Last year, Google and Yahoo were denied a deal that would have left Yahoo with its own search technology, after the US Department Of Justice rattled its anti-trust saber. This year, Yahoo’s pursuing a deal to sell off its tech to Microsoft. While Google CEO Eric Schmidt sees his company’s former deal as “part of history,” he said Google still feels an “independent” Yahoo is important.

Yahoo CEO Carol Bartz is banking heavily on the idea that Yahoo can stay competitive in search even without its own search technology. I wondered if Schmidt agreed, given how much he knows Google spends on its own technology. Last week during an interview, I asked if he felt Yahoo could stay a competitive player, if it gave up its search tech.

Schmidt dodged answering that one, saying he wanted to avoid specifics, as Google hasn’t taken an stance on the deal:

We have not taken a position on the deal. First place, as you know we proposed a deal which we came within an hour of being sued by the U.S. government over. So, in the annals of Google and Yahoo, that’s the deal we would like. And obviously that can’t happen right now. So I think it probably would sound like spoiled, whatever the term is, complaining to talk a lot about the Yahoo-Microsoft stuff. Historically Microsoft has not been a very good partner in these things. And so we’ve decided to take the perspective of just waiting. Let’s see more. I’m trying to avoid answering a specific question about Yahoo. Because one, I think it’s a little unfair for me, and second is that we truly don’t know.

But Google has taken a position to some degree, putting out this statement after the deal was initially announced:

There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. We’re interested to learn more about the deal.

In other words, the search space currently has Google, Yahoo and Microsoft currently as major competitors. The worry in that statement is that the Microsoft won’t leave Yahoo as competing. In contrast, when Google announced its proposed deal with Yahoo, the fact that Yahoo would keep its technology was positioned as important for Yahoo to stay strong. When I raised this issue, Schmidt reflected lightly on the differences between the two deals and how ultimately, he thinks an independent Yahoo helps search competition:

There are some significant differences. As we understand it there are some significant differences in the deal. In our deal it was non-exclusive. In our deal they would remain in the search space. In our deal they would maintain a direct advertising sales force. There are quite a few differences. But as I said, that’s not a deal that we could get through today, and we didn’t get it through in November. So it’s sort of like, what’s to say about it? It’s part of history. We took a very strong position that an independent Yahoo was important. And I think that remains our view. Because an independent Yahoo means more competition in the space in general. It’s better for advertisers, it’s better for content. You know, Yahoo has basically become a good company.

Wired offers a fascinating, if sensational, account of the “plot” by Microsoft, its allies and its operatives to sew discontent over Google’s proposed paid search deal with Yahoo: The Plot to Kill Google. The article presents Microsoft as the driving force, along with other allies, behind an effort to stop Google’s further dominance in search (via the Yahoo deal) after its own failed bid for Yahoo.

Here’s an excerpt:

[John Kelly, Microsoft's head of strategic relations,] sprang into action, activating his company’s vast Washington infrastructure.Microsoft’s protracted antitrust battles had left it with an army of lawyers and lobbyists and deep institutional knowledge of which politicians to approach and how best to sway them. Soon, Microsoft’s lobbyists were meeting with Herbert Kohl, chair of the Senate’s Antitrust Subcommittee. By early July the subcommittee was holding hearings. In October, Kohl wrote to [Tom Barnett, assistant attorney general for antitrust] warning that “important competition issues are raised by this transaction.”

But that was all familiar, the kind of campaign Microsoft had routinely run. Kelly wanted to take a different approach this time—not just opposing the deal but persuading other interested parties to speak out as well. The arguments of a known competitor may not sway the Justice Department, but customers’ opinions hold special influence. If advertisers—Google’s customers—voluntarily declared their opposition, the DOJ would listen closely.

Kelly turned to Michael Kassan, an advertising consultant who had been advising Microsoft off and on since 2002. Kassan—whose clients have included AT&T, Disney, and Viacom—recently had been named by Advertising Age as possessing the third-most-impressive Rolodex in the industry. Kelly asked Kassan to start talking to his contacts and drum up opposition to Google. Kassan assured him he knew just how to do it; there was plenty of fear and mistrust of Google among advertisers. “Google has badly misjudged how it is perceived,” he reassured Kelly. “We have a clear and easy story to tell.”

