John Paczkowski

Recent Posts by John Paczkowski

Now What Are You Going to Do, Jerry?

The deal was designed precisely to meet the terms of antitrust laws in the United States because we knew people would raise these questions. We spent months and months working with Yahoo to come up with a good deal. We’re very committed to the deal.”

— Google CEO Eric Schmidt, Sept. 18, 2008

Apparently Google would rather abandon its proposed advertising partnership with Yahoo than have the government dictate its terms. This morning Google walked away from the deal saying it’s not in the company’s best interests to risk the protracted legal battle brewing over it. This, not a week after Google and Yahoo submitted a revised, diminished version of the pact that the companies had hoped would appease regulators. “Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners,” Google chief counsel David Drummond wrote in a post to the Google Blog. “That wouldn’t have been in the long-term interests of Google or our users, so we have decided to end the agreement.”

Seems Google (GOOG) wasn’t quite as committed to working with Yahoo as CEO Eric Schmidt suggested. But you know, time is money in Google’s business, and this deal was taking up a lot of it.

A tough break for Yahoo (YHOO), which expected the deal to generate between $250 million to $450 million in incremental operating cash flow in its first year. In a statement, the company said it was “disappointed that Google has elected to withdraw from the agreement rather than defend it in court.”

What’s Yahoo CEO Jerry Yang going to do now? Wait by the phone for a call from Steve Ballmer? I wonder what sort of terms he’d offer Yahoo today? Not nearly as good as those offered this past summer, I suspect.

Statements from both companies, and the Department of Justice, after the jump …

From the official Google blog:

Ending our agreement with Yahoo!

In June we announced an advertising agreement with Yahoo! that gave Yahoo! the option of using Google to provide ads on its websites (and its publisher partners’ sites) in the U.S. and Canada. At the same time, both companies agreed to delay implementation of the agreement to give regulators the chance to review it. While this wasn’t legally necessary, we thought it was the right thing to do because Google and Yahoo! have been successful in online advertising and we realized that any cooperation between us would attract attention.

We feel that the agreement would have been good for publishers, advertisers, and users–as well, of course, for Yahoo! and Google. Why? Because it would have allowed Yahoo! (and its existing publisher partners) to show more relevant ads for queries that currently generate few or no advertisements. Better ads are more useful for users, more efficient for advertisers, and more valuable for publishers.

However, after four months of review, including discussions of various possible changes to the agreement, it’s clear that government regulators and some advertisers continue to have concerns about the agreement. Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn’t have been in the long-term interests of Google or our users, so we have decided to end the agreement.

We’re of course disappointed that this deal won’t be moving ahead. But we’re not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on. Google’s continued success depends on staying focused on what we do best: creating useful products for our users and partners.

From the Yahoo Press Room:

Yahoo! Announces Termination of Services Agreement by Google

SUNNYVALE, Calif., Nov 05, 2008 — Yahoo! Inc. (Nasdaq: YHOO), a leading global Internet company, today announced that Google has terminated the advertising services agreement the companies announced in June. Yahoo! continues to believe in the benefits of the agreement and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court. Google notified Yahoo! of its refusal to move forward with implementation of the agreement following indication from the Department of Justice that it would seek to block it, despite Yahoo!’s proposed revisions to address the DOJ’s concerns.

While the implementation of the services agreement with Google would have enabled Yahoo! to accelerate its investments in its top business priorities through an infusion of additional operating cash flow, this deal was incremental to Yahoo!’s product roadmap and does not change Yahoo!’s commitment to innovation and growth in search. The fundamental building blocks of a stronger Yahoo! in both sponsored and algorithmic search were put in place independent of the agreement.

Yahoo! continually optimizes its algorithmic and sponsored search, and we have, in 2008 alone, developed and launched hundreds of improvements all designed to enhance search quality and deliver a more relevant search experience to the company’s users. To that end, Yahoo! has benefited from strong revenue per search (RPS) gains in the U.S. as discussed on the Q3 earnings call. Furthermore, Yahoo! continues to make substantial progress against its Open Strategy and in the deployment of its game changing APT from Yahoo! display advertising platform.

