/ 3 July 2008

Inquiry into Yahoo! ad link with Google ramped up

The United States Department of Justice has begun a formal investigation into competition concerns surrounding an advertising tie-up between the two biggest global players in internet searches, Google and Yahoo!.

Officials want to know whether the revenue-sharing deal risks creating an effective monopoly for the two companies which, between them, account for almost three out of four of the world’s online searches.

A voluntary review has been under way for some time, but was recently upgraded to a formal inquiry, indicating that the department has alighted upon areas of concern.

The investigation has arisen at an awkward time for Yahoo!. Reports in the US suggest that Microsoft is once again sniffing around the Silicon Valley company and has held talks with potential partners, including Time Warner and News Corp, about a potential break-up bid for Yahoo!.

Yahoo!’s partnership with Google was motivated, in part, by a desire to escape from Microsoft’s $47-billion hostile takeover bid that was made this year. It involves Google providing advertising to appear alongside certain Yahoo! searches in North America, with the two firms splitting the resulting revenue. The deal could boost Yahoo!’s coffers by an estimated $800-million annually.

In a statement, Yahoo! brushed aside the anti-trust investigation: ”There is nothing unexpected in the review of this arrangement as structured by the parties and Department of Justice officials.”

Critics of the deal say that what it amounts to is a surrender by Yahoo!, which has fought a losing battle for years to keep up with Google in searches. A long-awaited hi-tech new Yahoo! advertising platform called Panama failed to close the gap last year. According to the market research firm Comscore, Google accounts for 63% of global internet searches while Yahoo!, its closest rival, can only muster 11%.

Advertisers have become increasingly uncomfortable about the dominance of Google, which generates more revenue from online advertising in Britain than ITV gets from its television commercials.

Nigel Gwilliam, head of digital at the London-based Institute of Practitioners in Advertising, said: ”Clearly US anti-trust legislators have concerns as we can see from their scrutiny of the deal. Google are even more dominant in many European markets, including the United Kingdom. While this has begun as a North American pact, we will be monitoring any plans to extend this overseas.”

Beset by much discontent among several investors, Yahoo! faces a potentially stormy annual meeting next month at which the activist hedge fund investor, Carl Icahn, will seek the removal of its entire board.

Jerry Yang, Yahoo!’s chief executive, who co-founded the business in 1994, has been attacked for mishandling Microsoft’s $31-a-share offer since talks between the two companies collapsed in early May. Yang (39), who styles himself as ”chief Yahoo!”, would have personally received about $1,4-billion for his stake if he had agreed to a deal.

Yahoo!’s shares sank below $20 on Monday for the first time since Microsoft’s initial approach in January, though they jumped by 6,4% to $21,50 in early trading on Wednesday on a Wall Street Journal report that Microsoft is back on the attack.

Unconfirmed reports suggest that Microsoft wants to buy Yahoo!’s search business and that the Seattle-based software firm has held preliminary talks with Time Warner and News Corp about picking up the rest of Yahoo!.

Analysts said that even if the Google tie-up survives regulatory scrutiny, it is unlikely to prove as lucrative for shareholders as a takeover of the business by Microsoft.

”A lot of people have post-deal regret that it did not happen, and they’re trying to cobble something together,” Jeffrey Lindsay, an analyst at Bernstein Research in New York, told Bloomberg News. ”There’s a huge sense of a great opportunity having been lost.” —