Senators Question Google-Yahoo Deal's Benefit to Advertisers

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Today on Capitol Hill, Senators grilled Yahoo and Google about the harm their search advertising deal could inflict on advertisers.

The line of questioning was part of a Senate Judiciary Committee hearing on whether the deal would remove an important check on Google's dominance of the search advertising market.

"We are forced to examine whether this agreement will reduce Yahoo to the newest satellite in Google's orbit," said Senator Herb Kohl in introducing the hearing conducted by the Senate Judiciary's Antitrust, Competition Policy and Consumer Rights subcommittee.

Yahoo appeared on the defensive, especially after testimony by Microsoft General Counsel Brad Smith. In that testimony, Smith described private comments Yahoo CEO Jerry Yang made during recent negotiations with Microsoft CEO Steve Ballmer and other senior Microsoft execs.

According to Smith's testimony, Yang told Ballmer the Google-Yahoo deal would create "one pole" in the marketplace, neutralizing Microsoft's efforts to effectively compete with Google. Smith said Yang's exact words to Ballmer were "there's only going to be one pole in the market" after the Google search ads deal is implemented.

Two senators on the committee indicated the comment was significant, and asked Yahoo General Counsel Michael Callahan, who was also present during the negotiations, to verify it. Callahan said he couldn't recall whether Yang had made the comment.

The hearing coincided with a new report from SearchIgnite, which estimates the deal would increase Yahoo's search ad prices by as much as 22 percent, depending on how much inventory it decides to outsource to Google.

Indeed, much of the Senate questioning and testimony hinged on ad pricing. YellowPages.com Chief Marketing Officer Matthew Crowley argued the agreement would inevitably reduce Yahoo's inventory and raise Google's prices. He suggested that would push search ad costs beyond the reach of many small business advertisers.

"We'd have to pay higher rates to compete for less inventory on Yahoo," he said.

Microsoft's Smith echoed that argument.

"The whole basis of the agreement is the opportunity for Yahoo to raise its prices," he said. "Yahoo's prices may never be lower than Google's because whenever they are, Google will set the price and Yahoo will sell them the ads. It's not good for advertisers."

Microsoft's vested interest in blocking the deal was lost on neither committee members nor witnesses.

"This is the same Microsoft that is actively trying to buy or at least destabilize Yahoo," said Google Chief Legal Officer David Drummond. "Now if you think...that gives Microsoft a reason to oppose this agreement, you'd be right."

Drummond pointed out that numerous ad executives have come out in favor of the deal, including Publicis and Avenue A/Razorfish, Microsoft's own agency unit. He also asked Senators to consider two alternative scenarios: one in which Yahoo partners with Google but remains an independent tech, media, and advertising competitor, and another in which it is "gobbled up" by Microsoft, thus removing it from the market.

"This is not about search entirely," he said. "It's about the Internet in general. There would be significant concerns about a combination of those two companies."

YellowPages.com's Crowley argued consumers and advertisers shouldn't necessarily face an either/or proposition. "I don't know that there are just two options," he said. "I don't know that there aren't other opportunities for Yahoo...to innovate."

The House of Representatives conducted its own separate hearing on Internet competition yesterday. The proceedings featured the same cast of characters, with the addition of witnesses from Wunderman and Seton Hall Law School.