Fearing Regulators, Google Abandons Yahoo Deal

Published December 1, 2008

Deciding it was not worth the time and effort to fight government regulators, Web search giant Google pulled out of a proposed partnership with Yahoo to share search advertisement revenue.

The deal fell apart in November when it became clear the U.S. Department of Justice was going to sue to stop the deal on antitrust grounds, according to David Drummond, senior vice president for corporate development and chief legal officer for Google.

The Justice Department argued the revenue-sharing plan between Google and Yahoo would give Google too much power in the search-ad market—revenue generated from the advertisements that appear on Web sites when users enter words into search engines.

The collapse of the deal came at a bad time for struggling Yahoo. The Sunnyvale, California-based company’s stock has dropped from about $30 a share in mid-2008 to about $14 when the Google partnership fell though.

“Killing off this deal may represent a pretty big blow to Yahoo’s chances of moving forward as an independent concern,” said Michael Masnick, technology expert and founder of the influential Techdirt blog. “The company was very much relying on the Google deal to stabilize its financial condition. Without that, Yahoo is in trouble. Considering the Justice Department wanted more competition rather than less, it’s unfortunate that its misguided decision is effectively killing off one of the competitors.”

Misunderstanding Internet Competition

Cord Blomquist, a technology policy analyst for the Competitive Enterprise Institute, said the government should have realized how farming some of Yahoo’s search-ad business to Google would have allowed Yahoo to compete better with Google in other key areas.

“Yahoo knows it’s not going to be a leader in search anytime soon, but it’s a leader in many content areas,” Blomquist said. “Its Yahoo Mail service alone has over a quarter of a billion users, dwarfing Google’s Gmail.

“Once again, in trying to maintain some conception of what competition has been, antitrust regulators have prevented the competition of the future from forming as quickly as might have,” Blomquist added.

Government Power Won

The government killed the deal, experts say, because it doesn’t understand that the dynamics at play in the Internet industry are different from those in traditional bricks-and-mortar businesses.

“Allowing these two companies to enjoy the benefits they perceived from combining their resources would have made them both better off and acted as a spur to others—competition that would have produced new innovation for consumers to enjoy,” said Jim Harper, director of information policy studies at the Cato Institute. “But the dead hand of government power has won out.”

No Monopolies Online

Masnick said federal regulators looked at “exactly the wrong issues in determining what is a monopoly” in this case.

“[The government] is defining monopoly based on market percentage rather than on the potential harm, if any, to the market—as well as whether or not there are any barriers to entry from competitors,” Masnick said “As we’ve seen time and time again in the technology world, there are very few barriers to entry, no matter how big [the existing players are].

“Digital Equipment Corp was a dominant player. IBM was a dominant player. Others came in and took their market away by being more nimble and by being ahead of the curve,” Masnick continued. “I have no doubt that someone just starting out will tackle a problem in a totally new way, and take a market away from Google.”

James G. Lakely ([email protected]) is managing editor of Infotech & Telecom News.