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Oct 31 2008 9:09AM EDT

Google, Yahoo Might Ditch Their Ad Deal

Sam Gustin writes: The controversial Google-Yahoo search ad deal may fall apart, on its own.

After meetings with the Justice Department Thursday, both companies are considering walking away from the deal, according to the Wall Street Journal.

The deal has been highly controversial from the start. Nearly six months ago, experts suggested that the deal would be a non-starter, because it could put as much as 80 percent of the search advertising market into Google's control. At the time, Google and Yahoo -- which sought the deal as a refuge from Microsoft's hostile takeover bid -- said the pact would pass muster because it would be "non-exclusive," and allow other companies, including Microsoft, to bid for search advertising.

Yahoo hopes the ad deal with its one-time rival Google could boost its bottom line by $800 million annually. Only one year ago, Yahoo still contested the Web search market, despite being increasingly dominated by Google. Microsoft's failed gambit to buy Yahoo represented Steve Ballmer's vision to try to make a run at the search leader's ad market share.

By rejecting Microsoft's offer and running into Google's arms, Yahoo threw up the white flag and declared submission to Google, effectively ending the great Web search wars.

Since then, a number of interests -- from advertising groups to lawmakers -- have warned that the deal could harm competition in the online advertising market. California is only one of a number of states that are probing the deal. In September, the Justice Department hired Sandy Litvack to consult on its investigation of the deal between the two Web giants, serving notice that regulators intended to closely scrutinize the deal.

For its part, Google has complained that Microsoft -- which has it own history of tangling with the Justice Department -- has lobbied legislators and regulators against the pact. Google's growing skittishness with the deal would be a sign that it wants to avoid a Microsoft-style discussion about its own market power.

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