Google Ends Search Advertising Deal with Yahoo

Posted by: Rob Hof on November 05, 2008

After four months of wrangling with the Justice Department, Google has ditched its search advertising deal with Yahoo. The move, announced unilaterally by Google, had been widely expected in recent days, despite last-minute concessions by the two companies this week to mollify the concerns of antitrust regulators. They reportedly proposed a shorter term and a cap on revenue for the deal, under which Yahoo would run Google ads on some of its pages. (UPDATE: Here’s my story on why the end of the deal is no guarantee of a competitive search ad market.)

But advertisers, publishers, and other players, notably rival Microsoft, continued to fear that the combined efforts of Google, the dominant force in search ads, with No. 2 Yahoo would stifle competition and lead to higher ad prices. Google executives decided they weren’t going to win this one, and they opted not to engage in a legal battle for what was, after all, a small amount of money for Google. “After four months of review, including discussions of various possible changes to the agreement, it’s clear that government regulators and some advertisers continue to have concerns about the agreement,” said Google Chief Legal Officer David Drummond. “Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn’t have been in the long term interests of Google or our users, so we have decided to end the agreement.” He added that the prospect of a lengthy legal battle “would be like trying to drive down the road of innovation with the parking brake on.”

Update: In a press release, Justice actually says it informed the companies it would file an antitrust lawsuit to block the deal. So it’s quite understandable Google decided to bail, especially since such a threat was one of the outs provided for in its Yahoo deal. So Google not only avoids a bruising fight with regulators, but a cash settlement with Yahoo for exiting the deal.

For Yahoo, however, this is a huge blow, since it has said it expected to earn up to $450 million in operating cash flow annually from the deal. In its statement, in full after the jump, Yahoo said it was “disappointed that Google has elected to withdraw from the agreement rather than defend it in court.”

Oddly enough, its stock is up about 4% in early trading, likely on the expectation of Microsoft returning with a new deal. Several analysts have suggested that if the deal failed, Yahoo would be forced to go back to Microsoft, which had initially made an offer to buy all of Yahoo and then to buy its search ad operations, both rejected by Yahoo. Today, Yahoo’s stock stands at under $14 a share, far below the $31 a share Microsoft originally offered and a sweetened $33 a share offer.

The stock spiked briefly as much as 10% after a rumor circulated by a broker claimed that Yahoo cofounder and CEO Jerry Yang would leave and Microsoft would make another offer to buy all of Yahoo. But people close to the companies deny both claims, and say there are no current talks.

Here's what David Drummond, senior vice president for corporate development and chief legal officer, had to say on Google's official blog:

In June we announced an advertising agreement with Yahoo! that gave Yahoo! the option of using Google to provide ads on its websites (and its publisher partners' sites) in the U.S. and Canada. At the same time, both companies agreed to delay implementation of the agreement to give regulators the chance to review it. While this wasn't legally necessary, we thought it was the right thing to do because Google and Yahoo! have been successful in online advertising and we realized that any cooperation between us would attract attention.

We feel that the agreement would have been good for publishers, advertisers, and users - as well, of course, for Yahoo! and Google. Why? Because it would have allowed Yahoo! (and its existing publisher partners) to show more relevant ads for queries that currently generate few or no advertisements. Better ads are more useful for users, more efficient for advertisers, and more valuable for publishers.

However, after four months of review, including discussions of various possible changes to the agreement, it's clear that government regulators and some advertisers continue to have concerns about the agreement. Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn't have been in the long term interests of Google or our users, so we have decided to end the agreement.

We're of course disappointed that this deal won't be moving ahead. But we're not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on. Google's continued success depends on staying focused on what we do best: creating useful products for our users and partners.

For its part, Yahoo sought to put the best light on the deal in a statement:

Yahoo! Inc., a leading global Internet company, today announced that Google has terminated the advertising services agreement the companies announced in June. Yahoo! continues to believe in the benefits of the agreement and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court. Google notified Yahoo! of its refusal to move forward with implementation of the agreement following indication from the Department of Justice that it would seek to block it, despite Yahoo!’s proposed revisions to address the DOJ’s concerns.

While the implementation of the services agreement with Google would have enabled Yahoo! to accelerate its investments in its top business priorities through an infusion of additional operating cash flow, this deal was incremental to Yahoo!’s product roadmap and does not change Yahoo!’s commitment to innovation and growth in search. The fundamental building blocks of a stronger Yahoo! in both sponsored and algorithmic search were put in place independent of the agreement.

Yahoo! continually optimizes its algorithmic and sponsored search, and we have, in 2008 alone, developed and launched hundreds of improvements all designed to enhance search quality and deliver a more relevant search experience to the company’s users. To that end, Yahoo! has benefited from strong revenue per search (RPS) gains in the U.S. as discussed on the Q3 earnings call. Furthermore, Yahoo! continues to make substantial progress against its Open Strategy and in the deployment of its game changing APT from Yahoo! display advertising platform.

Going forward, Yahoo! plans to continue to provide the cutting-edge advances in products, platforms and services that the industry needs and expects, and intends to be the destination of choice for advertisers and publishers who want to reach one of the largest and most engaged populations of consumers on the web.