Earlier this week Google made the decision to no longer pursue their ad partnership deal with Yahoo as the deal faced heavy scrutiny from the Department of Justice(DOJ). If you are not familiar with the deal, to sum it up briefly, was an agreement that Google would serve the ads on Yahoo and split revenues. The purpose of the deal was to increase revenue for Yahoo as Google is able to garner much more per visitor from their searches than Yahoo. This deal would have allowed Yahoo to still serve ads for their less profitable keywords and Google would have displayed the ads for the more profitable keywords. This was sold as a win-win.
The latest sticking point that caused Google to walk away from the deal was the requirement by the Department of Justice that Yahoo not generate more than 25% of the revenue from Google. Google decided that a deal with those requirements were not in their best interest and they walked away from the deal. The real winner of Google walking away from the deal are the advertisers. The Department of Justice made this requirement to prevent Google from gaining monopoly status.
From an advertiser perspective, this deal not going through is great. If the deal would have gone through, Google would have controlled the advertising on over 90% of the searches in the United States and nearly all of the revenue. Although Yahoo is still searching for an identity and is no longer really a formidable competitor for Google, their market share of 20% still makes them very significant. Had Google controlled all of the ads for search, it would not have been immediate, but over time there would be a significant increase in advertising costs.
The reason prices would have increased would be due to lack of competition. In an unregulated industry, a company that is a monopoly has the ability to price gouge and I have no doubt that would have happened with this deal. Although the Google Adwords platform is far superior to Yahoo and Microsoft, forcing all advertisers to solely use that platform would drive up prices and stagnate innovation.
I have a feeling that the deal is not totally done, but for now we can breathe a bit easier. My expectation is that Microsoft will renew their interest in Yahoo and purchase them. Those two combined companies would represent approximate 30% of share of search and would then be a solid competitor to Google which would keep innovation high and prices low.
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