Yahoo says DOJ threat scuttled Google deal

Contends that the Internet firms could have defended the proposal in the courts

A U.S. Department of Justice plan to block Google Inc.'s proposed advertising deal with Yahoo Inc. led to the dissolving of the plan today, according to Yahoo.

Google had pointed to continued concerns among U.S. regulators and Internet advertisers in its announcement earlier today, but it did not say that the DOJ was planning to block the deal. The deal would have lead to a "lengthy legal battle," Google said.

The deal, first announced in June, would have allowed Yahoo to run Google advertising on its search pages, and Yahoo had said projected that it would add $800 million to its annual revenue.

Yahoo, in a statement, expressed disappointment that Google backed out of the deal. "Yahoo continues to believe in the benefits of the agreement and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court," the company said. "Google notified Yahoo of its refusal to move forward with implementation of the agreement following indication from the Department of Justice that it would seek to block it, despite Yahoo's proposed revisions to address the DOJ's concerns."

In a post on Google's public-policy blog earlier today, David Drummond, the company's senior vice president and chief legal officer, said that the controversy over the proposed deal had become a distraction top the firm.

"After four months of review, including discussions of various possible changes to the agreement, it's clear that government regulators and some advertisers continue to have concerns about the agreement," Drummond said. "Pressing ahead risked not only a protracted legal battle, but also damage to relationships with valued partners. That wouldn't have been in the long-term interests of Google or our users, so we have decided to end the agreement."

Drummond said that Google is also disappointed that it had to kill the proposal, but added that "we're 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."

Google and Yahoo had voluntarily disclosed the deal's details to the DOJ, but the agency had yet to approve the proposal. Groups of Web advertisers had expressed concerns that the deal would lead to fewer options for Internet advertising and higher advertising rates. Google rival Microsoft Corp. also lobbied hard against the deal.

The DOJ said the decision to call off the deal preserves competition in search advertising. "The companies' decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action," said Thomas Barnett, assistant attorney general in charge of the Justice Department's antitrust division, in a statement. "The arrangement likely would have denied consumers the benefits of competition -- lower prices, better service and greater innovation."

The deal as proposed would likely have significantly reduced competition in the Internet search advertising and search syndication markets, the DOJ said in a statement. "Yahoo is by far Google's most significant competitor in both markets, with combined market shares of 90% and 95% in the search advertising and search syndication markets, respectively," it said. "Yahoo provides an alternative to Google for many advertisers and syndication partners, and Yahoo recently had begun making significant investments in order to compete more effectively against Google."

The proposed ad deal was an attempt by Google to prevent Microsoft from buying Yahoo. Microsoft made several hostile offers to acquire Yahoo earlier this year.

Google and Yahoo contended that the deal would not reduce competition in Web advertising, noting that the deal did not require that Yahoo run the Google advertisements. Yahoo's search results would remain independent of Google's, and ad prices would be set through online auctions, the companies said.

Drummond contended that the deal would have offered positive options for publishers, advertisers and Internet users "because it would have allowed Yahoo -- and its existing publisher partners -- to show more relevant ads for queries that currently generate few or no advertisements. Better ads are more useful for users, more efficient for advertisers and more valuable for publishers."

Yahoo will move forward with its business plans, the company said. "This deal was incremental to Yahoo's product road map and does not change Yahoo's commitment to innovation and growth in search. The fundamental building blocks of a stronger Yahoo in both sponsored and algorithmic search were put in place independent of the agreement."

Jeffrey Chester, executive director of the Center for Digital Democracy, a group focused on rights for Internet users, said he was happy to see the deal collapse.

"We are pleased that Google finally understood that the proposed alliance with its leading competitor threatened competition. Much is at stake over the competitive landscape for online advertising," he said in an e-mail. "For too long, policymakers and regulators have failed to address the growing consolidation of control in the online advertising market. Today's announcement in its own way underscores what we have been telling officials: that a very tiny handful of global digital giants -- particularly Google -- is increasingly dominating the most prevalent way online publishing is financially supported."

Copyright © 2008 IDG Communications, Inc.

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