Google, Yahoo and the elephant in the room

Various groups, ranging from farmers to Microsoft, have expressed concern about the deal

Despite assurances from Google and Yahoo that their online advertising deal doesn't need regulatory approval, the two companies should not be too quick to dismiss Microsoft's influence on Capitol Hill.

Thursday, just hours after ending talks with Microsoft, Yahoo announced that it will start running advertising from Google Inc. alongside Yahoo search results in the U.S. and Canada. According to a filing by Yahoo Thursday with the U.S. Securities and Exchange Commission, Google can terminate the deal if investor Carl Icahn is successful in his fight to gain control of Yahoo's board of directors.

The two companies said that while the deal doesn't require regulatory approval, they would delay its implementation for three and a half months while the U.S. Department of Justice reviews the arrangement. Various groups, ranging from farmers to Microsoft, have expressed concern about the deal.

Yahoo said it expects the nonexclusive deal to generate US$250 million to $450 million in operating cash flow during the first 12 months, and that it represents an annual revenue opportunity for Yahoo of US$800 million. The deal is for an initial period of four years, with an option for Yahoo to extend it for another six years.

However, while the two companies are doing the right thing by waiting to consummate their partnership until after receiving DOJ approval, analysts said Google and Yahoo should not overlook the potential damage Microsoft could do to the deal.

"Assuming that Google and Yahoo do not move forward until they get DOJ approval, I think that is a very wise step to show cooperation and that they're acting with better faith," said Marc Edelman, a law professor at New York Law School and a former antitrust lawyer. "But I think we have another party out there, Microsoft."

Edelman said he expects the software maker will be knocking on doors in Washington as early as next week. Most likely, Microsoft's internal and outside antitrust counsel will swoop in on the DOJ and the Federal Trade Commission, arguing that the Yahoo-Google deal would forestall competition in advertising markets.

Andrew Frank, an analyst at Gartner Inc., said both Yahoo and Google will benefit from the deal, but he, too, said Microsoft will do everything in its power to bring the arrangement to a screeching halt.

"Expect Microsoft to challenge it and come back aggressively with some search plans of its own," he said.

Microsoft declined to comment on Google-Yahoo deal, although General Counsel Brad Smith attacked the proposal when testing was first announced in April, saying it would consolidate 90% of the search advertising market with Google .

Rob Enderle, an analyst at Enderle Group in San Jose, said Microsoft is a formidable opponent and knows how to play politics.

"Without Microsoft, this probably would stand up to regulatory scrutiny," Enderle said. "But Microsoft has increased its presence on Capitol Hill significantly ... and there are restraint of trade issues, so by the nature of Google's size and because Microsoft is going to be pounding on a lot of doors, I think this is going to be a problem."

Because of Microsoft's considerable influence, Enderle gave the deal a 35 percent chance of passing regulatory muster. But if regulators approve it, they will be keeping a much closer eye on Google in the future, he said.

Although the deal with Google is good for Yahoo, Enderle said the timing is bad, noting that Yahoo was once an investor in Google, when it was a fledgling startup. Yahoo later separated from Google, deciding it wanted to go after Google's business, and that, Enderle said, was a big mistake.

"[Being partners with Google] is the way it should have always been for Yahoo, but it's badly timed now because it focuses on a critical mistake that Yahoo made at a time when Yahoo's existing administration is up for review," Enderle said. "And when [your board] is up for election, having people focused on one of your big mistakes is probably not a good thing. And that should work in Carl Icahn's favor."

Meanwhile, more objections to the partnership were raised by the American Consumer Institute, which said a permanent deal between Yahoo and Google raises serious concerns for consumers and businesses.

"In our view, Google's dominance of online search and advertising has already reached a tipping point," the organization said in a statement. "If a Google/Yahoo deal becomes business-as-usual, Google would have garnered nearly all of the search advertising market."

And that would mean that Google would influence what consumers see in terms of advertising and search ranking, causing consumers to click on ads in ways that benefit Google, its products and its sponsors. The group is urging the DOJ to block the deal.

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