Washington — Members of Washington based nonprofit think tank dedicated to antitrust issues has released a 19-page analysis of the Google-Yahoo deal that warns that the transaction has the potential to become “a black hole that swallows up Yahoo,” could justify an antitrust injunction, according to the antitrust group.
The AAI group advises regulators to reshape the alliance between Google and Yahoo advertising deal that will allow the two Internet companies to place some ads on Yahoo’s search pages, which the Justice Department is reviewing, should be allowed with limits, the American Antitrust Institute said in its report.
The American Antitrust Institute said Wednesday it thinks the current Google-Yahoo ad deal may be blocked by the U.S. Justice Department based on Google and Yahoo’s combined share of the search advertising market, and suggested some restrictions to preserve competition. Norman Hawker, a senior fellow at AAI and a professor at Western Michigan University, said the deal could weaken Yahoo or force it out of the search market. AAI thinks the government could require a consent decree from Yahoo and Google.
The paper was issued after AAI assembled with representatives from Yahoo and Google on a number of occasions, according to Hawker.
“The risk harm to competition in this case is exceptionally great because the agreement has the potential to increase Google’s market share to over 90 percent,” said Hawker in an interview. “At that point Google would have the power to dictate prices and other terms to advertisers. Yahoo provides the most significant source of competition to Google in paid search, and the agreement has some potential to strengthen Yahoo as a competitor, but it also poses an enormous risk of either weakening Yahoo’s ability to compete or causing Yahoo to exit the market entirely.”
Thus, the U.S. government should endorse a controversial deal that would have Yahoo carry Google ads on search results, but regulators should also set conditions on the partnership, the think tank.
“The pro-competitive potential of the arrangement depends on Yahoo remaining in paid search,” Hawker, said in a statement. “The government cannot compel Yahoo to do this; though, the government can take a firm stand on legally enforceable requirements that will ensure that Yahoo has an incentive to continue to develop and deploy Panama, its search technology.”
Under the deal announced on June 12, Google would provide some of the ads for Yahoo’s search engine, making as much as $800 million annually for Yahoo. Yahoo states that it will dispense that money into improving its own search engine — in other words, partnering with Google to get more competitive with Google.
Google’s current market share of U.S. web search increased to 63 percent in August, while Yahoo dropped to 19.6 percent and Microsoft slipped to 8.3 percent, according to comScore Inc.
“Prohibiting Yahoo from using Google ads could result in Yahoo’s acquisition by Microsoft, which would effectively remove Yahoo from the market,” Hawker stated.
“With a U.S. market share approaching 70% to 80% depending on how the market is defined, Google would already be considered a near-monopolist under traditional antitrust standards, and the combined market share of Google and Yahoo would likely exceed 90%,” the report said. “The loss of an innovative competitor in the extraordinarily concentrated market would surely have anticompetitive effects for advertisers that would undoubtedly ripple into other online advertising markets to the detriment of content providers, advertisers and consumers generally.”
Yahoo has insisted ever since the deal was first announced in June that it intends to keep search as part of its core business. “We believe strongly that this agreement will strengthen Yahoo’s competitive position in online advertising and will help to drive a more robust, higher-quality Yahoo marketplace for our advertisers, publishers and users,” Yahoo spokesperson Tracy Schmaler said Wednesday.
Google and Yahoo have encountered a storm of criticism over the proposed deal, which would have Yahoo running advertising from Google alongside Yahoo search results. The planned partnership has also come under fire from major advertiser groups and has prompted the U.S. Department of Justice to hire a high-profile litigator to look into possible antitrust issues.
Google in recent days intensified its defense of the partnership as criticism mounted that it would result in Google having a monopolistic hold on online advertising. Google asserts that the deal would not result in huge advertising cost increases or lead to a monopolistic hold on the online search advertising market.
Thomas Weisel Partners managing director Christa Quarles expects the Justice Department to put limits on how often Yahoo will be allowed to run Google’s ads on Yahoo’s web properties. Yahoo’s revenue-sharing agreement gives the Internet portal flexibility on the number and the type of Google ads it can show. Quarles predicts that the Justice Department will not trust Yahoo enough to give it that much freedom.
“The DOJ will put some caps on how much Yahoo can move over to Google,” Quarles says in an interview.
Google and Yahoo hope to begin the partnership in October. The pair gave the Justice Department 3.5 months to review the agreement for antitrust concerns after striking a deal in June. Any restrictions on the deal that the government wanted could either be accepted by the companies or not, in which case the feds would have to decide whether to pursue court action. The department has reportedly hired Sanford Litvak, a top litigator, to head up any case.
Both Google and Yahoo insist that competition will get better as the tarnished Internet portal invests the additional money to improve its search ad system.
Quarles predicts that Yahoo will make far less than the $800 million the company says it can.
Finally, the government may want that the share of profits Yahoo receives from each click be constant and that the agreement does not give Yahoo a higher share of revenue for using more Google ads.
“If the Department of Justice decides to challenge the agreement in its current form, then it would be wise for Google and Yahoo to settle the case by accepting a consent decree along the lines suggested by AAI,” said Hawker. If a consent decree cannot be met, AAI said the government should seek an injunction to prevent the deal from going forward.
AAI thinks the government has a solid argument for such requirements. “Anytime you have a market with only three competitors and the two largest firms enter into an agreement to share resources, the government has a strong case,” Hawker said. “If Yahoo is sincere about its desire to become a more vigorous competitor, then it should welcome the creation of safeguards that will help prevent it from entering a death spiral where use of Google ads only saps Yahoo’s strength in advertising.”
That is not good news for investors who saw a buyout from Microsoft as a better alternative to the Google pact. In a June note to clients, Quarles wrote that Yahoo’s revenue opportunity for the first year will be between $313 million and $563 million. She speculates that Yahoo will outsource no more than 15% of its search ads to Google.
She says now that based on her market research and conversations with Yahoo insiders, the feds will likely limit the agreement in a way that keeps Yahoo’s take to her estimates.
At the Justice Department, Thomas Barnett, the assistant attorney general for antitrust declined to discuss the government’s assessment of the deal; “We are obviously looking at the issues and trying to work through them,” he told reporters.