Google pulls out of Yahoo advertising deal

8:10 AM, November 5, 2008

Google pulled out of its controversial advertising agreement with Yahoo this morning because of fears of a "protracted legal battle" with federal and state antitrust regulators concerned about the deal's impact on the online market.

The decision ends a four-month quest to get regulatory approval and a broader attempt to keep Yahoo out of the hands of Google rival Microsoft. The software giant led the charge against the Web advertising deal, stirring up opposition among advertisers and raising worries within the Bush administration and Congress about the potential impact of a partnership between the top two search engines.

With the deal already delayed and then revised in hopes of overcoming strong concerns from the Justice Department, Google announced in a blog post this morning it was pulling the plug because those steps were not enough to ...

... secure regulatory approval. David Drummond, Google's chief legal officer and senior vice president for corporate development, said:

We feel that the agreement would have been good for publishers, advertisers, and users -- as well, of course, for Yahoo and Google. 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.

Yahoo said Google had notified it of the decision to end the proposed agreement, through which Google would have brokered some text ads for Yahoo's search engine, "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."

Yahoo downplayed the impact of Google's decision on its future. But Wall Street clearly thinks Microsoft may come back into the picture and revive its bid for part or all of Yahoo. Despite the collapse of a deal that Yahoo said would boost its annual revenue by hundreds of millions of dollars, its stock was trading up more than 4%, around $13.90, in early trading after the announcement. The Sunnyvale, Calif., company said in a statement:

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.

The Justice Department said it had significant concerns about the deal.

"The companies' decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action," Thomas O. Barnett, who oversees the department's antitrust division, said this morning. "The arrangement likely would have denied consumers the benefits of competition–lower prices, better service and greater innovation."

-- Jim Puzzanghera

Photo: A Yahoo billboard in San Francisco. Credit: Justin Sullivan / Getty Images