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Yahoogle boondoggle

If Yahoo and Google team up, competitors -- and the public -- would likely be the losers.

May 06, 2008

Microsoft Corp. has withdrawn its $43-billion bid for Yahoo, at least for now, in the face of the Yahoo board's demand for billions of dollars more. The withdrawal cheered Yahoo executives and opponents of the takeover, most notably Google, whose dominance over some kinds of online advertising was threatened by the pairing. But if Yahoo responds by joining forces with Google, consumers and advertisers might end up worse off than had the Microsoft deal gone through.

Don't get us wrong, we're not in the Google Is Evil camp. We'd just like to have lively competition in online advertising. Sometimes choice and innovation are promoted when weaker competitors join forces to battle stronger ones. But when a dominant competitor co-opts the runner-up, that's troubling.

Such would be the case if Yahoo took its search advertising business, which now ranks a distant second behind Google in market share, and handed it over to Google. Search advertising is a powerful way to sell goods and services, promote a brand and compete with better-known rivals. For example, if Brand X wants to sell more detergent, it might pay a search engine such as Google or Yahoo to show ads for that product whenever someone searches for "best detergent" or "Tide." The effectiveness of such ads, though, depends in part on how many people see them. Google's system already delivers ads to more searchers than any of its competitors; adding Yahoo's giant audience to its own would make Google's service more compelling to advertisers -- and more difficult for anyone else to compete with.

Yet that's what Yahoo has been considering, first to hold off Microsoft's advances and now to bolster its revenue. It recently conducted a trial run, substituting Google's system for its own on a fraction of its searches for two weeks; even that tiny test run drew scrutiny from government antitrust authorities. To avoid those problems, the companies are considering ways to limit how much of Yahoo's traffic Google could serve or to let multiple search-advertising systems bid for advertisers' business on Yahoo. The idea is to generate more revenue for Yahoo, which could use the money to improve its alternatives to Google's offerings.

Such an auction system might satisfy the Justice Department, but it's not likely to provide much comfort to Google's rivals. Google likes to say that its ad system became the leader because it works better. But many advertisers buy from Yahoo too, in order to reach the latter's large audience. Given the chance to reach that audience through Google's system, why would they use Yahoo's or anyone else's? Yahoo might prosper by keeping a healthy piece of the ad revenue Google generates. But competitors wouldn't, and neither would the public.

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