Now What Are You Going to Do, Jerry?

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.

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.

“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.