Google, Yahoo Delay Search Ad Deal, Still Discussing With Justice Department

Google and Yahoo, which had been slated to start their controversial search advertising deal in the next couple of weeks, have agreed to a

Google and Yahoo, which had been slated to start their controversial search advertising deal in the next couple of weeks, to a “brief delay” to continue talking with the Justice Dept. The delay comes despite Google CEO Eric Schmidt’s vow just two weeks ago to go ahead with the deal on the early to mid-October schedule the two companies set three and a half months ago. Here’s the statement from Yahoo, which follows reports from Bloomberg and Boomtown’s Kara Swisher:

“The companies have agreed to a brief delay in implementing this agreement to continue our ongoing discussions with the Department of Justice. We have had discussions with regulators and look forward to responding to their questions about this agreement.”

One undeniable takeaway from the delay is that there are issues with the deal that Justice feels the need to hash out. So clearly, the deal isn’t going to sail through just as Google and Yahoo have laid it out so far. Justice’s options range from filing suit to block it to seeking to impose conditions or restrictions on it. And Google’s and Yahoo’s options are to agree to some conditions (which seems likely if they don’t fundamentally change the terms), forget about it (possible), or go ahead with the deal as-is and fight it in court (unlikely).

UPDATE: Kara now says that “according to several sources with knowledge of the situation, staffers at the Justice Department had recommended to their superiors that the deal be investigated further and even blocked in court.” That doesn’t necessarily mean Justice will do what the staffers recommend, but if true, it sure doesn’t seem to bode well for an agreement that Google and Yahoo had hoped was crafted to avoid antitrust problems.

The delay isn’t too surprising. Based on recent conversations I’ve had with outside antitrust attorneys about the deal, in which Yahoo would run Google search ads on some of its pages, the issues are far from clear. Since this isn’t a merger and Yahoo retains control over which and how many Google ads run on Yahoo pages, the antitrust implications are murky. Yet clearly, there’s concern on the part of advertisers about the potential for Google—which by various estimates has north of an 80% share of search advertising revenues—could capture even more and effectively raise prices for search ads. And Justice recently hired antitrust litigator Sandy Litvack, in a sign that its antitrust division is either planning to bring a case, or at least wants to provide deep cover in case it decides not to file.

So what does the delay mean? Hard to tell, but the ongoing discussions may hint that the deal won’t necessarily be quashed entirely. Also, Sen. Herb Kohl of Wisconsin, chair of the antitrust subcommittee, on Thursday said that the deal warrants monitoring but stopped short of recommending it be stopped, which some observers took to mean he was assuming some form of the deal would go through. And a group of California legislators sent a letter on Sept. 26 to Justice arguing against an “unprecedented” preemptive action against the deal.

What’s more, American Antitrust Institute, which generally opposes any deal that reduces competition, recently raised uncertainties about the potential impact. It said that it’s unclear whether the deal would cede effective control of search advertising to Google or, conversely, provide enough money to Yahoo—up to $800 million annually, by Yahoo’s reckoning—for it to remain independent. If it’s the latter, the AAI mused, there could be a more competitive marketplace than if the deal were quashed and Microsoft swooped back in to buy Yahoo, as it tried to do earlier this year.

Indeed, one notable antitrust figure from the past, Microsoft antitrust hound dog Gary Reback, speculates that Google—whose monetary benefit from the deal is relative chicken feed—wants an independent Yahoo as a hedge against more regulatory scrutiny in the future. If Yahoo continues to exist independently, even as weak as it is in search ads, Google can point to a market with at least three competitors—a magic number for antitrust regulators. This worked well for AT&T despite its similar dominance over Sprint and MCI.

As a result, some observers believe the deal will pass muster after all, though with possible restrictions or ongoing oversight. But not all the experts I talked to agreed. Some think antitrust thinking is moving back toward taking a more proactive role in maintaining competition. Justice, which has come under criticism for greenlighting too many mergers and other deals, may be under pressure to take a more active role in the Google-Yahoo deal.

Google and Yahoo weren’t required to seek antitrust approval, but did so in order to try to smooth the way on what they knew would be an eyebrow-raising deal. They’re hoping to come to some mutual agreement on the terms of the deal to avoid an outright confrontation that could make the less worthwhile to both Google and Yahoo. But there’s no guarantee they’ll be able to do that. Otherwise, that’s the announcement we would have heard today instead.

So for now, it’s anybody’s bet which way this will go. It’s just not going right now. And, I should add, it’s apparently not going Google’s and Yahoo’s way.