, and that competition will help fuel innovation that is good for users," Omid Kordestani, Google's senior vice president of global sales and business development, said in a blog post.

Yahoo takes pains to point out that it has control over which Google ads it chooses to display, and when. The company argues that Google's ad system is more effective in producing relevant ads for uncommon searches--the "tail"--while Yahoo's own Panama ad system is competitive for the common "head" searches.

In other words, it's possible that Google-supplied ads won't be displacing those from Yahoo, so advertisers using Google's system would see more placement than before the deal, and Yahoo would make money on searches it previously wouldn't have monetized at all.

Q: Will the Justice Department's investigation hold up the deal?
Not unless Yahoo and Google choose to let it. The companies could start putting Google ads on Yahoo search results tomorrow, if they so chose. Because the deal isn't a merger or acquisition, it doesn't require approval under the Hart-Scott-Rodino Act. "We believe, given that it's a commercial agreement, there's not formal regulatory approval" required, Yang said.

Q: What does the Justice Department have to say about all this?
Not a lot beyond confirming that it's investigating. "We're looking at the proposed transaction...We're conducting a civil investigation," said spokeswoman Gina Talamona. She wouldn't share further details about what sorts of information will be gathered or what timeline the investigation is using.

Q: I don't get it. Yang said there's no regulatory approval required. If he seems so sure, why do regulators think they get a say?
Yahoo and Google might not need DOJ permission to start the deal, but that doesn't mean the DOJ can't step in with some form of antitrust enforcement later. Indeed, the agency often investigates antitrust situations after the conduct under scrutiny has taken place, not before.

"We can look at deals we feel might affect consumers and look at competitive effects," Talamona said.

Q: Will the federal agency have concluded its review by the time Yahoo and Google go live with the deal?
Not likely. "They usually take many months. It's not at all unusual to take six months or more," Gleklen said.

And answering a CID isn't a trivial matter; companies often negotiate what must be produced. "If you send a CID to Sony saying, 'Give me every document about online advertising,' Sony might say, 'That's 30 million pages. We don't want to give that. It's too burdensome.' Then there would be negotiations about the scope of compliance, about whose files will be searched," Gleklen said. "That takes time."

Even when the DOJ has all the information it wants, it takes more time for the department's staff to recommend a course of action, then for the section and later an assistant attorney general--in this case Tom Barnett at present--to approve that course, Gleklen added.

Q: So if Yahoo and Google don't have to wait, and the Justice Department will take longer than three and a half months to investigate, why offer the waiting period at all?
Because Yahoo and Google will be spending a lot of quality time with the department, and antagonizing the regulators has its consequences too. "They are trying to appear to play nice with the regulators," Gleklen said.

Q: What does it mean that the investigation likely will extend beyond three months from now?
It means that the federal agents likely will be scrutinizing not just the deal at its current largely theoretical phase, but also seeing what effect people believe it has. At present, the deal is an SEC filing and a lot of promises, but once it goes into effect, regulators will begin to be able to replace some of the deal's current vagueness with data on actual effects.

"It's going to be very hard for an advertiser to talk about how this alliance affects them, because it's hard to know," Gleklen said. For example, "They don't know how much of the Yahoo display space is going to be dedicated to (Google) ads or what the effect is going to be on pricing."

Even with concrete data, though, the DOJ must enter the speculative domain, trying to assess what the effects will be in the long run.

Q: So is the relevant market here search ads, online ads, or all advertising? How will the DOJ define the market?
The DOJ will decide the scope based on the facts it uncovers in its investigation, Talamona said, but wouldn't share more.

The scope is an interesting point. Microsoft, which has repeatedly raised antitrust concerns about the Google deal, has directed attention at search-ad share, while Google has argued for a broad view. Google's acquisition of DoubleClick earlier this year has given it a much stronger position in display ads, though Yahoo is well ahead.

And the stakes are high: the economic slowdown appears to be hurting the advertising industry, but many believe online advertising will fare better than print and TV ads because it's easier to measure whether an online ad is effective and therefore calculate the return on an advertising investment. So far, though, tracking that effectiveness is much easier with search ads than display ads. Search ads are more tightly tied to specific search terms and not general demographic attributes of a Web site's readers, and unlike with display ads, advertisers pay for the ads only when people click on the search ads, which shows a certain level of interest.