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Google-Yahoo Deal Raises Antitrust Fears

By Peter Whoriskey
Washington Post Staff Writer
Saturday, June 14, 2008

Google, already the world's dominant Web company, keeps on growing.

But the announcement on Thursday that it has struck a deal to assume some of the business of its nearest competitor, Yahoo, has aroused questions about whether the company is on its way to becoming a monopoly for advertising in the new medium.

Yesterday, the heads of key subcommittees in the House and the Senate reiterated their intention to look into whether the Google-Yahoo arrangement would diminish competition.

Google is the runaway leader in Internet search advertising in the United States; Yahoo is a distant second.

Under the terms of the deal, Google would provide the ads for an undisclosed portion of Yahoo's search queries in the United States and Canada. Search advertising is the largest source of U.S. Internet advertising revenue.

The deal "is yet another example of the rapid changes in this market, and further underscores the need for close scrutiny," Rep. Bobby L. Rush (D-Ill.), chairman of the Commerce subcommittee on commerce, trade and consumer protection, said in a statement yesterday.

Sen. Herb Kohl (D-Wis.), chairman of the Judiciary Committee's antitrust panel, said his subcommittee would investigate the "competitive and privacy implications of this deal."

Although there are no requirements that the deal win government approval, lawyers for Google and Yahoo are working with the Justice Department to work out any concerns. They notified the Justice Department before they began testing the agreement earlier this year.

"Our sense is that by the end of the review, they'll be comfortable with the process," Kent Walker, Google's general counsel, said yesterday. "We do feel that it is a pro-competitive deal."

Among other things, Google has pointed out that competitors in other industries often cooperate on some efforts while maintaining a healthy competitive relationship. Moreover, it noted that the deal is not exclusive in that Yahoo could partner with another company to provide search advertising.

But a source familiar with the Senate subcommittee's views said some of those arguments are "right in theory, but wrong in practice."

The source spoke on condition of anonymity because the investigation is just beginning.

The analogies that Google makes to defend the deal involve deals in industries that aren't as dominated by one player as is the Internet advertising business in the United States, the source said.

"There is a lot at stake here," the source said. "If an advertiser wants to find an audience on the Internet, they have to go to Google."

The debate over the Google-Yahoo alliance takes place as Google, Yahoo and Microsoft struggle for advantage in the search advertising business, a key element for any company wanting to compete in the $40 billion Web advertising market.

Microsoft, the third-ranked search advertising player, is vehemently opposed to Google's alliance with Yahoo. The company had recently sought a similar advertising partnership with Yahoo, in which it would have invested $8 billion in the company.

Microsoft is expected to lobby against approval with the subcommittees and with the Justice Department.

State attorneys general might also be tempted to look into the arrangement, said a source close to Microsoft's thinking.

The source rejected the idea that Google was helping Yahoo "out of the goodness of its heart."

"If the effect of an arrangement is to make the number one more dominant and make the number two more dependent on that dominant [company], then that's bad for competition," said the source, who spoke on condition of anonymity because of the sensitive nature of the Yahoo negotiations.

In a statement Friday, Microsoft said: "Our position has been clear since April that any deal between these two companies will increase prices for advertisers and start to consolidate more than 90 percent of the search advertising market in Google's hands. Legal and industry experts agree that this would clearly make the market less competitive."

David Balto, an antitrust lawyer who was policy director at the Federal Trade Commission during the Clinton administration, said that regulators must struggle with the essential question of whether Yahoo will have an incentive to continue to compete under the deal.

Google says the deal would yield enough money for Yahoo to make it a stronger competitor.

But Microsoft says that the deal would strengthen Google while rendering one of its few remaining U.S. competitors dependent.

"From the perspective of the regulators, it's important to make sure that you have Yahoo as an independent competitor," Balto said.

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