Other “Google enemies” mentioned in the story include AT&T, the National Association of Broadcasters, Verizon, Comcast and several others.

The story casts Google as the green (as in naive) political victim of more experienced and cunning adversaries who saw Google disrupting or undermining their respective franchises and markets. The now-tarnished myth of American capitalism is that markets are transparent, fair and operate largely on their own. In fact, as this case shows in microcosm, success in the “free” or “open” market is as much about politics and political influence as it is almost any other factor.

The Wired piece even implies the killing of the Google-Yahoo search deal is partly a Republican political vendetta for Google’s historical support of Democrats. However U.S. Senator Herb Kohl, chairman of the Senate Antitrust Subcommittee and Google critic, is a Democrat.

As much as Microsoft may have orchestrated the objections to the Google-Yahoo search deal, Google’s hands aren’t entirely clean either. Google was involved in thwarting the MicroHoo deal, by throwing Yahoo a search lifeline and providing some political cover for former Yahoo CEO Jerry Yang who wanted to find a way to preserve the independence of his company. And as much as the Wired piece portrays a conspiracy, as the quote above suggests — “We have a clear and easy story to tell” — Google’s increasing success itself raised concerns in enough quarters that it was not hard organize opposition to the deal.

Success is admired in this country. Too much success breeds envy, distrust and fear.

Fearing a protracted legal battle, damage to its reputation/brand and perhaps even to its stock price, Google abruptly pulled out of the proposed Yahoo paid search deal. It was revealed at the time that the US Justice Department was planning to file an action against the deal. Now in an interview in AmLaw Daily, the attorney spearheading the potential case against Google, Sanford Litvack discusses what happened.

Here are some excerpts from the article/interview:

“We were going to file the complaint at a certain time during the day,” says Litvack, who rejoins Hogan & Hartson today. “We told them we were going to file the complaint at that time of day. Three hours before, they told us they were abandoning the agreement.”

The never-filed government complaint would have charged that the agreement violated Sections 1 and 2 of the Sherman Act, Litvack tells the Am Law Daily in one of his first interviews since the companies canned the venture. Section 1 bans agreements that restrain trade unreasonably. Section 2 makes it unlawful for a company to monopolize or attempt to monopolize trade.

“It would have ended up also alleging that Google had a monopoly and that [the advertising pact] would have furthered their monopoly,” Litvack says.

Litvack acknowledges that Microsoft Corporation and other companies lobbied the department to block the agreement, both publicly and and in private meetings. Litvack insists, though, that Microsoft’s lobbying had no bearing on his recommended course of action or on the division’s ultimate decision.

What’s significant is that the US DOJ effectively considers Google to be a monopoly, although it’s important to note that the question has not been adjudicated and so it’s merely a legal opinion. Google did not want to expose itself to potential regulation on the basis of an adverse finding by a court on the question of whether it was in fact a “monopoly;” hence, the cancellation of the Yahoo deal.

This also likely means that Google’s future deals involving online advertising may be scrutinized much more carefully and closely than they have been in the past.

Coming just 24 hours after the resignation of Yahoo CEO Jerry Yang, Microsoft CEO Steve Ballmer is saying publicly that Redmond is “open” to a “search collaboration” with Yahoo but not a total acquisition of the Sunnyvale company. The Wall Street Journal and Seattle PI report on the remarks, made during a Microsoft shareholder meeting. Meanwhile, Valleywag says that Yahoo has lost Sean Suchter, a key search executive, to Microsoft.

The search collaboration that Ballmer referred to would presumably be similar to the search (as opposed to acquisition) deal previously offered to Yahoo — essentially to have Yahoo outsource search (both organic and paid ads) to Microsoft in exchange for guaranteed revenues over a several year period. Danny did a detailed post on the prior Microsoft search offer to Yahoo (compared with the now defunct Google deal).

That offer, as with the larger acquisition offer itself, was previously rejected by Yahoo as undervaluing the business. It was also rejected because it was seen by Yahoo as removing a strategic component of the company’s larger suite of advertising capabilities.

Circumstances have dramatically changed since Yahoo rejected Microsoft’s offer. And today Yahoo might be more open to a modified version of the earlier Microsoft search proposal; one could imagine a version of the Google-Yahoo deal. However, Microsoft doesn’t have as many advertisers as Google and couldn’t offer as much inventory for “the tail.”

