The Unholy Alliance: Google and Yahoo v. Microsoft

This past summer, Google and Yahoo had announced a partnership that would allow Google to furnish Yahoo with supplemental search ads, which would help boost Yahoo’s revenue. Google was practically foaming at the mouth in anticipation of getting their biggest ad customer of all time, and Yahoo saw a way out of a crackbum deal from Microsoft, who in February offered to purchase Yahoo for $43 billion.

Well, it was a crackbum deal according to Jerry Yang, CEO of Yahoo—but not according to everybody else who has since lambasted Yang for what would have been a lucrative deal in light of the significantly smaller $18 billion that now represents his company’s market value. But jumping ship on Microsoft and into bed with Google hasn’t been easy. The two search giants have been blocked by major advertising associations, Microsoft, and more importantly, the U.S. Department of Justice who has been investigating the agreement for infractions against antitrust laws. The partnership had raised concerns that a merger between the two companies would constitute a monopoly on the paid search advertising market and also that Google and Yahoo might agree to set a price floor for paid search, which would essentially be illegal price fixing.

Google has, of course, come out and repudiated the notion that there would be a merger with Yahoo, arguing that giving their competitor a boost in revenue would help preserve competition in paid search and encourage others to invest in Yahoo. Yet, if Microsoft has anything to say about it, they’d swear that the deal is anything but competition-fostering. The third major competitor in the paid search area, Microsoft has been very vocal about its aversion to the ad deal. In the face of a Google-Yahoo alliance, Microsoft would be virtually unable to compete in paid search.

Once upon a time there was a balance with Google on one scale and Yahoo and Microsoft on the other. And then one day, fearing the advances of Microsoft, Yahoo hopped onto the other scale, tipping it in a glaringly noticeable way. But Lady Justice just ain’t havin’ it. The DoJ hasn’t come to any conclusions yet, and time is ticking for both companies who were hoping to rise above the floodwaters of current economic strife. No word on when, or if, the DoJ will unshackle the internet pigs and let them fly.

As Roger Parloff notes in his CNN fortune blog Legal Pad, there are plenty of ways for the partnership to get scary. He notes that whatever revenue Yahoo is getting out of the deal isn’t going to be anywhere close to what they need in order to keep themselves competitive (The deal would probably look like a 90%/10% split). He also explains the inevitability of price fixing: Yahoo would always run the more expensive per-click ad, whether its one of Google’s or one of their own, because it’s been proven to garner the most revenue. And more money for Google would mean more revenue for Yahoo. It’s just a bit sad that the premiere search engine in 1994 with higher revenue than the fledgling Google at the time has resorted to this. Yahoo needs to fight back. You don’t see MySpace ponying up the props to Facebook or PC taking the Mac ads lying down. To be fair, paid search is a whole different animal. But the general consensus is that Yahoo—and Yang—has had its fair share of chances.

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