Once it became clear that The Department of Justice would take dim view of Google (GOOG) selling search advertising for Yahoo! (YHOO) under a 10-year partnership, it looked as though the proposed deal would just fall apart.
Yahoo! would have significantly benefited from the arrangement. Google’s search mechanism works better than Yahoo!’s and yields higher ad revenue. But, with Google holding 65% of the US search market and Yahoo! holding 20%, it looked like an antitrust problem from the start. Advertisers assumed that the marriage would cause rates to rise, and they were almost certainly right.
Yahoo! and Google submitted a new proposal to the government, but it is so watered down that the financial benefits for Yahoo! are almost gone.
According to The Wall Street Journal, "But under the revision, the companies agreed to cap the revenue Yahoo can generate from the deal to 25% of Yahoo’s search revenue and to shorten the length of the agreement to two years from up to 10 years."
Most of Yahoo!’s revenue comes from display advertising, a segment of the industry which is no longer growing rapidly. The value of the Google search partnership is that it is essential to getting Yahoo! further into the one portion of internet marketing which is still growing.quickly. The 25% cap takes most of that potential advantage away.
Justice may still turn down a Yahoo! sales arrangement with Google, but from the standpoint of revenue benefit to Yahoo!, there is not much left to turn down.
Douglas A. McIntyre
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