Businessweek: Google and Yahoo revamp their search AD deal

Google and Yahoo have made significant concessions in their search advertising agreement to win approval from the Justice Department, according to people familiar with the matter on Wall Street. According to sources, the two sides have shortened the agreement from 10 years to two years, and Google will receive 25% of Yahoo's search advertising revenue. At the same time, Google advertisers can choose not to run ads on Yahoo sites.

At present, it is not clear how much the two sides will adjust. For one thing, Yahoo has said it is late to reach a deal with Google and will wait to see how the deal plays out before making a decision on whether to invest in Google ads. In the third quarter, Yahoo's search AD searches were $438 million, so on an annual plan, 25 percent of revenue is not a small amount, not $800 million of revenue floating away, but about half of revenue. So this is a significant adjustment and a significant amount of revenue. In the Internet age, 10-year cooperation agreements mean anything can happen.

But the big question now is whether the Justice Department's antitrust division will be satisfied, or demand further concessions in light of Google's growing power, or block the deal altogether. For now, there is no sign of an agreement. Google and Yahoo are clearly eager to strike a deal. The extent to which antitrust laws apply to the deal is unclear, according to antitrust experts, because it is not a merger and Yahoo still controls when, where and how it can run Google ads. As a result, these experts believe the Justice Department could have a tough time winning prosecutions.

If the Justice Department continues to interfere, the deal doesn't make much sense for Google, which doesn't want the government meddling too much in its business. If Yahoo gets limited revenue from the deal, Yahoo will find it unattractive, despite the fact that the deal is better for Yahoo than nothing.

It is also possible that Google and Yahoo will move forward and engage more deeply with the Justice Department. If negotiations with the Justice Department go well, either Google or Yahoo will disclose the information, according to people familiar with the matter. Clearly, that's an option the Justice Department sees as well. The Justice Department asked for possible evidence of what concessions would be made, people familiar with the matter said. Bottom line: If Google and Yahoo's negotiations with the Justice Department bear fruit, you won't hear much news until both sides spread the word.

Google and Yahoo have indicated they intend to make concessions as a way to put pressure on the Justice Department. Or maybe they're signaling to worried advertisers that they want a deal. Or maybe Google wants to put negotiations on hold until after the U.S. presidential election, when a new official will be appointed attorney general. Mr. Schmidt is an Obama supporter, though it is unclear whether Mr. Obama will adopt a tougher antitrust policy than the Bush administration.

As time went on, the likelihood of the deal going through also diminished.

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