San Francisco — Google Inc. and Yahoo Inc. have reportedly offered to drastically rationalize the scope of their planned search advertising deal in a last-ditch effort to appease the Justice Department anti-trust regulators threatening to block the alliance, which is scrutinizing the deal for its effect on competition, a person close to the discussions on the revised plan, said on Monday.
Both the search titans submitted their revised plans to the U.S. Justice Department at the weekend, according to a story posted Monday on The Wall Street Journal’s Web site.
The turn of events occurred after Google appeared to be on the verge of walking away from the partnership, which was announced in June to foil Microsoft Corp.’s takeover attempt of Yahoo. The deal has since drawn scrutiny from U.S. regulators amid a growing chorus of criticism from advertisers.
The newspaper, quoting “people familiar with the matter,” said the Internet giants had added “a number of new alternatives designed to limit the scope of the deal” in a bid to get a green light from the Justice Department.
Referring to people familiar with the matter, the Journal stated that Google and Yahoo are now prepared to limit the amount of revenue generated from the partnership and shorten the deal’s duration. Google’s advertising customers would also be given the option to not have their commercials appear on Yahoo’s Web site.
The new advertising pact requires Google to place ads next to some Web search results on Yahoo, lifting Yahoo’s revenue. Under the new plan the deal will run for two (2) years instead ten (10), said the person, who agreed to spoke on condition of anonymity because the discussions remained confidential.
Under the revised terms of the deal, which caps the revenue Yahoo can generate from the deal to 25 percent of Yahoo’s search revenue, and allows Google advertisers an opt-out option of being placed on Yahoo, the source said. The original agreement signed in June spanned 10 years and did not have any restrictions on how frequently Yahoo could draw upon Google’s technology for displaying ads alongside its search results.
Yahoo spokeswoman Tracy Schmaler said in an emailed statement that the company continues to work with the Justice Department and discussions are ongoing.
The discussions are intended for protecting a deal that Yahoo needs to shore up sales after shunning takeover advances from Microsoft Corp. this year. Advertisers and Microsoft, which offered to buy Yahoo for as much as $47.5 billion to catch up with Google, have argued that the Google agreement would hurt competition and raise online marketing prices.
Google and Yahoo are “trying to avoid leaving Yahoo exposed to a Microsoft acquisition,” said Jeff Lindsay, an analyst with Sanford C. Bernstein & Co. in New York. He recommends buying Google and has a hold rating on Yahoo. He does not own shares in either company.
The Wall Street Journal reported the changes earlier today.
Yahoo had expected Google’s system would enable it to increase its revenue by $800 million annually, but the restrictions would cut that amount in half.
The revisions are viewed as a last-ditch attempt by the two Internet giants to gain the anti-trust regulators support for the alliance, which was unveiled nearly five months ago. Regulators so far have been cool to the notion of the No. 1 and No. 2 search engines cooperating, and it is unclear whether the latest proposal is enough to change their opinion.
Adam Kovacevich, a Google spokesman, declined to comment on this weekend’s offer, saying only that discussions with the Justice Department continue and that his company believes a deal would be beneficial to competition.
Gina Talamona, a Justice Department spokeswoman, would say only that the matter is still pending.
Analysts believe the revised terms could help the deal get regulators approval, but wondered whether such a limited partnership would be financially lucrative to Yahoo, which is a distant No. 2 to Google in the web search market.
Mukul Krishna, digital media global director at consulting firm Frost and Sullivan, described the revised terms as “more of a Band-Aid than the extensive surgery that is needed” for Yahoo.
“This sweetens the deal to go through antitrust red flags and gives (Yahoo CEO) Jerry (Yang) some breathing space, but how much money it would add to Yahoo’s treasure chest would be very crucial,” Krishna said. “And it does not answer the question, what after two years?”
Mark May, another analyst at Needham & Co, said Yahoo’s willingness to limit the scope of the deal “indicates that other alternatives are either not available or not attractive at all.”
One reviewer of the deal said that the revisions would do nothing to make the deal more palatable to advertisers. “If a deal can not survive long-term scrutiny, what is the benefit of allowing it for the short term?” said Robert D. Liodice, president of the Association of National Advertisers, which has urged the Justice Department to oppose the deal.
Several advertising associations and privacy groups, together with technology titan Microsoft, have protested the deal, saying that it would give Google too much power over the search advertising industry. Alone, Google already dominates the field, owning a nearly 60 percent U.S. market share in September, according to Nielsen Online.
Eric Schmidt, Google’s chief executive, repetitively mentioned that the agreement is structured so that it would not harm competition because Yahoo can choose the number of ads from Google to display as well as enlist other companies to provide ads.
“It appears that they are addressing legitimate concerns of the Justice Department,” said Evan Stewart, an antitrust attorney with Zuckerman Spaeder LLP. “This is a negotiation … It sounds like it is getting closer.”
Analysts have debated that it may not make much sense for Yahoo and Google to work together if they are forced to make too many concessions.
However, Yahoo is under severe pressure to do anything possible to increase its sagging profits after inflaming its shareholders by rejecting a $47.5 billion takeover offer from Microsoft six months ago. Microsoft withdrew its $33-per-share offer after Yahoo co-founder Jerry Yang held out for more money.
Shares of Google and Yahoo were little changed in extended trading after news of the modified proposal broke. Google edged up $1.51 to $348 from its $346.49 close, while Yahoo slipped 7 cents to $12.68 from its $12.75 close. Microsoft, based in Redmond, Washington, rose 29 cents to $22.62.