Washington — Yahoo Inc., in an unprecedented consequence of event is back to square one, the search pioneer that has seen the light of hope by a proposed ad deal with Google following its successful — and highly controversial — resistance of a Microsoft takeover bid earlier this year, search giant Google Inc. on Wednesday finally ended the ad deal with Yahoo to avert “a protracted legal battle” with regulators.
Search engine giant Google Inc. on Wednesday announced that it will pull out of a joint search advertising partnership with Internet portal Yahoo Inc. after facing fierce criticisms from customers, rivals and the U.S. Department of Justice who saw the Google/Yahoo alliance as being resolutely anti-competitive and made it clear that it would seek to block the agreement in court.
Barely two days after both Google and Yahoo amended the agreement, the search-advertising marriage between the two has been called off because the DOJ said it would still have “denied costumers the benefits of competition.”
With the shocking circumstances a flurry of press releases from the two search-engine giants and the antitrust division of the Department of Justice made it clear that Google was not willing to go forward with the deal in the face of possible DOJ action. The whooshing sound you hear is $800 million in ad revenue disappearing from Yahoo’s bottom line.
According to a statement by David Drummond, Google’s senior vice president for corporate development and chief legal officer said the projected search ad deal announced earlier this year faced mounting pressure from the US Justice Department antitrust regulators.
“However, after four months of squabbling with advertisers and government regulators who voiced competitive and antitrust concerns about the deal, including discussions of various possible changes to the agreement, it becomes clear that government regulators and some advertisers continue to have concerns about the agreement,” Drummond said in a blog post that continuing the effort is not in the best interests of Google or its users.
“Pressing ahead risked not only a prolonged legal battle but also damage to relationships with valued partners,” noted Drummond in the post. “That would not be feasible in the long-term interests of Google or our users, so we have decided to end the agreement.”
Drummond added: “We feel that the agreement would have been good for publishers, advertisers and users — as well, of course, for Yahoo and Google.” “We are of course disappointed that this deal would not be moving ahead. But we are not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on.”
The U.S. Justice Department said on Wednesday it had informed Google that it plans to file a lawsuit to block the alliance, under which Google would have placed its more lucrative ads on Yahoo searches, claiming it would stifle competition in Internet search advertising by controlling up to 90 percent of the market.
“Had the companies carried out their arrangement, Yahoo’s competition likely would have been blunted immediately with respect to the search pages that Yahoo chose to fill with ads sold by Google rather than its own ads,” the government said.
Yahoo could lose more than USD 800 million in annual revenue from the Google advertising deal. Yahoo regretted Google’s decision, saying it was “disappointed that Google has elected to withdraw from the agreement rather than defend it in court.”
“The companies’ decision to discard their agreement removes the competitive concerns identified during our investigation and eliminates the need to file an enforcement action,” said Thomas Barnett, head of the department’s antitrust division.
“The arrangement likely would have denied consumers the benefits of competition — lower prices, better service and greater innovation.”
Even though the duo presented a modified plan, the Justice Department “determined that such modifications would not eliminate the competition concerns raised by the agreement,” according to the statement.
Shortly after the proposed “Goohoo” deal was announced in June, Google and Yahoo came under fire from large advertiser groups, who worried about a possible lack of competition and raise online advertising prices.
Moreover, Microsoft had applied full pressure against the partnership which Yahoo initially struck with Google as a way to fend off an unsolicited takeover bid from Microsoft.
“They did not want the Yahoo-Google deal to go through because they wanted to be in control of Yahoo’s assets instead of Google being in control,” said Youssef Squali, an analyst at Jefferies & Co.
“The DOJ apparently has finally woken up to the growing consolidation of control in the online advertising market,” said Jeff Chester, executive director of the Center for Digital Democracy, a group that has lobbied strenuously against the deal.
“Whoever controls or shapes the revenue structure for online advertising will have tremendous power determining how content is financially supported online,” Chester added. “Given Google’s tremendous growth over the last several years and its dominance in search, the proposed alliance with Yahoo threatened competition and diverse funding models.”
At the same time, the U.S. Department of Justice hired a high-profile litigator to look into whether the deal warranted an antitrust investigation.
Analyst Henry Blodget at Silicon Alley Insider said the end of the plan could put Microsoft back into the picture for Yahoo, even though officially the software giant has indicated it has abandoned its effort to buy Yahoo.
“Yahoo’s last little bit of leverage in a potential search deal with Microsoft just evaporated,” Blodget said.
“Yahoo investors are reacting favorably to the news (that the Google deal is off) as it might open the door to a possible deal with Microsoft, including a possible outright takeover of Yahoo,” said Frederic Ruffy, options strategist at New York-based Web site WhatsTrading.com.
“If Yahoo can get Microsoft back to the table to discuss a search deal, we expect the terms it gets will be significantly worse than the ones it passed on last summer. And that is if Microsoft comes back. Microsoft might just want to see if Yahoo just completely implodes,” Blodget said.
However, Yahoo denied rumors it was in talks to sell itself to Microsoft for between $17 and $19 a share but its shares were over 8 percent higher. “Not true” said Yahoo spokeswoman Tracy Schmaler, who also denied a rumor that Yahoo CEO Jerry Yang, was on his way out.
But Google’s unenthusiastic attempt to keep Yahoo out of Microsoft’s grips might have actually played in favor of the latter as Yahoo’s shareholders get angry at yet another formidable blow that will almost certainly bring their company’s valuation down.
Yahoo shares were up 8.5 percent to $14.49 in afternoon trading while Google was down 4.3 percent at $351.18. Microsoft was down 3.6 percent to $22.68. All three trade on Nasdaq.