Citing Risk, Google Ends Yahoo Paid Search Deal

Only days after the two companies submitted a modified proposal to try and win the favor of anti-trust regulators, Google has unilaterally decided to discontinue its paid-search agreement with Yahoo, citing “a protracted legal battle but also damage to relationships with valued partners.”

Yahoo issued a public statement expressing disappointment with Google’s decision:

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.

The combined statements reveal that the US Justice Department was indeed preparing to bring an anti-trust case against Google and the company didn’t want the fight. The confirmation of the impending action comes in a NY Times quote of US assistant attorney general Thomas O. Barnett:

“The companies’ decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action . . . The arrangement likely would have denied consumers the benefits of competition — lower prices, better service and greater innovation.”

The end of the deal represents a potential loss of hundreds of millions of potential dollars in search revenue to Yahoo. Right now Yahoo’s stock is up slightly and doesn’t seem to be affected by the news. Google’s shares are down by comparison.

Yahoo board member Carl Icahn has been trying to restart talks between Microsoft and Yahoo around search. One of Microsoft’s offers to Yahoo was to acquire its search business. This development may give him some more ammunition with other board members. It may also create the opportunity for Microsoft to go after Yahoo again, in whole or part.

Also “out there” is the possibility that Yahoo might merge with or acquire AOL’s internet business (though not the ISP unit). AOL revenues were off because of online display ad weakness in Q3 results announced today.

For more, see related discussion on Techmeme.