Last spring, Yahoo was under assault. Microsoft had launched a hostile takeover, activist investor Carl Icahn was promising to sweep out the company's recalcitrant management team, and large shareholders were filing a barrage of lawsuits accusing the company of acting irresponsibly in turning Microsoft away. Yahoo had only one option: run to Google. The search giant offered Yahoo a Faustian bargain—in return for a huge chunk of cash, Yahoo would outsource its advertising operations to its primary rival. Yahoo accepted, and experts estimate that the company could get a much-needed infusion of cash from the deal, as much as $1 billion annually. There's only one potential holdup: the Department of Justice.
While both companies maintain they're doing nothing illegal, they agreed last week to suspend their collaboration while the DoJ finishes its review, which is expected to take a couple more months. Google already commands about 70 percent of the search engine market. A deal in which it takes over ads for Yahoo—which controls another 20 percent of the market—would seem to create a monopoly. Nevertheless, the government isn't likely to stand in the way of the deal, and Google looks sure to further expand its power and reach in the ad market. This could be bad news not only for advertisers but also for the many Web sites that depend on revenue from ads. In the long run, the deal could also mark a turning point for Google—the moment its public image shifted from that of an innovator to a monopolist whose every move is suspected and dissected.
In scrutinizing the Google-Yahoo project, regulators are asking one main question: Will it raise the prices of ads on the Internet? Generally when two big producers in a market join up, competition declines, and prices rise. But Google, Yahoo, and their defenders say that the market for search engine ads is completely different. Search ads are pegged to keywords. If you want to run a Google ad for your Web shoe shop, you choose terms ("shoes," "sneakers," "pumps," etc.) for searches on which you'd like your ad to appear. Many other shoe companies want their ads to come up on the same keywords, of course, so Google runs an auction to determine which ads to display most often and in the highest positions. The shoe company that pays Google the most gets prime billing. In other words, Google and Yahoo argue, search companies don't determine ad prices—the advertisers set their own prices. If an advertiser is willing to pay Google 50 cents every time someone clicks on an ad pegged to the keyword "shoe," he's not going to raise his bid just because his ad might also come up on Yahoo.
There's also some fear that a Google-Yahoo collaboration could push advertisers to abandon Yahoo's ad platform, further narrowing the search market. After all, if ads you place with Google will run on both search engines, why would you bother dealing with Yahoo at all? Google says that's unlikely. Yahoo has promised that it will run Google's ads only on a small portion of its search terms. (Under the terms of the agreement, Yahoo will display Google ads when users search for a term—say, "red roses in Alabama"—for which it has no ads of its own to display.) The only way for advertisers to guarantee that their ads come up on Yahoo, then, is to place ads at Yahoo. In this way, Google argues that the deal would be better for advertisers. Because Google will provide Yahoo with "more relevant ads," advertisers will likely see "a better return for every dollar they invest" in online advertising, Google's advertising president, Tim Armstrong, wrote in a blog post last month.
The Association of National Advertisers, a trade group that represents more than 9,000 consumer brands, disputes Google's claims as speculative. In a letter that the group sent to the Justice Department last month, it put forward a different scenario: If Yahoo can boost its cash flow by running a small number of ads from Google, why wouldn't it decide, over time, to run more and more ads from Google? The ANA predicts that will happen—and in time, "all search engines will increasingly rely on Google as a source of advertising."
There's another big flaw in Google's defense of the Yahoo deal: It's not exactly true that search engines give advertisers complete control over the price they pay for ads. Search engines use algorithms to determine an advertiser's "relevance" to a given keyword—the less relevant your ad, the higher you've got to bid for that keyword. Search companies do this to make sure that a given ad goes with a given search term. This makes sense—you wouldn't want every keyword to trigger ads for Viagra just because Pfizer has a huge advertising budget.