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Dangerous Liaison

Yahoo hopes a risky ad deal with Google will keep Steve Ballmer at bay. 
Ballmer

Beleaguered Web giant Yahoo, scrambling to find an alternative to Microsoft's hostile takeover bid, has sealed a deal with Google allowing its archrival to serve ads on its network.

In a statement issued late Wednesday, Yahoo said it would "begin a limited test of Google Inc.'s AdSense for Search service, which will deliver relevant Google ads alongside Yahoo's own search results."

"The test will apply only to traffic from Yahoo.com in the U.S. and will not include Yahoo!'s extended network of affiliate or premium publisher partners," the company said. "The test is expected to last up to two weeks and will be limited to no more than 3 percent of Yahoo! search queries."

The pact between Yahoo and Google could lead to an escape hatch for Yahoo if the two companies determine that such an arrangement — on a much broader scale — could be profitable.

Yahoo's decision to test drive a search advertising partnership with Google is the surest indication yet of Yahoo C.E.O. Jerry Yang's desperation to find an alternative to Microsoft, which has been threatening a hostile takeover move.

If Yahoo outsourced its search advertising to Google, the company would essentially be admitting of defeat in the search advertising wars that have been running for almost a decade.

But it remains to be seen if the Google-Yahoo partnership will pass regulatory scrutiny, given Google's overwhelming dominance in the search ad market.

In February, Glenn Manishin, a top tech antitrust lawyer at Duane Morris, told a UBS conference call that a Yahoo-Google search tie up would be "much more problematic" than the Microsoft-Yahoo merger itself.

The reason is simple. Google commands nearly 70 percent of the search market, while Yahoo holds almost 20 percent. Combining the two companies' search engines would create a virtual monopoly in search.

Manishin said the one exception would be if Yahoo stood before the Department of Justice and argued that it was a "failing company" and thus needed the deal to avoid "financial distress." In other words, Jerry Yang would have to convince the D.O.J. — and European regulators — that Yahoo needs a deal with Google in order to stave of bankruptcy.

While Yahoo is getting slaughtered by Google in search, it is hardly in "financial distress.” In fact, it earns over $1 billion per year, and was attractive enough for Microsoft to offer $45 billion for it.

And given Google's attitude toward the Microsoft-Yahoo deal — warning that the tie-up would in effect create an internet monopoly — Microsoft would waste no time in pointing out, correctly, the anti-competitive implications of a Yahoo-Google search pact.

Microsoft General Counsel Brad Smith said Wednesday the agreement "would consolidate over 90 percent of the search advertising market in Google's hands."

"This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo," Smith said in a statement. "We will assess closely all of our options. Our proposal remains the only alternative put forward that offers Yahoo shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers."


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