The long awaited verdict is in with regards to the long awaited proposed advertising deal between Google and Yahoo.  On Wednesday, Google officially announced its decision to bow out of the publicly scrutinized advertising arrangement.  The proposed arrangement of search engines #1 and #2 working directly together created controversy and nearly became a legal trial, as the Justice Department announced on Wednesday that if Google and Yahoo moved forward with the ad deal they would file suit to block the deal.

This past week Google & Yahoo offered the Justice Department a significantly revised version of its original advertising partnership plans for approval.  The revised plans were an effort to cooperate with the Justice Department, who has been scrutinizing the proposed deal in regards to its potential effect on competition.
Analysts say that the deal was a no lose proposition for Google, as they had nothing to lose if the deal did not go through, and in the meantime Google was able to keep Yahoo out of the arms of Microsoft.  Google’s chief legal officer David Drummond posted in their blog the following statement:

“Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners.  That wouldn’t have been in the long-term interests of Google or our users, so we have decided to end the agreement.”

The proposed advertising partnership has stirred up much controversy over the past few months among competition, investors, regulators and the Justice Department.  Thomas O. Barnett, assistant attorney General to the Justice Department’s antitrust division said the following per press release:

“The arrangement likely would have denied consumers the benefits of competition-lower prices, better service and greater innovation.”

The majority of those concerned about the ad arrangement had relayed fears that Yahoo’s advertising system generates less profit from each search performed than Google’s.  The Justice Department had stated its fears that the agreement would reduce Yahoo’s incentives to invest in its own search advertising ventures and end up submitting larger and larger portions of its ad business to Google.  Brought to you by Deep Blue Interactive, your Fort Lauderdale interactive marketing firm.

As previously covered- opinions in favor of and against the proposed advertising deal between Google and Yahoo are strong. Those against the deal often cite the fact that Google controls roughly 70 percent of the search advertising market, painting it as a monopoly. Those in favor of the deal have researched further to analyze the facts.

While Google does control 70 percent of the search advertising market, it does not set the pricing. Advertisers set the pricing, bidding against each other for the amount they will pay when a user clicks on their advertisement. Microsoft, Yahoo and other companies operate in the same manner. At Google advertising spots are not simply sold to the highest bidder, quality scores are also factored in. A quality score is based on the relevance of the advertiser’s destination page to the search term and the prior history. The higher an advertiser’s quality score is, the lower the price of the advertisement.

This is all part of Google’s search algorithms whose goals are to link users with the products and services they are searching for. This is also the reason advertisers are willing to pay more for a spot on Google ads, because it is well known that Google’s software and technology is more likely to produce customers who make a purchase, because the ads are strategically targeted to relevant users- and advertisers are willing to pay more to reach those users. It is also a fact that Ask has renewed its advertising deal with Google in 2004 and 2007, since its initial startup in 2002–a keen indicator that it is lucrative for Ask.com. and could be for Yahoo as well.

Google has a large ad inventory; it makes sense for them to find ways to disperse them among other engines. The practice of auctioning prices to advertisers is so ingrained in this business that it is clear why Google and Yahoo did not see their advertising deal as a monopoly or threat to anyone else, and assumed they would breeze through the regulatory review to which they voluntarily submitted. The arrangement is simply Google supplying ads to Yahoo, the same as they do for Ask. To read previous entries on this topic, see Deep Blue’s blog, your Fort Lauderdale interactive marketing firm.