A Microsoft-Yahoo search tie-up wouldn’t incur the wrath of the justice department, however, because combined they would only control about 30% of the consumer search market in the US.

Everyone at Yahoo must be totally exhausted — perhaps most of all CEO Jerry Yang. It’s probably apprpriate to now use modifiers such as “beleaguered” or “embattled” to describe Yang. Mike Arrington has called for Yang to be replaced, as have others before him. After the termination of the Google paid search deal yesterday, more people will likely be doing the same.

Yahoo has many initiatives in various stages of execution and still has tremendous value to the consumer public (consumers don’t care who the CEO of Yahoo is). But if Yahoo were a parliamentary regime, there would be a vote of “no confidence” coming from much of the tech press and many bloggers.

(My personal view is that Yang seems to have lost the confidence of marketplace and that a new, more charismatic and forceful leader may be required to restore that confidence.)

Both the BBC and TechCrunch report on Yang’s chat with John Battelle at the Web 2.0 conference yesterday. The primary message that these reports convey is that Yang wants another bid from Microsoft. BBC quotes Yang saying, “To this day the best thing for Microsoft to do is buy Yahoo.” While that statement could be read as Yang’s unsolicited advice to Redmond, given Microsoft’s challenges in search, it could also be read as a plea of sorts.

In the latter context, Yang denied that he/Yahoo was responsible for killing the negotiations with Microsoft the last time around. According to the TechCrunch live notes from the talk:

Battelle says that a lot of people claim Yang is to blame for the deal falling apart. Yang counters, saying he is indifferent about keeping Yahoo independent and just wants what’s best for the company. He also reiterates that they went back to Microsoft after the offer was revoked to get them interested again.

This would appear to be a bit of “revisionist history,” looking back at Yahoo’s behavior and at all external appearances at the time. It certainly appeared that Yahoo was actively pursuing alternatives — and not just to maximize shareholder value. One of those alternatives came in the form of a paid-search deal with rival Google, which is now defunct. Another much-discussed alternative, an AOL acquisition or merger, was not discussed much during yesterday’s interview:

Battelle asks if Yahoo is talking to Microsoft about any kind of deal. Yang says no. Battelle asks if Yahoo is buying AOL, Yang says “I can’t talk about that.”

From my read of the various reports, it appears that Yang is sending a very mixed message, something like: “Yahoo is executing, Yahoo will continue to acquire other companies, Yahoo is strong . . . Microsoft, please buy us.”

Here’s more discussion from Techmeme.

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.

Billionaire inventor/corporate gadfly Carl Icahn, who owns 5 percent of Yahoo and is now a board member, continues to publicly advocate a MIcrosoft deal for the portal site. Icahn has at least two board members aligned with his positions (former Viacom CEO Frank J. Biondi Jr. and former Nextel CEO John H. Chapple) based on an earlier settlement that saw him and the two handpicked others added to the Yahoo board.

Since Icahn joined the Yahoo board, and since the rejection of the multiple Microsoft offers, the company has lost roughly 40 percent of its value.

Yahoo and Google just resubmitted their proposed paid search agreement with some modifications in hoping to mollify critics and pass US Justice Department muster. The Google paid search deal was presented to shareholders as an alternative to the more narrow Microsoft search deal that followed the failure of the outright acqusition of Yahoo.

If the newly revised deal fails, Icahn will have considerably more ammunition to argue for renewed talks with Redmond.

Faced with continuing opposition to their original search ad partnership, Google and Yahoo have changed the terms and submitted a new agreement to the U.S. Justice Department.

According to the Wall Street Journal, the new deal changes the agreement from 10 years to two years and limits the amount of money that Yahoo can collect up to 25% of its search revenue. The new plan also includes an opt-out mechanism for Google advertisers who don’t want their ads to show on Yahoo.

The original Google-Yahoo deal was announced in June and drew immediate concerns over antitrust issues. At that time, Yahoo CEO Jerry Yang said that the two companies didn’t need regulatory approval for this deal because it’s open and non-exclusive. Google’s blog post about the deal went out of its way to dampen any antitrust claims.

That didn’t stop the Justice Department’s Antitrust Subcommittee from investigating the agreement. Last month, the two search engines agreed to delay implementing the deal while the Justice Department continued its investigation. As recently as last week, rumors circulated that Google and Yahoo were preparing to call off the agreement altogether due to Justice Department demands.