Going forward, Yahoo! plans to continue to provide the cutting-edge advances in products, platforms and services that the industry needs and expects, and intends to be the destination of choice for advertisers and publishers who want to reach one of the largest and most engaged populations of consumers on the web.

From the Department of Justice:

Yahoo! Inc. and Google Inc. Abandon Their Advertising Agreement

WASHINGTON — Yahoo! Inc. and Google Inc. abandoned their advertising agreement after the Department of Justice informed the companies that it would file an antitrust lawsuit to block the implementation of the agreement. The Department said that, if implemented, the agreement between these two companies accounting for 90 percent or more of each relevant market would likely harm competition in the markets for Internet search advertising and Internet search syndication.

“The companies’ decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action,” said Thomas O. Barnett, Assistant Attorney General in charge of the Department’s Antitrust Division. “The arrangement likely would have denied consumers the benefits of competition–lower prices, better service and greater innovation.”

The agreement would have enabled Yahoo! to replace a significant portion of its own Internet search results advertisements with search results advertisements sold by Google. After an extensive investigation that was facilitated by the companies’ cooperation and agreement to provide the Department time to investigate prior to implementation, the Department concluded that Google and Yahoo! would have become collaborators rather than competitors for a significant portion of their search advertising businesses, materially reducing important competitive rivalry between the two companies. Although the companies proposed various modifications to their original agreement in an effort to address the Department’s antitrust concerns, the Department determined that such modifications would not eliminate the competition concerns raised by the agreement.

The Department and the Canadian Competition Bureau cooperated extensively throughout the course of their investigations. Attorneys General from 15 states–California, Connecticut, Delaware, Florida, Hawaii, Iowa, Maryland, Massachusetts, Michigan, Missouri, New Hampshire, New York, Texas, Wisconsin, and Washington–also participated in the investigation.

Google and Yahoo! are search engine companies. A search engine allows people to search for information on the Internet. In response to a search request (or query), a search engine presents a Web page listing links to other Web pages that are relevant to the query. Those listings consist of so-called “natural”or “algorithmic” results of the search engine’s canvas of the Web, as well as paid or sponsored search advertisements that are relevant to the query. Google and Yahoo! both display search advertising results above the natural search results, in the so-called “north block,” and to the right of the natural search results, in the so-called “east block.” Informative, relevant search advertisements provide a uniquely efficient and increasingly important means for advertisers to reach potential consumers. When a person clicks on a search ad, he or she is sent to a Web page designated by the advertiser. An advertiser typically pays the search engine when its advertisement is “clicked on” by a user, and the advertiser hopes the user will perform some action (called a “conversion”) when the user reaches the destination page, such as to purchase the advertised product.

Search engine companies such as Google and Yahoo! also offer their search engine and search advertising services to third-party syndication partners, such as, for example, the Internet Web sites of retail stores or newspapers. The syndication partner will use the search engine provider to search the Internet and the partner’s Web site and to provide relevant advertisements. If a user clicks on an advertisement provided in response to a search on the partner’s Web site, the search engine shares the revenues it generates from the click with the syndication partner.

The agreement granted Yahoo! the option to use Google to sell ads for placement on Yahoo!’s search results pages and certain third-party syndication partner Web sites in place of ads sold through Yahoo!’s competing search advertising platform.

The Department’s investigation revealed that Internet search advertising and Internet search syndication are each relevant antitrust markets and that Google is by far the largest provider of such services, with shares of more than 70 percent in both markets. Yahoo! is by far Google’s most significant competitor in both markets, with combined market shares of 90 percent and 95 percent in the search advertising and search syndication markets, respectively. Yahoo! provides an alternative to Google for many advertisers and syndication partners, and Yahoo! recently had begun making significant investments in order to compete more effectively against Google, including the 2007 introduction of its Panama search advertising platform. Had the companies implemented their arrangement, Yahoo!’s competition likely would have been blunted immediately with respect to the search pages that Yahoo! chose to fill with ads sold by Google rather than its own ads, and Yahoo! would have had significantly reduced incentives to invest in areas of its search advertising business where outsourcing ads to Google made financial sense for Yahoo!