Yahoo, Google To Partner on Advertising

Talks With Microsoft Fail

By Peter Whoriskey
Washington Post Staff Writer
Friday, June 13, 2008; Page D01

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.

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