Amid government scrutiny of the Web search giant's deal with Yahoo, opponents of the agreement—including advertisers—sound off

U.S. government pressure on Google is building. Regulators across the country are stepping up their scrutiny of Google's role in the market for online advertising, and antitrust experts say they've got cause for concern.

Recent signs that the government is getting serious about Google (GOOG) came from a Sept. 9 report in The Wall Street Journal that the Justice Dept. had hired former U.S. antitrust chief and former Walt Disney (DIS) Vice-Chairman Sandy Litvack for a possible antitrust case. The department had already said it's examining an online advertising partnership between Google and Yahoo! (YHOO), announced in June. Meantime, attorneys general in at least 11 states are conducting their own investigations to determine whether the deal gives Google too much control over the online advertising market, hampering competition.

Whether the government is focusing narrowly on the Yahoo-Google agreement or more generally on Google's position in online advertising isn't clear. The Justice Dept. declined to comment on the scope of its investigation. No matter, says Norman Hawker, a Western Michigan University professor of finance and commercial law. Hawker is writing a white paper on the deal on behalf of the American Antitrust Institute, a Washington-based nonprofit think tank that promotes competition.

The Yahoo-Google deal alone will give Justice Dept. officials plenty of fodder for concern, says Hawker, who plans to submit his paper to the department in as soon as a month. Under the partnership, Google will sell and place ads on Yahoo pages and share the revenue with Yahoo. Both companies argue the alliance won't quash competition or result in higher prices for advertisers; rather, the deal will benefit advertisers by giving them access to a wider range of potential customers. "We are able to essentially create more access and better ROI [return on investment] for the advertisers," Hilary Schneider, executive vice-president of Yahoo U.S., said during a Sept. 11 presentation to journalists (BusinessWeek.com, 9/11/08).

Advertisers Fear Higher Rates
What's more, say the deal's defenders, the arrangement is limited in scope and nonexclusive, meaning it doesn't preclude either from forging comparable deals with other companies. Yahoo says it isn't planning to cede its roughly 20% share of the search market to Google, which commands 70% of Web searches.

The concern for regulators isn't a limited partnership, but the potential that Yahoo may have little choice but to cede control of an ever larger share of the search market to its bigger partner. Google often does a better job than Yahoo of placing and making money from ads that appear alongside search results. If Yahoo can cut costs and generate a higher return by ceding a small slice of its business, why not turn over all of it? "It is pretty basic antitrust economics that businesses tend to go where the financial incentives are," Hawker says. "The reality is that Google will have a whole lot more freedom to dictate the terms of online advertising when they have a 92% share than when they have a 70% share."

Some advertisers oppose the Yahoo-Google deal, too. They fear that wider Google control is inevitable. In that case, Google could set higher prices for search ads. "This is not a good environment for advertisers," says Bob Liodice, president and CEO of the Association of National Advertisers, an industry group that has sent a letter to the Justice Dept. opposing the deal.

Publishers are also concerned. They worry that the deal will reduce the share of revenue the search giants give to partner Web sites. On Sept. 15, the World Association of Newspapers, which represents 18,000 newspapers worldwide, called on the U.S. Justice Dept. and European antitrust authorities to block the deal. "Wan believes that the competition that currently exists between Google and Yahoo is absolutely essential to ensuring that our member titles receive competitive returns for online advertising on their sites " said WAN president Gavin O Reilly in letters to the Justice Dept., the European Commission s Competition Directorate, and the Competition Bureau of Canada, made public on WAN s Web site.

Is Microsoft Overplaying the Threat?
Another concern for opponents is what might happen to publishers if Yahoo disappeared as an alternative to deliver ads on their sites. Blogs, small Web sites, and even large online publications that rely on Google or Yahoo to supply ads could find it more difficult to argue for a significant share of the pie if Google became the only significant partner for search-related ads. "I see it as far more realistic that Google would cut back on its share of revenue to Web sites," Hawker says.

Google says Microsoft is helping magnify potential problems with the deal. Microsoft (MSFT) tried to buy Yahoo earlier this year in a bid to narrow Google's lead in the online advertising market. An attorney familiar with Google's thinking says Microsoft is overplaying the threat in a bid to get Yahoo back to the negotiating table. Microsoft didn't respond to a request for comment, but executives of the company have in the past made no secret they think the deal should be blocked, saying it will give Google too much sway over the market.

Not so, says the attorney, who asked not to be identified. He notes that Google is taking measures that would guard against giving the two companies an unfair advantage against competitors. For example, Google will not be privy to information such as the IP addresses of the computers that clicked on its ads on Yahoo's sites—data Google could use to show similar ads to those computers if it detects them other than through Yahoo. "This is a nonexclusive agreement where one company can draw on the superior technology of another," says the attorney. "This kind of arrangement, historically, has not generated challenges.…But Microsoft is waging a huge lobbying and PR battle against the deal."

Possible Justice Dept. Restrictions
The best argument for the deal may be the question of what happens to Yahoo if it can't partner with Google. Yahoo can use Google's expertise in search to help it reduce costs and hang on to the cash it needs to stay independent—and ultimately, be a viable contender.

Rather than quash the deal altogether, the Justice Dept. could impose conditions aimed at fostering continued competition. First, the government could require that Yahoo only use Google's search results on categories where it lacks advertisers. Another condition could be to demand that Yahoo impose restrictions on how much inventory it could give to Google over time, ensuring that even if Yahoo one day gets out of the business, it will do so slowly enough that other rivals could catch up.

Yahoo and Google say they are still working out how the deal will be implemented and have declined to discuss specifics. Some of these pro-competition clauses may already exist in the agreement. It's also possible that if they're not written into Google's partnership with Yahoo now, they will be by the time the Justice Dept. has anything to say about it.

Source:BusinessWeek