The WSJ is reporting that Google and Yahoo are negotiating with the Justice Department to remove their objections to the search deal the two companies signed in June but haven’t yet implemented.
The fact everyone’s negotiating isn’t news, but some of the details are. Concessions reportedly being discussed include “capping the volume of Google ads Yahoo would use, assurances that Yahoo would continue to compete in search ads, and a reporting mechanism to ensure compliance.” The article also says the government is looking to impose price constraints to ward off increases in advertising rates after the deal is implemented.
Let’s put the price constraints aside, which are always a bad idea because they disrupt supply/demand equilibrium and generally screw up markets. But the volume caps may not be such a bad idea, if the deal were to go through.
Our main objection to Yahoo and Google teaming up on search advertising is the perverse incentives that are created to encourage Yahoo to abandon their own product over time. Yahoo makes far more money on Google ads than they do from their own (which is why the deal was signed in the first place). Every time Yahoo puts up a Google ad instead of their own, they get a cash payoff but at the cost of the vibrancy of their own ad market. It creates a viscious downward cycle that can only result in Google gaining yet more market share in search marketing over time.
In other words, Google is effectively paying Yahoo off to gain market share. Earlier this month Sen. Herb Kohl (D - Wisc.), chairman of the Senate Antitrust Committee, expressed these same concerns.
A cap means Yahoo can only rely on Google to a point, and if the cap is small enough then Yahoo will be forced to continue to invest in their own search business, so it removes a lot of the meat behind our objections.
However, I doubt Google and Yahoo would be happy to have a cap, since they’ll negotiate it as high as possible. And to date, both companies have argued that Yahoo wouldn’t use many Google ads. A cap effectively shows their hand, since whatever it is, its likely Yahoo will use it all.
But the deal, with or without a cap, keeps Yahoo afloat and independent, and out of Microsoft’s hands. My guess is they’ll take it.
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All this just to avoid an MS deal - I would have thought selling out to Google would be just as bad, if not worse than a MS partnership.
Crazy how schoolground politics spill out into multibillion dollar business, actually quite scary.
A cap on the Google deal does sound good though. Still can’t believe Yahoo will be pleased to be running Google ads though. Having their main online competitor that has pretty much grinded them into the ground over the last 10 years hardly sounds like an event to celebrate.
MS no more interesting to YH already.
Volume cap is better than no restrictions on Yahoo…coz both Yahoo and Google are looking highly interested in getting this deal through
Hence no options left for relatively healthier deal
Why doesn’t Yahoo, just work on creating a better product. Market Caps, Monopolies….what is happening to the free market?
Doesn’t it feel wrong? Yahoo and Google working together would be like the Red Sox and Yankees becoming trading partners. Just unnatural.
I agrree with Brian. However, Government is looking to impose price constraints? It is not agreeable.
Google and Yahoo should agree to walk away.
If there are indeed negotiations then they likely do not give ground in any direction beneficial to either company long term.
Perhaps the talks are really for both companies to understand what climate exists today within a government that may/will undergo transformation in the coming months — and delay.
All that delay allows for learning how little the government understands so that they can proactively restructure future deals.
It is interesting the way our world is ruled. Once the so-called “dont be evil”, now becomes the evil itself, no matter how much Schmidt struggles to say the opposite. For the sake of our world, I hope this deal is not closed (with or without cap), otherwise we may see a new M$ taking our world, information and such to its feet!
Yahoo need to find some new ground, focus on this and organise themselves. At the current rate, we still have the same basic business model from 10 years ago and it’s really showing.
I think it is time that Yahoo! focused on their successful products, Flickr, Answers, the web dev stuff, mail, etc. I don’t think they should loose search all together, but instead rework their way in the market which doesn’t depend on them being a successful search engine. They certainly aren’t now…
You don’t know anything about the internet advertising business do you?
YuCk!
I just tried Yahoo search and it does not use Google ads.
I don’t understand how Yahoo is making more off Google ads, than Google is making?