Google and Yahoo fight with the feds
Yahoo’s ad alliance with Google seems like a great deal to Messrs. Brin, Page, and Yang. Now they just have to win over the Justice Department.
Google and Yahoo had hoped to have it all up and running by now. As you may recall, the two Internet giants announced an alliance last June in which Google would supply Yahoo with search ads to supplement Yahoo’s own. Google would get a big new customer for its ad-delivery service, while Yahoo would get a new source of revenue – and best of all, they’d keep Microsoft from swallowing Yahoo.
Then Washington got in the way. Due to pushback from antitrust regulators, in early October, Google (GOOG) and Yahoo (YHOO) put off the launch to give the Justice Department more time to chew on it. In September, Justice reportedly hired veteran antitrust litigator (and former Walt Disney vice chairman) Sandy Litvack to help review the deal, and soon thereafter Canadian authorities hired an outside lawyer too. The European Union is also taking a hard look.
What’s the hang-up? Well, there are three basic concerns about just what this alliance really amounts to. First, if it had been a merger between Google, with 70% share in the paid-search market, and Yahoo, with the next 20%, it would clearly violate antitrust laws by creating a monopoly. (Paid-search ads are the ones that show up near the top of a search-result screen or off to the side, under the rubric “sponsored links.”) Second, if Google were paying Yahoo to exit the paid-search arena, that would be an illegal agreement between competitors to allocate markets. Third, if Google and Yahoo were agreeing to set a price floor for the two companies’ paid-search offerings, that would be illegal price-fixing.
The actual deal being proposed looks something like a slow-motion version of the first two scenarios, and it might constitute an immediate realization of the third.
Google and Yahoo have tried to placate skeptics with a raft of reassurances: They’re not merging; Yahoo will continue to compete in paid searches; ad prices will continue to be set by auction, with each company’s auctions operating independently; Yahoo will only run Google ads to the extent it chooses; and Yahoo is still free to display ads from other paid-search providers, including third-place Microsoft (MSFT).
Not everyone is convinced, though – notably advertisers. The Association of National Advertisers (ANA), the Association of Canadian Advertisers, and the World Federation of Advertisers have all written regulators to voice opposition. In the letter from the ANA – a 375-company association with a board that includes members from Wal-Mart, Sears, and McDonald’s – CEO Bob Liodice writes that his group “is aware of only one advertiser/marketer that does not object to the Google-Yahoo collaboration.” (Liodice wouldn’t identify the exception.)
MICROSOFT GETS SUSPICIOUS
One big problem for Yahoo may be an astounding comment allegedly made by its own CEO, Jerry Yang, during negotiations with Microsoft in a San Jose airplane hangar on June 8, just three days before the Google-Yahoo pact was unveiled. (Google offered Yahoo the ad deal in an apparent effort to keep it out of the hands of Microsoft, which had offered to buy Yahoo at a 75% stock premium.)
According to testimony that Microsoft general counsel Brad Smith later gave to the Senate Judiciary Committee, Yang peered across a conference table and said, “Look, the search market today is basically a bipolar market…. On one pole, there’s Google, and on the other pole, there are Yahoo and Microsoft…. If we do this deal with Google, Yahoo will become part of Google’s pole.” Smith and his Microsoft colleagues were dumbstruck. Smith testified that during a break a few minutes after Yang’s comment, Microsoft CEO Steve Ballmer cracked, “[Yang] said there’s only going to be one pole in the market. I guess that would be a ‘mono-pole,’ wouldn’t it?”
When stunned Senators demanded that Yahoo general counsel Michael Callahan, who had also been present at the June 8 meeting, give his account of what Yang had said, Callahan repeatedly refused until, when pressed, he finally said, “I don’t recall that comment.”
Even putting aside the disputed remark, there are plenty of reasons to be skeptical about those reassurances from Yahoo and Google. For example, consider Yahoo’s claim that the deal will enable it to compete harder in the search business. The company has told shareholders that it hopes to make $800 million a year from its pact with Google – money that, as Yahoo president Sue Decker has written on a company blog, will be plowed back into R&D “to help us become a stronger competitor in all aspects of online advertising,” including paid searches. Yahoo has an incentive to do so, the company says, because it keeps all the revenue from its own ads but only a portion from Google’s.
