Searching for Dollars

The Justice Department rightly opposed a Google-Yahoo deal.

IN THE WORLD of business and antitrust law, big is not necessarily bad or illegal. But alarm bells went off when Google and Yahoo, the top two players in the search advertising market, decided to join forces. The Justice Department was right to challenge that proposal, which the companies have since withdrawn. An inadvertent beneficiary: Microsoft, and not just for the obvious reasons. A possible casualty: Yahoo CEO Jerry Yang.

Google and Yahoo crafted a revenue-sharing deal that would have allowed Yahoo to run on its own Web site ads sold through Google. The deal was touted as a means for Yahoo to bring in hundreds of millions of dollars a year in needed cash. For Google, there may have been no better incentive for the deal than keeping Yahoo beyond the clutches of Microsoft; earlier this year, Mr. Yang rebuffed a Microsoft takeover bid.

But there was cause for concern from the beginning. Google claims roughly 70 percent of the search ad market, with Yahoo in second place with about 20 percent and Microsoft far behind, at 8 percent. (The Washington Post Co. does business with all three companies; Melinda Gates, wife of Microsoft founder Bill Gates, is a member of The Post's board of directors.)

In what is essentially an ongoing online auction, advertisers bid for the right to a particular search term on a particular search engine; the bidder offering to pay the search engine the most per user click gets its ad placed alongside free search results. Yahoo's technology is competitive with Google's in placing "head" searches -- ads linked to one-word searches, such as "shoes." Because of Google's superior technology, though, Yahoo lags way behind in placing ads linked to "tail" searches -- or those that contain multiple terms, such as "pink running shoes Miami." These are the kinds of ads Yahoo was most likely to pick up through the revenue-sharing agreement. And therein lies the problem.

The Justice Department worried that the arrangement would prove so profitable for Yahoo that it would abandon "tail" searches altogether; even if it did not, the company would have had little incentive to further develop its technology for such searches. As outgoing antitrust chief Thomas O. Barnett noted in a news release this month, the deal risked turning the companies into "collaborators rather than competitors." Justice was right to be concerned -- as were legions of advertisers that rely on the search engines and that would almost certainly have faced higher prices.

In the end, Microsoft may turn out to be the big winner. In the spring, the company offered $33 a share to buy Yahoo, then trading at roughly $28 a share. Yahoo's common stock closed Monday at under $11 a share. Mr. Yang, who announced last night that he will step down as soon a successor can be found, had been quoted in news reports saying that a Microsoft deal might now make sense. Google's failed effort to keep Microsoft from acquiring Yahoo may have made it easier and cheaper for the software giant to do just that.