Executives from Silicon Valley to Madison Avenue are keeping a wary eye on the Justice Department this week as it nears a decision on whether to try to block an Internet advertising partnership between Google and Yahoo.
WASHINGTON — Executives from Silicon Valley to Madison Avenue are keeping a wary eye on the Justice Department this week as it nears a decision on whether to try to block an Internet advertising partnership between Google and Yahoo.
After months of studying the arrangement, government antitrust attorneys could move any day to sue — or they could abandon a potential court challenge and allow the partnership to proceed.
Under the deal’s terms, Google will sell some of the online advertisements displayed alongside search results on Yahoo’s site. Yahoo entered the partnership in June after rebuffing a $47.5 billion takeover offer from Microsoft, sparking a shareholder backlash.
With the Justice Department investigation shrouded in secrecy, it’s unclear when a decision could come. But after Google and Yahoo agreed this month to a “brief delay” in launching their deal to allow the government to complete its probe — and perhaps to try to reach a settlement — many observers expect an announcement by midweek.
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The stakes are high. The Justice Department investigation has pitted Google and Yahoo against not only their archrival Microsoft but also many of the advertisers that are their primary sources of revenue.
In a letter to Justice Department officials last month, the Association of National Advertisers warned that the Google/Yahoo partnership would leave advertisers with fewer options for placing online ads, raise the cost of online advertising and further cement Google’s control over search advertising.
The association represents such large companies as Kellogg, Johnson & Johnson, American Express, Walt Disney Co., Kraft Foods and McDonald’s.
For their part, Google and Yahoo argue the deal will benefit both advertisers and consumers by delivering more targeted and more relevant ads.
They also maintain that because Google’s system to identify and display ads is more lucrative than Yahoo’s approach, the deal will generate more revenue for Yahoo, making it a stronger rival to both Google and Microsoft.
When it announced the deal, Yahoo projected the agreement would increase its operating-cash flow by $250 million to $450 million in the first year.
The Justice Department’s review could play out in one of several ways for Google and Yahoo.
If the department doesn’t make its intent clear soon, the two companies could simply move ahead with their partnership and wait to see whether the government acts.
While a court case would be unpleasant, there is no guarantee a lawsuit would succeed, leading some to speculate the Justice Department may be bluffing in threatening to sue.
If the department does sue, Google and Yahoo could fight or walk away from the deal.
Or to play safe, the companies could offer concessions — limiting the volume of ads subject to the agreement, for instance — to head off a possible lawsuit.
Still, that approach risks exposing Google to accusations the partnership would have in fact crossed the line into anticompetitive behavior.
Many in the industry doubt the two sides can agree on concessions that would enable the deal to pass antitrust muster, still make the partnership worthwhile for Google and Yahoo and not taint the companies.
Melissa Maxman, head of the antitrust-practice group at Baker & Hostetler, said government attorneys must answer critical questions in determining whether to intervene.
Those include: How much market share does each party have? Would the agreement further concentrate the market? How would the deal affect consumers, competitors and other players, such as advertisers, in this case?
The challenge, Maxman noted, is applying standard antitrust measures to a deal like this. For example, the department will often measure market share geographically, but Internet companies have a global reach.
And precisely delineating “product” market share is hard to do in online advertising.
Microsoft, for one, argues the deal should be blocked because Google already controls more than 70 percent of the market for search-related advertising. If it teams with Yahoo, which controls as much as 20 percent, the two could together have a 90 percent share, Microsoft has warned.
The nature of the Internet ad business also complicates things. Both Google and Yahoo use auctions to sell the ads that run alongside search results on their sites. The companies maintain that even if they partner, the marketplace will still determine prices through separate auctions.
The Association of National Advertisers is unconvinced. In its letter to the Justice Department, the group warned that the agreement will effectively drive up prices for ads sold through Yahoo’s auctions since Yahoo will have access to ads sold by Google at a higher price.
Ultimately the battle over the Google/Yahoo partnership is about more than just the online-ad business.
It’s about the survival of Yahoo as an independent company and whether Microsoft or Google has more of a say in the future of the Internet and computing.
That war extends far beyond Washington, D.C., and the tug-of-war over Yahoo. But for now, the Justice Department could help shape the outcome.