Hmm. What portion will Yahoo keep when it uses a Google ad? That’s not public. But according to a lawyer close to the Google-Yahoo camp, Google’s ad deals with web publishers large and small-from the New York Times website to GPSworld.com -typically leave the publisher with “the lion’s share” of the revenue. Accordingly, when Yahoo runs an ad delivered by Google, we’re probably not talking about a 50-50 split; it’s more like 90-10, with 90% staying with Yahoo. So if Yahoo can make 90% of what Google’s superior mousetrap currently yields while incurring no research expenditures, how great is its incentive to keep dumping hundreds of millions into R&D for its own clunkier mousetrap? Plus, if Google really thought the deal would help Yahoo build a more competitive paid-search program, would Google be doing the deal? Concern about the deal’s sapping Yahoo’s long-term incentive to compete is presumably a key factor spurring EU regulators to nose around, notwithstanding its ostensible geographical limitation to the U.S. and Canada.
THE PRICE PROBLEM
Then there’s the price-fixing issue. Nobody’s price fixing, Google and Yahoo insist, because ad prices will continue to be set by separate auctions. That’s true. But part of the idea with this alliance is to replace some Yahoo ads on Yahoo search screens with Google ads, when the Google ads will fetch more revenue. Here is an oversimplified hypothetical example: Suppose you’re an auto parts dealer trying to drum up some business with search ads. You bid for the query “spark plugs Dallas Texas” on both the Yahoo auction and the Google auction-and learn that the going rates on Yahoo and Google, respectively, are $0.80 per click and $1.20 per click. Google reaches more users – hence the higher bids – but you decide to go for the $0.80 ad on Yahoo.
Guess what? You’ll need to pay the $1.20 anyway. Why? Remember that with the Google alliance, Yahoo now has the choice of going with ads delivered through its own system or through Google’s. Yahoo, of course, is going to run the ad that makes the most money – the ad from Google. In fact, Yahoo would never run its own ads if they were priced more cheaply than an available, comparable Google ad. In that sense the Google ad prices, though set by auction, would effectively set a floor for the prices of comparable ads displayed on Yahoo. Price floors constitute illegal price fixing.
Yahoo and Google respond that Yahoo won’t have the real-time pricing information about Google’s ads it would need to make instantaneous price comparisons to Yahoo ads. Still, Yahoo obviously thinks it has some way to compare the relative prices of Google and Yahoo ads – how else will it know when to replace a Yahoo ad with a Google ad?
Which is not to say that the search giants’ formidable teams of lawyers won’t eventually win Justice’s blessing for the deal. Clearly, though, those lawyers still have some serious work to do.
[CLARIFICATION: A spokesperson for Yahoo says that the way I've described the "$800 million" annual revenue figure above is inaccurate. To be clear, what Yahoo said in its announcement and SEC filing was this: "Yahoo! believes that this agreement will enable the Company to better monetize Yahoo!'s search inventory in the United States and Canada. At current monetization rates, this is an approximately $800 million annual revenue opportunity. In the first 12 months following implementation, Yahoo! expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow." What Yahoo president Sue Decker said during the June 12 teleconference call was this: "In the first 12 months following implementation, we expect this agreement to generate $250 million to $450 million in incremental operating cash flow. Over the longer term, Yahoo! believes this agreement enables the company to better monetize Yahoo!'s search inventory. At the current monetization rate, we believe there is an approximate $800 million in annual revenue opportunity in the U.S. and Canada on those queries where monetization upside exists. This revenue opportunity could be achieved either from this arrangement with Google, which includes both search and nonsearch elements, or from other enhancements to our search capability, or a combination of them." -- RHP]
I agree with Rob – likely a monopoly but the consequences probably low. A better product will eventually mitigate the effects of a monopoly in an age of transparent pricing. Witness the rise of firefox or the ironic reconstitution of the baby bells or the mergers of oil companies. I hold out hope for Apple in pcs. Whoever pays the bills to Yahoo or Google will find the best deal between them somehow.
