Washington — Search engine giants Google Inc. and Yahoo Inc. are in discussion with the U.S. Department of Justice in an attempt to avoid antitrust concerns to their pending advertising agreement.
Reports that the three sides were assembling first surfaced in the Wall Street Journal early Tuesday.
The newspaper, quoting unidentified lawyers close to the talks, reported that the two companies are negotiating a deal that will curb concerns that the arrangement would concentrate too much power in the hands of Google.The settlement negotiations are at a premature stage and it was still unclear whether the talks would resolve antitrust objections to the agreement or result in a deal acceptable to the two California-based firms, lawyers close to the effort said.
At the same time, investigators are proceeding to develop a lawsuit to block the deal, worried it would give Google too much power in online advertising.
The companies plan to be able to place Google ads next to Yahoo search results and share the profits.
The Justice Department does not have to approve the deal, but it is investigating for potential anti-competitive impacts and could block the plan. The two companies recently postponed plans for their ad partnership because of the investigation.
Authorities in the European Union and Canada also are investigating the deal.
Antitrust issues have been brought up by major advertising groups including the Association of National Advertisers, based on the fear that an ad-sharing deal between the top two online ad players — Google and Yahoo — would give Google too much control of the Internet ad market.
Yahoo declined to comment, but Google confirmed that talks are taking place.
“We are continuing to have cooperative discussions with the Department of Justice about this arrangement and agreed to a brief delay in implementing the agreement while those discussions continue,” said Google spokesperson Adam Kovacevich. “We are confident that the arrangement is beneficial to competition, but we are not going to discuss the details of the process.”
The newspaper said the companies were talking about concessions in the settlement talks with the government over the deal which would put Google technology to work targeting search ads on Yahoo pages.
“These include capping the volume of Google ads Yahoo would use, assurances that Yahoo would continue to compete in search ads, and a reporting mechanism to ensure compliance,” the Wall Street Journal said.
Under their proposed partnership, Yahoo will start displaying search ads sold by its rival. The companies say the arrangement would serve advertisers and users more efficiently. For Yahoo, it would mean hundreds of millions of dollars in much-needed new revenue in its first year.
Microsoft senior vice president and general counsel Brad Smith has argued the deal would give Google “an unprecedented level of control over advertising for search on the Internet — up to 90% potentially of all search ads.”
The group claims that it would enable Google to tighten its grip on online advertising and restrict competition. Advertisers also have asserted that the partnership could increase their costs.
Alternating the deal would include a reporting mechanism, which could require the companies to disclose more about the mechanics of their closely-guarded search-advertising technology than they want to. And caps on how many Google-sold ads Yahoo can display could limit Yahoo’s financial gains from the agreement.
Industry analysts have cautioned that politicians and regulators blamed for letting financial markets self-destruct may use the Google-Yahoo tie-up to show they are better watching out now for the public’s economic interests.
Microsoft is number three in the online ad market and made a failed bid earlier this year to take over Yahoo, which expects hundreds of millions of dollars in revenue from the ad tie-up with Google in the first year alone.
If the companies reach a settlement with regulators, its principles would likely be laid out in a consent decree that would be filed in court.
Eventually, Google and Yahoo must provide evidence on two things to regulators: One, that their proposed deal will somehow benefit advertisers by not increasing prices in the online ad market; and two, that the proposed deal would not harm consumers. However, it is the effect on consumers that is of greater concern to the DoJ.
“The issue is whether this leads to lower prices or higher prices,” Evan Stewart, a senior partner at Zuckerman Spaeder, said in a statement. “Let us say, for example, that Company A finds that the Internet is the most effective way to advertise and pays (US) $1 per hour to do so. As a result of [the Google-Yahoo deal], suddenly Company A could end up paying $3 per hour to advertise. They are not going to eat that cost – they are going to pass that cost on to the consumer.”
Yet another challenge Google and Yahoo will face is convincing regulators that they can be both allies and strong competitors.
“They have made the representation that while they are going into joint-venture land on this project, they are going to remain fierce competitors in other markets,” Stewart said. “I think antitrust regulators are skeptical of that on its face. It is hard to embrace someone with your right hand while trying to beat their brains out with your left hand. That is not normal human commercial behavior.”
While that would enable the deal to go forward, it would also be a formal recognition of Google’s market power. That could constrain the Mountain View, Calif., company’s conduct in the future and might draw private antitrust suits from competitors or advertisers.
Even as senior Justice Department officials weigh the companies’ proposals to resolve antitrust issues, its trial staff continues to prepare a lawsuit to block the deal, according to lawyers and executives contacted by the government.
Google and Yahoo announced on October 3 that they were delaying the start of the alliance until at least October 22 to give federal and state antitrust officials time to complete their separate investigations.