Google (GOOG) Defies The Authorities

Google (GOOG) told regulators who do not like its program to sell search advertising for Yahoo! (YHOO) to go to hell. Antitrust authorities in the US and EU have expressed concerns that having the two largest search companies in America working together will raise ad prices. There are a number of economic precedents to show that their concerns are valid.

Google is taking the calculated risk that the authorities will drop their investigation. It is also risking angering them, which may substantially hurt its position.

According to the AP, Google CEO Eric Schmidt said he isn’t willing to wait very much beyond an Oct. 11 deadline spelled out in the companies’ contract. The man may be right. Yahoo! needs the money now that it has turned down an offer from Microsoft (MSFT). The portal company has to be able to make the case to shareholders that it can bring in stunning profits as a standalone company. With the Google deal delayed waiting for regulatory decisions, Yahoo!’s situation gets worse.

Yahoo!’s trouble may be the best argument in favor of the partnership with Google. Yahoo!’s search share in the US is now below 20%. It is no longer much of a force in that market. Without Google’s help, it might fall into a pit and never get out.

Google can raise rates without a link-up with Yahoo!. Google has 70% of the search market in America. Hooking up with a weak sister may make it money, but its does not improve its leverage on what it charges advertisers.

That is Google’s case, and it is sticking to it.

Douglas A. McIntyre