What a funny coincidence: Yahoo-Google deal would create alliance with 90% market share, which is the same as Microsoft’s share in the OS market.
So, in order to be consistent, DOJ would have to approve the deal because obviously it’s not willing to do anything about MS’s monopoly.
Should be interesting to see how this unfolds. I personally believe that this whole Yahoo-Google deal was nothing more than a stunt to counter Microsoft. The funny thing is, I don’t believe Microsoft ever really intended to buy Yahoo, but to get Yahoo stuck in this situation they are in to give MS some breathing room. I think it was a brilliant ploy. And gauging Yahoo’s stock price and the pressure Yang is under to deliver, we can probably expect a change in CEO’s after a couple of more quarters.
Is it a Monopoly? Probably. Does it matter? I don’t think so. Our justice department needs to protect American interests and stop tearing down successful companies. This whole thing is predicated on what Yahoo and Google might do wrong. Why not wait until there has been clear proof of abuse?
Google would be nothing more than a fat money sucking monster if this is allowed… http://trashgoogle.com/
Anyone who thinks creating a powerful alternative to Windows will magically break the MS monopoly knows NOTHING about the consumer software industry.
There are already better options than Windows, but without the widespread support from software developers a “better” OS means nothing.
And it’s important to note that developers go where the money is, so it’s a chicken-in-the-egg situation. MS is entrenched and can hold on to their marketshare regardless of quality.
Why are people even mentioning the “loss of control over their computer” in regards to their PC? Microsoft is the only non-proprietary computer/software manufacturer. Try making an add-on program or altering software for a Mac and see how far you get…
Also, Microsoft’s “monopoly” wouldn’t even exist if people didn’t like what they were getting. Previous comments state that they can change their OS whenever they want, and this is entirely correct. Microsoft’s monopoly is completely irrelevant to the current situation.
Nonetheless, I do not think that this deal should go through with Google and Yahoo!. I agree with the statement that PPC is a rip off.
Who cares, Pay Per Click advertsing stinks anyway. Full of fraud and creates only scarce returns, under the best of circumstances. Google, Yahoo and Microsoft are earning millions and billions on the hopes and dreams of green-horn advertisers (website owners) who think they will see huge returns from PPC. Only less-than-ethical and illegal business models gain from PPC advertising. The rest loose money. Anyone with a normal business model is a fool to use PPC.
i hope this deal goes down in flames – as it should. pathetic.
Hey Ed.S So now its because Google is large and dominating its because its what they’re good at, but at the same time while Microsoft is large and dominating in the PC market its a monopoly because they suck?
Last time I checked Microsoft couldn’t stop you or anyone else from creating an alternative now could they? Yet you still sit and complain you don’t have control over your computer like you do over who you use for search?
Have you ever heard of uninstalling windows or other Microsoft products and using the alternatives? MacOS, Linux and many other OS that you could easily switch to and regain this control you’ve felt you’ve lost.
Why do we care about this when no one cared about Exxon/Mobil? Having one search engine doesn’t change my life. Having a handful of oil companines and banks does! If it’s too big to fail, it shouldn’t exist.
I agree that an ad partnership between Google and Yahoo is virtually creating a monopoly for the online ad space. Yahoo’s cheaper prices should bring Google’s ad prices down. If there is an imbalance, then people will arbitrage between the two. However tying them together hurts everyone except Google and Yahoo. http://directory.stocksbuyorsell.com
No Way. Microsoft has far more Marketshare advantage over Apple and the Linux open source platform on the desktop market, MS still struggles against Unix/Linux in server share, and MS wines like a baby because it doesn’t have anything good in search.
Microsoft Live Search is out there and nobody cares.
Yahoo is still very much a player in the game. I’d kill to be a rotting second with as much share as Yahoo has. Yahoo also has a far better portal than i think Google ever will. Google is the Search and Add king. So, if Yahoo decides to supplement with Google, so what. MS is lying in the bed it made and angry that it’s usual methods haven’t worked.
If they had half a brain… They’d understand the Cloud, but they don’t. I just hope the consumer doesn’t fall for their version which is going to needlessly increase network traffic and congestion.
