The search giant blamed regulator and advertiser concerns about the agreement, and said going through with the deal could have resulted in a protracted legal battle and damage to its relationships with partners.
A long, hard look
"That wouldn't have been in the long-term interests of Google or our users, so we have decided to end the agreement," wrote David Drummond, senior VP-corporate development and chief legal officer at Google.
Under the deal, announced June 12, Google would serve ads against some Yahoo search queries. The deal was seen as a way for Yahoo to avoid a hostile takeover by Microsoft and placate shareholders, because it was expected to goose Yahoo's fresh cash flow by $250 million to $450 million in the first year. But the companies said they would delay implementation to allow regulators to assess the deal, and it didn't take long for the Department of Justice to open a long, hard look at the search-advertising business. Additionally, Microsoft and other advertisers, through the Association of National Advertisers, came out against the deal.
Recent negotiations to limit the deal's scope did little to pacify the concerns of the types of advertisers Google is courting to use not just search but also its myriad other advertising products.
Wrote Mr. Drummond: "We're of course disappointed that this deal won't be moving ahead. But we're not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on."
"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 road map and does not change Yahoo's commitment to innovation and growth in search," a Yahoo statement read this morning. "The fundamental building blocks of a stronger Yahoo in both sponsored and algorithmic search were put in place independent of the agreement."
The statement went on to note that in 2008 Yahoo has "developed and launched hundreds of improvements all designed to enhance search quality and deliver a more relevant search experience to the company's users" and cited that it was improving the amount of revenue per search it has been earning.
At first blush, it might appear as though Google is the big winner in all of this -- it thwarted Microsoft's initial attempt to takeover Yahoo and it has also weakened its closest competitor, as Yahoo became preoccupied with trying to push the deal forward. But upon closer examination, Google may have opened itself up to future scrutiny by antitrust regulators and major advertising executives.
Why Google embraced the Yahoo deal as it did was never completely clear. For one thing, Google didn't need the traffic boost. Already its search-query share is dominant -- it notched 63% in August and was the only one of the Big Three (Google, Yahoo, MSN) to gain, according to ComScore.
Indeed, most clients Ad Age has interviewed want to see healthy competition in the search space and a strong No. 2 to Google. Yahoo could become the second-biggest player by joining forces with Microsoft or through a combination of AOL, Ask.com and News Corp. (However, some suggested Microsoft needs Yahoo more than Yahoo needs Microsoft.) The one thing clients don't want to see is Yahoo's search business separated from its display-advertising business.
"The display business is an important part of the ecosystem, but it needs a vibrant search arm to support that so they can put together integrated programs that are more measurable with search," said Bryan Wiener, CEO of 360i. "Having search and display disaggregated would make both offerings individually less compelling."
The Justice Department issued a press release today explaining that the deal would likely have harmed competition in the search ad and search syndication markets.
"The companies' decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action," said Thomas O. Barnett, assistant attorney general in charge of the department's antitrust division. "The arrangement likely would have denied consumers the benefits of competition -- lower prices, better service and greater innovation."
The Justice Department, the Canadian Competition Bureau and attorneys general from 15 states -- California, Connecticut, Delaware, Florida, Hawaii, Iowa, Maryland, Massachusetts, Michigan, Missouri, New Hampshire, New York, Texas, Wisconsin and Washington -- all participated in the investigation.