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Google Scuttles Ad Deal with Yahoo
Justice Department Says a Partnership Would Probably Stifle Competition

By Kim Hart and Peter Whoriskey
Washington Post Staff Writers
Thursday, November 6, 2008

Google pulled out of a proposed advertising partnership with Yahoo yesterday after the Justice Department signaled it would oppose the deal because it could help the dominant Web company become a monopoly.

The forced abandonment of the deal represents an embarrassing setback for Google. It also damages the comeback hopes of Yahoo, which saw the deal as a way to boost revenue after rejecting Microsoft's takeover bid this year.

The Justice Department said an agreement between Google and Yahoo would probably harm competition for Internet search advertising.

Under the deal proposed in June, Google would have provided advertising for some Yahoo searches in the United States and Canada. The companies would have shared the advertising revenue, with Yahoo estimated to receive as much as $800 million annually from the agreement.

Google runs the dominant search engine, while Yahoo's and Microsoft's search efforts run a distant second and third. Microsoft, as well as some advertisers and consumer advocates, protested the partnership, saying it would let Google control a majority of online advertising and could lead to higher prices for advertisers.

"It's clear that government regulators and some advertisers continue to have concerns about the agreement," David Drummond, Google's chief legal officer, said on a company blog.

"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."

The decision represents a stark turnaround for Google, whose executives dismissed any possible antitrust problems.

But in July, the Justice Department issued "civil investigative demands" for information from the companies involved, a sign that a formal investigation had opened.

At the same time, several states announced that they were reviewing the deal.

"The arrangement likely would have denied consumers the benefits of competition -- lower prices, better service and greater innovation," said Thomas O. Barnett, assistant attorney general in charge of the department's antitrust division.

Google had argued that while it dominates search advertising, it does not dominate all online advertising.

But the Justice Department concluded that Google is the largest provider of both Internet search advertising and Internet search syndication, with shares of more than 70 percent in both markets.

"Yahoo! is by far Google's most significant competitor in both markets, with combined market shares of 90 percent and 95 percent in the search advertising and search syndication markets, respectively," the department said in a statement.

Microsoft, which has said it is no longer interested in acquiring Yahoo, fought hard to prevent the partnership between its two top competitors.

Microsoft General Counsel Brad Smith said the decision is "significant for advertisers, publishers and consumers, who voiced overwhelming concern about this illegal deal to law enforcement and policymakers."

Bob Liodice, chief executive of the Association of National Advertisers, said the partnership would have given Google too much influence over the online advertising market.

"It was truly a negative for the marketing community, and it represented a concentration of power that we found unacceptable," he said.

In an effort to address concerns, Yahoo had proposed an amended agreement that would have limited the length of the deal and the number of search ads Yahoo could outsource to Google.

The last-minute changes did not save the deal, and Yahoo played down the effect of Google's withdrawal on its strategy.

In an e-mail to employees yesterday, Yahoo President Susan Decker said she was "disappointed" that Google ended the agreement instead of defending it in court.

Still, she said the deal was "just one of many efforts that we have underway to accelerate our strategy."

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