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Yahoo, Google To Partner on Advertising
Talks With Microsoft Fail

By Peter Whoriskey
Washington Post Staff Writer
Friday, June 13, 2008

Google and Yahoo, two of the Web's most dominant companies, announced a partnership yesterday that could significantly alter the multibillion-dollar race for Internet advertising.

Under the terms of the deal, Yahoo will run ads sold by Google alongside some of its search results and on its other Web sites in the United States and Canada.

The agreement is a blow to Microsoft, which earlier this year had sought to acquire Yahoo or parts of it to help it compete with Google, which has been the runaway winner in the competition for online ads.

The three companies have been engaged in a fierce competition for the world's online advertising, estimated to be a $40 billion market -- and growing fast.

The Google-Yahoo agreement, which essentially unites the most- and second-most-popular search engines in the world, is expected to draw close scrutiny from regulators, who will ask whether the arrangement damages competition. The ads sold by search engines are the biggest source of online advertising in the United States.

Yahoo and Google agreed to delay implementation for up to 3 1/2 months to give the Department of Justice time to review the arrangement, said officials with the companies.

Google and Yahoo argue that the deal would increase competition because it would strengthen Yahoo enough to keep Microsoft from acquiring it. "This kind of arrangement is commonplace in many industries, and it doesn't foreclose robust competition," Omid Kordestani, Google's senior vice president of global sales and business development, wrote in a blog post. "Toyota sells its hybrid technology to General Motors, even though they are the number one and number two car manufacturers globally. Canon provides laser printer engines for HP, despite also competing in the broader laser printer market."

But Microsoft, other competitors and some advertisers fear that the deal would give Google too much control of the advertising market. They will lobby regulators to withhold their approval of the deal.

"This will impose a huge price increase on advertisers and start to move Google close to 90 percent of paid search advertising in the U.S.," said a source familiar with Microsoft's position who spoke on condition of anonymity because of the sensitive nature of the negotiations. "Ultimately, The Washington Post and every other part of the media is dependent on the competition for online advertising, and if one company ends up with 90 percent of the market, we're going to see competition die."

The idea of a partnership in which Yahoo would run Google ads had been broached before, but Yahoo executives opined as recently as January that such a partnership did not fit their long-term strategy.

The arrangement could lead to an "effective monopoly" in search, according to an internal Yahoo Q&A, which was cited in a lawsuit filed by Yahoo investors.

Now, however, the company believes it will pass muster with regulators.

Sen. Herb Kohl (D-Wis.), chairman of the Senate Antitrust Subcommittee, said his panel will scrutinize the proposal.

"This collaboration between two technology giants and direct competitors . . . raises important competition concerns," he said in a statement. "The consequences for advertisers and consumers could be far-reaching and warrant careful review."

Under the agreement, Yahoo would be able to use Google's advertising technology on as many or as few of its search results and content pages as it chooses. Yahoo chief executive Jerry Yang said the company could expect to increase cash flow by $250 million to $450 million annually.

The agreement has a term of up to 10 years: a four-year initial term and two three-year renewals at Yahoo's option. Under the deal, the companies would also enable their instant-messaging systems to work with each other.

The announcement of the Google-Yahoo partnership followed by just a few hours the news that negotiations between Yahoo and Microsoft had ended. The Microsoft-Yahoo negotiations fell apart over the weekend, according to Yahoo.

"Microsoft representatives stated unequivocally that Microsoft is not interested in pursuing an acquisition of all of Yahoo!, even at the price range it had previously suggested," Yahoo said in an announcement.

Microsoft had earlier offered to buy Yahoo for $33 a share.

More recently, the two sides had also discussed the possibility of Microsoft buying Yahoo's search-engine business. That would have allowed Microsoft to gain market share against Google. But those negotiations are now also over.

"Yahoo!'s Board of Directors has determined, after careful evaluation, that such a transaction . . . would leave the company without an independent search business that it views as critical to its strategic future," the Yahoo announcement said.

There was no immediate comment from Carl C. Icahn, the billionaire investor who has launched a proxy fight at Yahoo in hopes of forcing the company to accept a buyout offer from Microsoft.

Microsoft issued a statement saying that since it withdrew its bid for Yahoo, "the two companies have continued to discuss an alternative transaction that Microsoft believes would have delivered in excess of $33 per share to the Yahoo! shareholders."

Microsoft said it was no longer interested in acquiring all of Yahoo. But it said it was still open to an "alternative transaction" -- presumably the acquisition of Yahoo's search-engine and advertising units.

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