Yahoo Makes Goo-Goo Eyes at Google

Surprise Move Provokes Microsoft and Antitrust Officials

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NEW YORK ( -- Two days after Yahoo's terse response to a letter over the weekend from Microsoft's CEO, the Sunnyvale-based portal announced it will begin testing Google's search-advertising service.

The move proves that in the online space, everyone's in "co-opetition" -- and that it's hard to predict which strangely matched fellows will get in bed together next.

As part of the test lasting up to two weeks, Yahoo will deliver Google ads alongside Yahoo's own search results. Yahoo will only include search results from its own site, not search results from properties that partner with Yahoo to use its search technology, and will not include more than 3% of Yahoo's search queries.

'Dangerous bear hug'
"Assuming the test worked, that would give Google an effective monopoly over search, which wouldn't be healthy for marketers or the overall internet economy," said Bryan Wiener, CEO of New York-based agency 360i. "It seems like Yahoo's running away from Microsoft into a potentially more dangerous bear hug."

But other parties are also stepping up to wrap their arms around Yahoo. The Wall Street Journal, which also first reported Google ad pact, said Time Warner and Yahoo have continued talking and are very serious about a deal that would have Time Warner contributing AOL plus cash in exchange for a 20% stake in a combined entity. Yahoo would woo shareholders by promising to buy back some of its stock (with the cash from AOL) at a price higher than what Microsoft is offering. And partnering with Google on search could help sweeten the deal.

Meanwhile, The New York Times reports that News Corp. is talking to Microsoft about joining the Yahoo bid. While News Corp. CEO Rupert Murdoch appeared to dismiss his earlier interest in Yahoo at a recent investor conference, what he really said is a bit more nuanced -- that he wasn't looking to get into a fight with Microsoft.

Microsoft announced Feb. 1 that it would offer $31 a share to acquire Yahoo, betting on the company to help it close the search-advertising gap between Microsoft and Google and bolster the software giant's online ad audience. The merged entity would still vastly trail Google in search share: In February, Google accounted for almost 59.2% of consumer search queries, Yahoo 21.6% and Microsoft 9.6%, according to ComScore. But the disparity is even greater when looking at share of search ad dollars, an area in which Google commands closer to a 70% share.

Microsoft responded with a statement from its general counsel, Brad Smith, charging that an agreement between Yahoo and Google would consolidate 90% of the search ad market. "This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo. We will assess closely all of our options."

He went on to assert what Mr. Ballmer said over the weekend, that Microsoft's proposal is the only real alternative put forward.

Officials are watching
Within 30 minutes of Yahoo's announcement, U.S. Sen. Herb Kohl (D-Wis.), chairman of the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights, also weighed in, saying that his committee will be "following closely" to see if the test leads toward a permanent agreement.

According to The Wall Street Journal, the ad pact shouldn't stand in the way of a Microsoft acquisition, but is more a tactic to show Yahoo's investors that the portal has other options.

And, oh yeah, it's sure to stoke Mr. Ballmer's ire over the deal.

Yahoo wouldn't comment on the nature of the timing or the potential relationship with Google, but in a statement said its board of directors is "exploring strategic alternatives to maximize stockholder value, including exploration of potential commercial business arrangements."

Looking ahead
Mr. Wiener of 360i said that should a long-term deal between Yahoo and Google emerge, it would be short-sighted on Yahoo's part.

"The thing Yahoo really has going for it is this great property that can serve both search and display," Mr. Wiener said. "Google, buying DoubleClick, is trying to create that same sort of model. If Yahoo gave up search ads, it would hurt its ability to sell integrated marketing buys over the long haul."
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