Yahoo-Google Deal Draws Fire from Regulators, Competitors

Published November 1, 2008

A deal between Internet giants Yahoo and Google to join forces for some search advertising business has drawn attention from trustbusters in Washington, DC—and the ire of watchdogs who say the partnership is akin to a monopoly.

Under the terms of the deal, Yahoo will outsource some of its paid ads to Google. In practice, that means some of Google’s paid ads would appear on Yahoo’s search pages and the two companies would share the revenue. Yahoo executives say they expect to generate about $800 million from ads related to search-engine queries in the first year of the partnership.

Critics of the deal—including the Association of National Advertisers, World Association of Newspapers, and American Antitrust Institute—say the partnership would ultimately give Google too much power to set paid-for-click advertising rates. The groups are urging the U.S. Justice Department and Congress to halt the deal or amend it in ways they say will foster greater competition in Internet ad and search-engine markets.

At press time the Justice Department was examining the deal and had hired Sandy Litvack, head of the antitrust division in the Carter administration and former vice chairman of Disney, as a consultant.

Competition ‘Still Vibrant’

Yahoo and Google counter the critics by noting search engine advertising rates are not set by them, but rather are determined by the results of open auctions by advertisers. Yahoo, which controls about 20 percent of the online search market compared with Google’s 63 percent, insists the deal will strengthen its business and make the company more competitive in the long run.

Steven Titch, telecom policy analyst for the Los Angeles-based Reason Foundation, suggests the worries about the Yahoo/Google deal are overblown because market competition on the Web is still vibrant.

“Once again the Justice Department looks poised to slice business segments as narrowly as possible and then cry ‘Monopoly!'” Titch said. “While a Google-Yahoo partnership would give the two about 90 percent control of the search ad ‘inventory,’ search engines are not the only place to advertise on the Web. Besides, there is no evidence that Google has used its dominance as a search engine to illegally thwart or otherwise interfere with competition.

“In addition to Google, there are at least six other general English-language search engines, including newcomer Cuil, as well as several in other languages,” Titch said. “Add to that numerous specialized search engines for jobs, businesses, legal, and medical, and there is little case for [calling Google and Yahoo’s agreement a] monopoly.”

Seeking Government Protection

Cord Blomquist, director of new media at the Competitive Enterprise Institute in Washington, DC, agrees, saying the deal’s critics are not petitioning the government to help consumers but to protect their own outmoded business models.

“The Association of National Advertisers is taking a page out of a very old Washington playbook,” Blomquist said. “When you can’t beat them, sue them under antitrust law.

“The ANA is trying to define Google’s market narrowly in order to call them a monopoly, but then claiming Google hurts companies outside of that market,” Blomquist said. “This is an argument that contradicts itself and shows that the ANA is just another group trying to use antitrust law for its own benefit.”

The claims of excessive power are also contradicted by Google’s inability to drive up ad prices, Blomquist notes. “A company with control of an entire market, or nearly an entire market, could set whatever prices it wanted—it’d be immune from the forces of competition,” he said. “If this were the case with Google, we’d see skyrocketing online advertising rates, but rates have been more competitive than ever. That’s because the time people spend on search engines every day is minimal, amounting to only a handful of minutes.

“Google has successfully turned these few minutes a day into a machine that generates billions of dollars a year,” Blomquist said. “Yet despite its powerful position in the search market, competition from outside of search is forcing Google to keep its rates low.”

A ‘Buyers’ Market’

Critics argue the deal will allow Yahoo and Google to charge higher advertising rates, but Titch notes even if one grants that point, advertisers would still be getting great value for Web ads they purchase.

“It is certainly arguable that for years, Web advertising has been a ‘buyer’s market,'” Titch said. “Since audiences and responses were hard to measure and lead generation was hard to track, advertisers could all but name their price.

“In return for higher rates, Google is providing more value in the form of a larger audience combined with better, more reliable metrics,” Titch said. “If advertisers feel the asking price is too much, they can take their business elsewhere. There’s plenty of other Web media that will welcome it.”

Blomquist points out Google’s power on the Web is leveraged by countless small firms, even individual bloggers. If Google is weakened, those small enterprises will suffer.

“Google essentially takes on the role of a marketing department for these small sites through its advertising auctions, empowering even the smallest bloggers to make money writing online,” Blomquist said. “By attacking Google, the ANA threatens this model, one that is crucial to the little guys online.”

Web Is Changing

Blomquist says the fast-changing nature of the Internet would prevent any monopoly from emerging and hurting advertisers. In short, he said, the Google search engine model of ad revenue generation could quickly be eclipsed by new Internet business strategies.

“Facebook and MySpace hold their users’ attention for hours in some cases, offering advertisers great venues to reach key consumer demographics,” Blomquist said. “Popular news and entertainment sites bypass Google’s advertising auction system altogether by selling ads directly to advertisers.

“But the biggest competitive threat to Google comes from the growing online video industry,” Blomquist continued. “Americans spend several hours a day watching television; compare this to mere minutes of online searches. During an hour of watching television a consumer typically views 18 minutes of advertising. That’s one of the reasons why half of all advertising dollars are spent on TV ads. It’s simply the biggest thing going.

“As more video moves online, we’ll see the bulk of online advertising dollars move toward that content,” Blomquist added. “Google has brought us the online equivalent of a newspaper ad; soon others will bring the 30-second spot to our computer screens.”

Outflanking Google

Even though the company recently acquired YouTube, Google is “very vulnerable” to the coming future of video-driven Internet use, Bloomquist says, because bigger players in the traditional television fields are starting to make a move on the Web.

Blomquist pointed to, a Web site that offers free, ad-supported streaming video of television shows. Launched in 2007, Hulu quickly gained popularity—and deep-pocketed investors from the entertainment industry.

“With the backing of giant companies like NBC/GE/Universal, this video-viewing site has the potential to scoop up future billions in ad revenue,” Blomquist said.

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