Posted by: Rob Hof on November 3, 2008
Google and Yahoo have made major concessions in their proposed search advertising deal in hopes of getting the Justice Department to go along with it, according to a Wall Street Journal story. People “familiar with the matter” say the new proposal, submitted over the weekend, shortens the term of the deal from 10 years to two years and places a limit on the revenue Yahoo can generate from Google to 25% of Yahoo’s search revenue. Also, Google advertisers can opt not to have their ads shown on Yahoo. (UPDATED with more analysis below.)
It’s unclear how deep these concessions are. For one, Yahoo has always said it would start slowly on the deal and see how it goes before deciding whether or how much to increase the ratio of Google ads on its pages. Moreover, Yahoo’s search revenues on its own site in the third quarter alone were $438 million; 25% of that, annualized, still adds up to a fairly large number—not the $800 million revenue opportunity Yahoo has floated, but probably more than half of that. So while that would likely be a significant concession, it’s also still significant revenue. And in the Internet age, I wonder if a 10-year deal meant much of anything.
But the bigger issue is whether Justice’s antitrust division will be mollified, or if it prefers to make a statement about Google’s growing power by either demanding even more stringent concessions or blocking the deal entirely. It doesn’t seem out of the question that the two sides can come to some agreement, though from a story in TheDeal.com reprinted here, Assistant U.S. Attorney General Thomas Barnett told the companies a final proposal must come by Tuesday. Clearly Google and Yahoo want this deal. And according to many antitrust experts, how antitrust law applies to this deal is far from clear, since it’s not a merger and Yahoo retains control over when, where, and how many Google ads to run. So those experts think Justice would have a tough time winning a lawsuit that seeks to block the deal outright.
If Justice continues to balk, at some point—probably not much further than this latest proposal—the deal will no longer be worthwhile for Google, which doesn’t want heavy regulatory oversight of its business. If the amount of revenue Yahoo gets from the deal is too limited, even Yahoo may find it unattractive, despite the fact that any deal is probably better for Yahoo than nothing.
I also suspect there’s some positioning by Google and perhaps Yahoo going on here that transcends the actual negotiations with the Justice Department. According to one person knowledgeable with the situation, it’s unlikely Google or Yahoo would leak these details if things were going swimmingly with Justice. Surely these are options that Justice attorneys have been aware of, and examined, for many weeks now. Indeed, one person close to the situation says Justice has asked potential witnesses about what they think of potential remedies. Bottom line: If talks with the antitrust regulators were fruitful, it seems likely we wouldn’t hear much until an agreement were announced.
Google and Yahoo could be hoping to put some pressure on regulators by showing they are willing to compromise. Or they could be sending a signal to worried advertisers that they’re trying to deal with their concerns. Or perhaps Google hopes to stall until after the election, when there will be a new administration likely to bring in new Justice officials next year. (Google CEO Eric Schmidt is an ardent backer of Barack Obama, appearing briefly in his half-hour infomercial last week, though of course there’s good reason to think an Obama administration would be much more inclined to be stringent on antitrust enforcement than the Bush administration.)
Still, none of those reasons is especially convincing. With each passing day, the deal seems to look less likely to pass muster.