More discussion on Techmeme.

Postscript from Greg: While the new deal offers a more limited duration and caps potential Yahoo revenues — so that Yahoo doesn’t become “lazy” and too dependent on Google, presumably — it’s not clear that these changes will satisfy the objections raised by some marketers and trade groups: that Google controls too much of the search marketplace.

We know from talking to Yahoo quite a bit that they’re not complacent about consumer search and are rolling out (and planning) numerous innovations in the coming weeks and months.

I would assume that this new deal explicitly addresses some of the DOJ’s concerns because Google and Yahoo have been in ongoing talks with anti-trust regulators. Thus, on that speculative basis, I would imagine this has a much better shot at being approved. We’ll see.

Despite public pronouncements of confidence by Google and Yahoo about the future of their paid search deal, which was partly set up to fend off Microsoft and hostile Yahoo shareholders who wanted a Microsoft takeover, the emerging consensus is that it’s not going to happen. The Wall Street Journal this morning reports that the parties are not coming to terms and the US Justice Department wants concessions that the search engines don’t like. According to the WSJ:

The two companies met Thursday with the Justice Department, part of a series of meetings to address the concerns of regulators. While the parties may agree to continue the talks — or they could reach a resolution — there are signs they are unwilling to make compromises to address the Justice Department’s objections . . .

The option to scrap the deal has been on the table before, but Google in particular has begun considering it more seriously as Justice Department talks haven’t progressed. One sticking point has been the department’s discussion of having the companies sign a consent decree stating the terms of the partnership. That would subject their compliance to continuing oversight by a judge.

Google and Yahoo originally took the position — Google in particular — that the deal wasn’t even subject to government approval because it didn’t constitute a merger or an acquisition. The companies said they were voluntarily cooperating with the Justice Department rather than being compelled to do so. Google made the case that this agreement was like its arrangements with AOL or Ask, in which Google ads are provided via those companies’ search results.

Yet, in September, on the heels of some very public objections from various advertisers and publisher trade groups, the government hired former Disney vice chairman Sanford Litvack to prepare a potential antitrust case against Google. Publicity surrounding that development arguably caused Google stock to take a significant hit.

Lobbying by Google and Yahoo then intensified in favor of their deal. Google and Yahoo went online (Google, Yahoo) to explain “the facts” and promote the deal to interested parties and regulators. Meanwhile Microsoft publicly and privately had been doing the same thing to try and kill the deal.

Google and Yahoo have agreed to a couple of delays to allow the government to complete its anti-trust review. It appears those delays have been part of an effort by Google and Yahoo to negotiate with and satisfy regulators’ issues and objections to the deal.

If in fact the parties did “walk away” both Google and Yahoo are likely to see some investor fallout, perhaps Yahoo more than Google. But it would also signal that Google has bumped up against some limits that it hasn’t encountered before: it’s own success in search and the US government.

There’s more discussion at Techmeme.

Texas Republican Congressman and Google critic Joe Barton wants more information about the proposed paid-search deal between Google and Yahoo. Dissatisfied with Yahoo’s responses to his questions to date, Barton has asked the US Department of Justice to “thoroughly investigate issues of competition and privacy that Yahoo failed to address fully.”  He is concerned about Google developing “an effective monopoly” in paid search.

If you’re having a sense of deja vu, it’s probably because all this sounds very much like a rerun of Barton’s public pronouncements in scrutinizing the Google-DoubleClick deal last year. However, with this Google-Yahoo paid search agreement, Barton is joined by a range of others who fear the impact on the competitive landscape of search marketing.

In this somewhat more hostile political climate for Google, it would be interesting to consider whether the DoubleClick acquisition would have been tougher sell if it had been announced today. Of course there’s no way to determine that.

There’s a strong chance that regulators will not allow the Google-Yahoo search deal; indeed this is the emerging conventional wisdom. That conventional wisdom is cited over at Silicon Alley Insider in bringing up the possibility of another potential search-oriented deal between Yahoo and Microsoft. SAI claims that “Yahoo board members are reportedly reaching out to Microsoft to try to restart these talks.” The phrase “these talks” refers to the previously rejected Microsoft offer to buy Yahoo’s search business.

In the recent past Microsoft has given mixed messages about whether it’s still open to a deal with Yahoo of any sort (read: yes).