Many financial analysts have greeted Yahoo's ad deal with Google as the first real sign of life to come from the beleaguered Web pioneer since it spurned Microsoft's takeover bid.

In Washington, however, government regulators and lawmakers are expected to take a hard look at the anticompetitive implications of the partnership.

On paper, it looks great. In a side-by-side comparison, Google (NASDAQ: GOOG) makes a lot more money than Yahoo (NASDAQ: YHOO) placing an ad next to a page of search results, so pairing Google's ads next to some of its search results seems a good way for Yahoo to boost revenue at a time when it's desperate to prove to shareholders that it can make it as an independent company. "Free money," quipped former Ask.com CEO Jim Lanzone.

The strategic upsides for Yahoo -- and certainly Google -- are easy enough to see. But beyond the short-term value the deal might deliver, there is a real concern that as the partnership develops, Yahoo will gradually cede more of its search advertising to Google, effectively nullifying what competition there is in the market today.

In that scenario, advertisers would be left holding the bag, said Janel Landis, senior director of search development and strategy at SendTec, a multichannel agency specializing in search marketing.

"If Google makes more money and Yahoo makes more money, it's going to come from somewhere," Landis told InternetNews.com.

"I think we'll see the hugest jump in cost-per-click prices year-to-year next year if it goes through. It will end up skyrocketing. I think it's a really scary thing that could happen," she said.

Written with regulators in mind

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Google and Yahoo clearly structured the deal with regulators in mind. It is a non-exclusive agreement, leaving Yahoo free to form a search-advertising pact with Microsoft or anyone else.

Yahoo would also use Google's ads at its discretion, with no obligation to suppress the search ads coming from its own Panama platform.

Perhaps in a bit of damage control, Omid Kordestani, Google's senior vice president of global sales and business development, wrote a company blog post enumerating the benefits of the deal and taking pains to outline what it does not do -- like allow Google to raise prices.

"Google does not set the prices manually for ads; rather, advertisers themselves determine prices through an ongoing competitive auction," he wrote.

That is only partially true. The manner in which Google places search ads is actually much more complicated than awarding a placement to the highest bidder.

Increasingly, Google has been relying on what it calls the quality score, which anticipates the likelihood of a person clicking on the ad and looks at the relevance of the landing page to the search term.

Even with the improvements that Panama brought, Yahoo's search system is still more closely tied to a straight auction format. Yahoo has had trouble delivering clickthrough rates comparable with Google's, but often times the ad buys are cheaper.

"Yahoo had a system that was a little easier to use and not nearly as effective," Kent Lewis, president of the search marketing agency Anvil Media, told InternetNews.com.

Advertisers commonly spend at least 70 percent of their search budgets on Google.

Since Yahoo can place as few or as many of Google ads on its sites as it wants under the deal, some are worried that it will be heading down a slippery slope. The fear is that once Yahoo sees that a Google ad brings in more money than its own ad for the same query, what's to stop it from shifting an ever-greater portion of its search ads over to Google's systems?

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