Google scraps Yahoo partnership

Web company pulls out of advertising pact

Google dropped its plans for a joint ad venture with Yahoo on Wednesday after the Dept. of Justice informed them it would file an antitrust lawsuit to block the deal.

Pact, struck in June, would have enabled Yahoo to use Google’s Internet advertising services as a complement to its own, which normally competes with Google’s. The companies had offered to narrow the terms of the deal, but Justice still nixed it, determining that the modifications would not eliminate their concerns.

With Google’s pullout Yahoo was forced to bow out as well. Struggling Netco said it was “disappointed that Google has elected to withdraw from the agreement rather than defend it in court.” Company must now find a way to boost its ad biz.

But as far as the DOJ is concerned, the case is closed.

“The companies’ decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action,” Thomas O. Barnett, assistant attorney general in charge of the DOJ’s antitrust division, said in a statement. “The arrangement likely would have denied consumers the benefits of competition — lower prices, better service and greater innovation.”

Deal involved Internet search advertising and search syndication, two markets that Google dominates with more than 70% share of each. Yahoo is Google’s main competitor in these markets; together, the two companies command 90% of the search advertising market and 95% of the search syndication market.

“Had the companies implemented their arrangement, Yahoo’s competition likely would have been blunted immediately with respect to the search pages that Yahoo chose to fill with ads sold by Google rather than its own ads, and Yahoo would have had significantly reduced incentives to invest in areas of its search advertising business where outsourcing ads to Google made financial sense for Yahoo,” the DOJ said.

Google reported $16 billion in revenues in 2007, Yahoo about $7 billion.

Yahoo downplayed the loss of coin, which it had originally projected would bring in an additional $800 million of revenue. It acknowledged that the deal would have enabled the company to accelerate its investments, but said, “The deal was incremental to Yahoo’s product roadmap.”

The withdrawn accord sparked inevitable speculation about a search ad deal with Microsoft. Yahoo brokered the pact with rival Google after several rounds of talks with Microsoft broke down. Yahoo has also been heavily flirting with Time Warner’s AOL division.

The scuttled deal is a defeat for Google, which had insisted that the accord would go through. At one point topper Eric Schmidt suggested the companies would press on without government approval, noting, “Time is money in our business.”

“We’re of course disappointed that this deal won’t be moving ahead,” Google senior VP of corporate development and chief legal officer David Drummond posted on the company’s blog. “But we’re not going to let the prospect of a lengthy legal battle distract us from our core mission.”

Besides, Google already has its hands full with another hefty legal challenge. Viacom has sued the Netco for $1 billion on copyright infringement by its YouTube video-sharing site.

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