Roger and the anti-Google commenters are obviously on the Micro$oft payroll. Google is dominant at what they do because they are good at it, period. Micro$oft is the only monopoly crushing innovation on the desktop for 15 years now and counting. Y’all don’t realize it is impossible for Google to ever have the same control over the Internet that Micro$oft has over your PC. If Google ever starts doing anything I don’t like, all I have to do is click on the address bar and type in a URL to another web site that does what I want. Try wrestling control of your PC away from Micro$oft sometime and see how far you get.
Google is trying to push everyone out the market. To think, just 9 years ago Google was just a search engine. Now they’ve cornered the search, and ad market. They’re trying to push out M$’s Office suite with Google Docs, Gmail is gaining ground in email users, now they’re taking on Apple’s iPhone with the G1.
I fear that Google will stretch they’re arms so far into different businesses that they won’t be proficient in one. My old High School Football coach used to have old saying, “Jack of all trades, master of none”.
I used to be Google lover when they came out on search market in late 90s’. I was big supporter of Google’s founders not to go public. But since they issued an IPO in 2004 it’s became obvious to me that everything that I hate in Microsoft (monopoly) and loved back then in Google turned completely around. Now I am rather support Microsoft then Google. Generous monsters (monopolists) just do not exists. Yahoo is just like a prostitute which is trying to get from client as much it can. This is obvious a Google attempt to push everybody from that market, something they complain long time ago about Microsoft.
Justice Department BLOCK this merger immediately!!!
ABSOLUTELY IT IS A MONOPOLY! GOOGLE ALREADY HAS EMAIL/SEARCH/ADS/OFFICE WEB APP/SEARCHING EMAIL FOR AD TARGETING/NEWS and now a PHONE OS!
STOP THIS BEFORE IT STOPS ANY OTHER INNOVATION IN ITS TRACKS!
Good article!
A comment on this:
[QUOTE]
Still, Yahoo obviously thinks it has some way to compare the relative prices of Google and Yahoo ads – how else will it know when to replace a Yahoo ad with a Google ad?
[/QUOTE]
The rational behind this deal is not to replace yahoo ads with google ads. Yahoo is not looking to make a quick bucks, it is trying to fill up its ads inventory and in the meantime develop its advertising system. Yahoo paid search advertisement has lower ROI for the advertisers because ads are irrelevant to the search queries and this is caused, in part, by its weak inventory.
“Don’t you think goodle’s lawyers carefully crafted the plan so that we would get justice approval?”
ROFL – A Google employee telling Microsoft to stopharrasing them with lawyers. Yeah, I supposed it was carefully crafted to pass approval, after all it is the ‘do no evil’ company, how could they! All their lawyers come from heaven and aren’t greedy. Unlike Microsoft’s lawyers, which clearly all came from hell, and they wrote their legal arguments to make sure that the DOJ would go after them them for anti-trust issues.
I sure hope you are not an engineer, as if you are I can only imagine the logic you have in that code of yours.
Nice story, the quote about the search “poles” is stunningly amateur.
Regarding the pricing issue: Most articles have overlooked the fact Google owns DoubleClick. Doubleclick’s platform allows advertisers to manage their advertising campaigns across various web sites, including the price they’re paying on each site.
Google has crystal-clear insight into what DoubleClick customers are paying for keywords on Yahoo search, Yahoo display, as well as any other sites DoubleClick advertisers are running ads.
Don’t you think goodle’s lawyers carefully crafted the plan so that we would get justice approval? Microsoft’s lawyers need to stop pressing advertisers that this deal is bad – this deal can help Yahoo generate free cash flow and rebuild their company.
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This blog is about legal issues that matter to business people, and it's geared for nonlawyers and lawyers alike. Roger Parloff is Fortune magazine's senior editor (legal affairs). He practiced law for five years in Manhattan before becoming a full-time journalist.
Based on how this article puts the story I would say that this is a monopoly, but who is Microsoft to sound any alarms? They have had a monopoly on operating systems for years now and no one else complained. Whatever. No one ever uses those stupid ad click things anyway, I dont see why its such a huge market.