Published: June 13 2008 19:43 | Last updated: June 13 2008 19:43
Yahoo’s deal to outsource a share of its search advertising to Google, and to end talks about a sale of the company to Microsoft, is bad news for Yahoo shareholders. It also marks an effort by Google, the juggernaut of the search sector, to extend its market dominance. Such an extension would be bad for competition, bad for innovation in internet search, and bad for advertisers. The US Department of Justice should object to this deal.
The current saga began when Microsoft approached Yahoo about a takeover, with the goal of creating a stronger competitor to Google. The two sides, however, could not agree on price and, left stranded as an independent company, Yahoo has done a deal with Google to shore up its position. That deal will mean that Google advertisements appear alongside some of Yahoo’s search results in the US and Canada.
EDITOR’S CHOICE
Google-Yahoo ad deal faces intense scrutiny - Jun-13Lex: Yahoo’s deal - Jun-13In depth: Battle for Yahoo - Jun-13Yahoo in search deal with Google - Jun-13Tech blog: Google, a wolf in sheep’s clothing? - Jun-13Yahoo put in tight position with Google deal - Jun-13Why this is better for Yahoo shareholders than a sale to Microsoft at a generous premium is something that Jerry Yang, Yahoo’s chief executive, has failed to explain. He has, in effect, conceded that Yahoo needs a partner but failed to extract a price in return.
Yahoo and Google will argue that a partnership is all this deal is. They will say that it is non-exclusive, so Yahoo is free to sell its own search advertisements, or to source them from any other company. They will argue that, because Yahoo will continue to produce its own search results, Google’s market share for web searches, as opposed to web advertisements, will not increase. They will also point out that Yahoo can end the deal after four years.
None of that is sufficient. Advertisers, given the choice of a Google platform that includes Yahoo, or a Yahoo platform that does not include Google, will tend towards the former. Yahoo itself will tend to source more advertisements from Google because its larger, more effective platform is more profitable. This deal will, over time, make Yahoo’s search advertising system less viable as an independent entity.
That would deepen Google’s dominance. Some have argued that Google’s existing market share of internet searches – now 68 per cent in the US – justifies antitrust action. But it is still a market that others can contest: if someone invents a better search engine, then web surfers can easily switch. What Google must not be allowed to do is use its dominance to crush potential competitors – whatever the means.
There is also an important distinction between the market for web searches and the market for advertisements alongside them. Google’s search advertising system becomes harder to challenge the more other sites adopt it. To allow Google to serve all the adverts, even if the search sites themselves remain competitive, would be like allowing one company to sell the advertisements in every newspaper. This deal brings that closer, it stifles competition and it should be stopped.
Copyright The Financial Times Limited 2008
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