Google-Yahoo ad deal faces intense scrutiny

Google-Yahoo ad deal faces intense scrutiny
By Richard Waters in San Francisco and Joshua Chaffin in New York
Published: June 13 2008 19:49 Last updated: June 13 2008 19:49
Google and Yahoo have structured an alliance that cleverly gets around the immediate antitrust pitfalls that stem from linking the two biggest internet search companies, competition experts said on Friday.
However, the two face a tough ride in Washington over the longer-term implications of a link that could further strengthen Google’s grip on a market it already dominates, they added.
“On the surface, it may be a compelling argument,” Rebecca Arbogast, an analyst at Stifel Nicolaus in Washington, said of the companies’ case for why the deal would not hurt competition. But she added: “Over time, what this is doing is setting up a trajectory where [advertisers] move over to Google and they become the only game in town.”
The alliance, announced late on Thursday and limited to the US and Canada, will involve Yahoo running some Google text ads on its own search results pages, as well as making them available to web affiliates.
The deal is non-exclusive, allowing Yahoo to choose whether it uses ads supplied by Google or its own Panama system – or possibly others, including Microsoft. There are no precedents where antitrust regulators have tried to block non-exclusive commercial deals like this, according to the Yahoo camp.
The deal will apply only to a limited part of Yahoo’s search business. According to RBC Capital Markets, the $800m of extra profit Yahoo believes it can eventually make suggests it would involve about 22 per cent of its search advertising inventory.
Kent Walker, Google’s general counsel, said outsourcing deals between competitors like this were common in other industries. He cited General Motors’ use of Toyota’s hybrid technology and Hewlett-Packard’s use of Canon laser printer engines.
Yahoo also claimed that its own advertising system was broadly as effective as Google’s when it came to the most common search terms and that it would generally use Google only for the less common, “long tail” queries.
However, the question remains over whether the alliance, however limited in the short term, will become a slippery slope that leads to Yahoo outsourcing all of its search advertising to Google – something it did before setting up a rival system of its own five years ago.
Microsoft for one, which had tried to reach its own search advertising deal with Yahoo, is expected to make that argument strongly both in Washington and Brussels. Regulators are likely to look very carefully at whether advertisers will be more inclined to shift their buying to Google’s advertising system, and whether over time this reduces Yahoo’s ability and incentive to invest in its own rival technology, said Ms Arbogast.
Much will depend on whether advertisers and publishers are alarmed enough about this long-term risk to lobby against the deal. Yahoo’s decision came as a disappointment to media companies, which had hoped an acquisition of the company by Microsoft would establish a stronger competitor to Google and give them leverage to negotiate better terms for search and other online advertising deals.
The Department of Justice now has three and a half months – the length of time Google and Yahoo said they would allow before going ahead with the alliance – to weigh up the strength of those concerns.