By Peter Whoriskey and Frank Ahrens
Washington Post Staff Writers
Thursday, April 10, 2008
The competition for Yahoo heated up last night, as the Internet portal became the prize in a sudden and furious flurry of dealmaking among the world's largest media and Internet titans.
Yahoo, meanwhile, is working out a complicated deal to acquire most of AOL from Time Warner, the world's second-largest media company, in a move that would create the Internet's largest portal, according to a source close to those talks.
Both sources spoke on the condition of anonymity because the negotiations are private. None of the companies would comment on the deals.
The escalation comes as Yahoo is fighting to maintain its independence and resist Microsoft's offer, originally made about two months ago and now worth $42 billion. Yahoo, which has called the bid undervalued, has been under increasing pressure from shareholders to present an alternative proposal.
The global media giants are jockeying against one another in a high-stakes race to seize control of Internet advertising, which is growing at a 20 percent yearly clip.
Although Yahoo claims the most users on the Internet, it has been unable to turn that traffic into money, opening the door to a potential buyer and attracting Microsoft, which would like to challenge Google for a bigger piece of search-based advertising revenue.
Under the terms of the possible Time Warner deal, the AOL unit would become part of Yahoo. In exchange for AOL and an undisclosed sum, Time Warner would receive a 20 percent stake in the enlarged company, said the source, who cautioned that the terms were not final and that the deal could founder.
In the unlikely event that both deals close, News Corp. and Microsoft would control Yahoo, MSN, MySpace and AOL, a colossal and unrivaled combination that would reach nearly every corner of the Internet and nearly every user.
Yahoo also announced yesterday that it would run a limited test of Google's search-based advertising, beginning this week. Search queries entered by Yahoo users will return results generated by Yahoo as before, but the ads running alongside the results will be provided by Google.
"Yahoo's board of directors is exploring strategic alternatives to maximize stockholder value, including exploration of potential commercial arrangements," the company said in announcing the Google test.
The experiment is expected to last up to two weeks and will be limited to no more than 3 percent of Yahoo search queries, the statement said.
Google's expertise in serving ads with its own search results is the source of its riches, and its agreement with Yahoo, if expanded, could improve Yahoo's lagging financial performance. Yahoo will receive a share of the revenue generated from the ads. Google already provides a similar service for the search engine Ask.com.
The possibility of a broader partnership between Google and Yahoo, meanwhile, immediately provoked skepticism from those who say that such an agreement would run afoul of antitrust laws.
If the arrangement is expanded so that Google provides ads to all of Yahoo's search queries, it would give Google control of as much as 84 percent of the search on the Internet, according to Compete, a market-research firm. By some measures, search ads are the largest single type of online advertising.
"Antitrust authorities would be quite skeptical," said former FTC commissioner Christine Varney, especially if regulators view search advertising as one market.
"Following closely on the heels of Google's acquisition of DoubleClick, this Google-Yahoo alliance would represent even further consolidation in the Internet advertising market," said Sen. Herb Kohl (D-Wis.), chairman of the Senate Judiciary Committee's subcommittee on antitrust, competition policy and consumer rights. "We must ensure that this consolidation does not foreclose needed competition or harm consumers."