Google-Yahoo deal comes under scrutiny

The deal, announced on Thursday, would let Google sell search ads on Yahoo's Web site. The collaboration also saw Yahoo! back down from a proposed takeover deal from rival Microsoft.

Citing two sources familiar with the matter, Reuters reports that Microsoft has contacted advocacy groups that work to influence policy in Washington.

According to one source who was contacted by Microsoft, the software company said in an e-mail that the Google-Yahoo agreement would "limit choices for advertisers and publishers" and "destroy a competitive alternative."

Microsoft spokesman Jack Evans on Friday reiterated Microsoft's overall objections to any Google-Yahoo deal, saying it would make the Internet advertising market less competitive.

"Our position has been clear since April that any deal between these two companies will increase prices for advertisers and start to consolidate more than 90 percent of the search advertising market in Google's hands," Evans said.

Microsoft later said in statement its lobbying approach "reflects our belief that we have a responsibility to engage with policymakers on issues that impact our products, customers, shareholders and the industry overall ."

The deal will mean that from September, yahoo search users in the US and Canada will start to see search results from Google’s search ad system.

While there are no current plans for an expansion of this deal overseas, many UK-based search agencies have already expressed concern over the deal.

Oliver Bishop, CEO at search marketing agency Steak, said: “Both Google and Yahoo! claim that this deal will facilitate and not hinder competition. I’m not convinced. Yahoo! have a Google dial that they can now turn up and down regarding the Google ads they choose to display. Should Yahoo! need an influx of revenue, turning that dial up becomes increasingly attractive. Google ads tend to command higher bid prices so the Yahoo! dilemma will be whether to display the Google ads and get a share of the revenue from the click or display their own lower-priced ads and keep all the revenue.

“If Yahoo! is currently an attractive option for advertisers because it offers lower bid prices than Google, the Yahoo! dilemma just got even more interesting. First, if Yahoo! decides to keep turning up that dial, advertisers will benefit less and less from lower Yahoo! prices. Second, does Yahoo! traffic convert as well as Google traffic? That will be the key determinant in whether advertisers will sustain the higher Google bid prices on Yahoo!” Bishop concluded.

Meanwhile, Simon Norris, founder of paid search firm Periscopix, said: “For Google it is a great result.  It continues to extend its reach, not just as a leading search engine, but as an adverting syndication ‘hub’.  This allows advertisers to ‘deposit’ ads, creating a network of sites to which these are distributed and selecting which are the most appropriate for the site/page in question (‘contextual targeting’).  The Google 'hub' also supplies the ad whether in text, image or video format, and undertakes the back-end billing. The deal also significantly diminishes the threat to Google from the only large, established corporations that could have pulled together some credible competition.”

Norris added that the deal is less favourable for Yahoo. “It is a bad result as it is a tacit admission that its own ad serving system (called ‘Panama’) has failed to match up to that offered by Google,” he said.

“This system was launched in 2007 and turned out to be largely a copy (and a slightly inferior one at that) of Google’s own long-established system.  Yahoo now seems to have decided that the best route forward is to cut out all of the costs of running its own ad system (development, sales support, billing etc etc) and take its ads directly from Google.   However it seems safe to assume that Google will also be keeping a sizeable proportion of the revenue generated from these ads.   It may also limit Yahoo’s ability to innovate in the future”.

Overall it’s a good result for advertisers, as it will be much more straightforward for them to set up and manage their campaigns through a single system that serves the two biggest search sites.