Google Wins, Yahoo Still Standing - Page 2

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What will Washington have to say?

In April, when Yahoo announced its trial to outsource a small portion of search advertising to Google, Microsoft's general counsel, Brad Smith, shot back that such a deal would be anticompetitive, that it would "consolidate over 90 percent of the search-advertising market in Google's hands."

That was the response to a two-week trial program in which Google ads would appear next to no more than 3 percent of Yahoo's search queries.

Given that strong reaction, coupled with Microsoft's vigorous -- and ultimately unsuccessful -- lobbying against Google's acquisition of display-advertising powerhouse DoubleClick, Microsoft will likely again appeal to regulators to curb Google's clout in online advertising.

Since the agreement is not a merger, Google and Yahoo do not need regulatory approval to begin the integration. Nevertheless, they are giving the Department of Justice up to three-and-a-half months to review the agreement before Yahoo begins using Google ads.

The DoJ has already been looking at the two companies' previous trial.

The fact that the search companies are waiting to begin the new program suggests to Stifel Nicolaus analyst Blair Levin that the regulators might have some serious concerns that the deal would be anticompetitive.

In a research note, Levin wrote that the two companies will have to "answer the question why the efficiencies of the deal won't ultimately lead advertisers to move to Google, leaving Yahoo without a viable search advertising product and Google as the only search advertising game in town."

Levin suggested that by limiting the deal to Yahoo's U.S. and Canadian Web properties, the companies could be angling to avoid scrutiny from European regulators.

The deal was clearly structured with regulatory concerns in mind. The most important provision is the nonexclusivity language, which leaves Yahoo free to broker a similar deal with another company.

It will also choose how many of Google's ads it wants to use and where it wants to place them. Yahoo will still use its own Panama search ad platform and have complete control over the extent of the partnership.

The deal is structured with an initial four-year term, followed by two renewable three-year terms.

Google quickly jumped out to the defense of the deal against anticompetitive charges.

"Google and Yahoo will continue to be vigorous competitors, and that competition will help fuel innovation that is good for users," Omid Kordestani, Google's senior vice president of global sales and business development, wrote in a company blog post.

Kordestani noted that Google has struck similar deals with AOL and Ask.com, and that such arrangements can be found in other industries. General Motors (NYSE: GM), for instance, buys hybrid technology from Toyota.

One lawmaker has already promised to hold hearings on the matter.

"This collaboration between two technology giants and direct competitors for Internet advertising and search services raises important competition concerns," said Herb Kohl, the Wisconsin Democrat who chairs the Senate Antitrust Subcommittee.

Kohl said the committee would take a long look at the competitive and privacy implications of the deal.