How the 'Yahoogle' talks with feds fell apart

Sources say trustbusters took an increasingly hard line with Yahoo and Google in the past two to three weeks, causing their proposed ad deal to become unpalatable.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
3 min read

Early Wednesday morning, the Department of Justice notified Yahoo and Google that if they proceeded with their controversial search agreement, it would file a lawsuit to block the deal.

In some ways, the DOJ's decision was not terribly surprising. Over the past two or three weeks, federal antitrust regulators became increasingly wary of the agreement and, in particular, tested Google's resolve to remain in the deal, according to sources. Over the past few weeks, the give-and-take of negotiations between the parties seemed to be forward progress, but faltered as government regulators became increasingly unyielding in their demands.

"Up until a few weeks ago, there was a lot of back and forth," said one source. "After that, they began turning everything down."

Regulators, however, did not view it their role to advise the companies on how best to get the deal passed. Rather, sources said, they were there to evaluate the deal, as it was presented to them and any future versions that were submitted.

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

"We dealt with the (companies') proposals, as they made them...The suggestions for changes came from them," noted a source, who added that many of the things Yahoo and Google proposed were found to be anti-competitive.

Then things headed further south. Regulators, at one point two or three weeks ago, told Google that if it pursued a lawsuit to block the deal, it may consider adding a monopolization count against Google to the complaint, which in essence would allege the search giant of using its monopoly power in a relevant market. Apparently that hit a nerve with the search giant, noted a source, and it became evident to regulators that Google's resolve to fight a legal battle was wavering, rather than face the prospect of being saddled with the label of a monopolist and all the regulatory oversight that could potentially come with it.

Under its initial 10-year agreement announced in June, Yahoo would run Google's paid search ads on its own search pages and those of other third-party publishers. In return, Yahoo would get a cut of the advertising revenue.

Although the initial agreement did not call for caps that would limit the number of times Yahoo could run Google search ads on its own search pages, the companies increasingly began throwing out lower and lower caps to appease regulators, who were concerned Yahoo would either turn over its entire search advertising business to Google, or exit the business altogether, sources said.

While regulators, to some degree, appreciated the companies cutting their 10-year agreement to 4 years and then eventually 2, the caps increasingly became a tough pill to swallow.

In the last revised proposal before terminating the agreement, the companies had offered to not only limit the deal to two years, but also put a 25 percent cap on the amount of revenue Yahoo could receive from Google under the arrangement.

But there was nothing in the deal that would have prevented Yahoo, for example, from applying its 25 percent cap to a specific category of Yahoo's search advertising, thereby concentrating Google's presence in a particular part of Yahoo's search platform. The companies, however, did not see the benefit to advertisers, nor themselves, in using randomized search on Yahoo's search pages.

"Prior to two or three weeks ago, it seemed the regulators thought the cap was a promising solution," said a source. "But that changed over the last couple of weeks. Now, all sorts of problems were being identified with it."

During the course of the review process, the companies had extended the 100-day deadline it set in June from October 8 to October 22, as talks progressed among the parties. But as the latest extension deadline approached Wednesday, it became evident no further extensions were needed.

"In the last 24 hours, we really began to understand that the DOJ would not accept any deal under any terms," said a source.

No surprise, then, that the DOJ informed the companies Wednesday morning it would challenge a deal if they moved forward, resulting in Google backing away from the deal.