The Case Against Google-Yahoo

With the Justice Dept. confirming it plans to look into any Google-Yahoo partnership, foes are lining up their arguments

Google (GOOG) and Yahoo (YHOO) say there are plenty of reasons why their recently announced plan to work together on Internet-search advertising should pass muster with regulators. For starters, it's not a merger and it covers only a small part of Yahoo's search business. Besides, it's not exclusive—so either side can strike comparable deals with third parties. The deal was carefully crafted to not cause anti-competition concern, says Dana Wagner, Google's competition counsel. "The [Justice Dept.] has never blocked a nonexclusive deal," Wagner says.

Don't count on it, Google. Antitrust officials at the U.S. Justice Dept. are about to get an earful on why they should be leery of a partnership between the No. 1 and No. 2 search engines. The deal will only widen Google's dominance of the online advertising market, opponents say.

Many of them will soon get the chance to outline their concerns in detail. The Justice Dept., which long said it would review any Google-Yahoo partnership, affirmed on July 2 that it's conducting a formal investigation. As part of the probe, the government is sending "civil investigative demands" to an array of Internet, advertising, and media companies that could be affected by the deal, sources say. The Washington Post reported news of the CIDs on July 1.

Hearing from "Two Monopolists"

The case against the deal centers on the idea that Google already dominates the Internet search market and that pairing with Yahoo will only increase prices for advertisers.

Microsoft (MSFT) is one of the strongest foes of the deal. For a half-year, it has tried to acquire Yahoo or at least control part of it. On July 1, Robert Lande, a law professor at the University of Baltimore School of Law and director of the American Antitrust Institute, listened to an almost two-hour presentation from Microsoft officials about why a Google-Yahoo partnership is bad for the Internet. He and his colleagues had heard Google's presentation in favor of the deal just days before. "This is the first time we have had two monopolists trying to convince us of things," Lande says. The institute isn't affiliated with the Justice Dept., but its research could influence U.S. thinking.

There's little disputing that Google dominates Internet advertising, especially regarding search. Google has as much as 70% of all U.S. searches, according to a June report by measurement firm Hitwise. Yahoo has just shy of a 20% share. Microsoft, a distant third competitor, has less than a 6% share.

And while the deal is limited to just a portion of Yahoo's searches, opponents say it's likely to encompass an ever greater share—and entrench Google's pre-eminence. As part of the deal, Yahoo will let Google place ads on search pages for certain query terms in exchange for a portion of the revenue generated by those ads. Since Google is more effective, in general, at generating revenue from search ads, Yahoo will face increasing pressure to hand over larger slices of its search business to Google, analysts say.

"By agreeing to this deal, Yahoo has become an appendage to the Google content network," says Jeff Chester, executive director of nonprofit The Center for Digital Democracy. Chester wrote a letter to the Justice Dept. on July 2 outlining his concerns with the agreement. "In essence, Yahoo has unilaterally surrendered to Google."

Yahoo's Strategy

Google begs to differ. Yahoo is determined to remain a competitor in search and display advertising, Wagner says. Yahoo will use the $250 million to $450 million a year it expects to generate from the partnership and reinvest it in its own advertising business, he explains. "It's odd to hear an argument that Google's market share would increase," Wagner says.

"They are going to gain more revenue that they will use to compete with us."

Another argument against the deal is the effect on prices for advertisers. Google sells search ads in part by auctioning the terms that people use to search. So a company selling chain saws might bid on the term "chain saw" so that its ads turn up when a person enters the term into the Google search box. Google also sets minimum prices for those terms. But as part of the Yahoo deal, Yahoo will effectively turn over certain terms to Google.

Opponents say the minimums will result in price fixing, since advertisers who were able to pay lower minimum prices on Yahoo will be beat out by advertisers in Google's network whose bids are all higher. "Basically they are raising the minimum floor pricing for those keywords, so the simple argument [against the deal] is that it is price fixing," says a person familiar with Microsoft's thinking.

The price-fixing argument has not yet aroused the ire of advertisers, however. Interactive Advertising Bureau President and CEO Randall Rothenberg recently testified before a House of Representatives committee hearing that he did not think the government needed to step in. "The competitiveness of this industry and the dynamism of this industry is unquestionable," Rothenberg said. "We have a system that ain't broke at all so I would be very careful of going across that bridge from research and inspection to regulation."

Trump Card?

A third argument is that the deal is bad for publishers. Today, a publisher seeking to strike a deal for search-related ads on its site could negotiate with either Google, Yahoo, or Microsoft. One of the key bargaining chips is what percentage of the ad revenue Google gets to keep for selling and placing ads and how much goes to the publisher, which hosts the ad and provides the eyeballs that see it. Should Google ultimately gain control of a significant share of Yahoo's search business, publishers could find that they can't argue for as high a revenue split.

Several publishers who work with Google did not express concerns about losing negotiating power if the partnership with Yahoo goes through.

Should those three arguments fail, the deal's opponents have one more that could ultimately prove a trump card. They will argue that the deal was anticompetitive from the start because it was entered into to keep Microsoft from buying Yahoo and creating a stronger competitor to Google. "If a big part of the motivation behind the Google-Yahoo deal was to block entry of a competitor, that raises an antitrust issue," says Keith Hylton, a law professor at the Boston University School of Law and author of an antitrust law textbook.

To this claim, Google counters that the deal is profitable for both Yahoo and Google. "We are making money off the deal," says Wagner. However, he adds that Google is "certainly happy to support Yahoo in their bid to remain independent." Keeping Yahoo independent keeps Microsoft from making possibly anticompetitive moves, such as tying Yahoo's Web sites to the Microsoft computer operating systems, he notes.

But it's the Justice Dept. that may have the last word on just how far Google can go in keeping Yahoo out of Microsoft's orbit.

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