Google threw in the towel yesterday by declining to wage a legal battle with the US Justice Department (DoJ) by announcing that it was terminating its proposed advertising search deal with Yahoo after the DoJ told the two companies yesterday  that it would file a lawsuit to block the proposed deal as it would restrict Yahoo from investing and promoting its own search advertising business and Google would end with a bigger slice of the search advertising market.

The Justice Department said "if implemented, the agreement between these two companies accounting for 90 per cent or more of each relevant market would likely harm competition in the markets for Internet search advertising and Internet search syndication".

The DoJ said, "Had the companies implemented their arrangement, Yahoo's competition likely would have been blunted immediately with respect to the search pages that Yahoo chose to fill with ads sold by Google rather than its own ads."

Thomas Barnett, assistant attorney general in the Justice Department's antitrust division, said in a press release, ''The arrangement likely would have denied consumers the benefits of competition - lower prices, better service and greater innovation.''

doJ noted on its website, "Yahoo! is by far Google's most significant competitor in both markets, with combined market shares of 90 per cent and 95 per cent in the search advertising and search syndication markets, respectively. Yahoo! provides an alternative to Google for many advertisers and syndication partners, and Yahoo! recently had begun making significant investments in order to compete more effectively against Google, including the 2007 introduction of its Panama search advertising platform. Had the companies implemented their arrangement, Yahoo!'s competition likely would have been blunted immediately with respect to the search pages that Yahoo! chose to fill with ads sold by Google rather than its own ads, and Yahoo! would have had significantly reduced incentives to invest in areas of its search advertising business where outsourcing ads to Google made financial sense for Yahoo!

It concluded that Google and Yahoo! would have become collaborators rather than competitors for a significant portion of their search advertising businesses, materially reducing important competitive rivalry between the two companies.

Writing in his personal blog, Google's senior vice president and chief legal officer David Drummond, said, "We're of course disappointed that this deal won't be moving ahead. But we're not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on."

Yahoo said in a statement, "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."

This proposed tie-up was expected to enable Yahoo withstand shareholder pressure to accept Microsoft's merger offer by generating a stable revenue stream to survive and support itself by displaying Google ads on its sites.

It said, "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."

Google and Yahoo announced their search advertising agreement in June where Yahoo would let Google sell search ads on some of its websites in the US and Canada initially for four years which could be extended up to 10 years under mutual consent. (See: Yahoo strikes $800-million ad deal with Google, ends talks with Microsoft)

Since Google had similar deals with Time Warner Inc's AOL and IAC / InterActiveCorp's Ask.com, the Google-Yahoo agreement had a non-exclusivity clause, which both the companies had hoped  would help the deal pass regulatory approval.

The deal that would have generated $800 million annual revenue with an additional between $250 million and $450 million in incremental operating cash flow for Yahoo in the first year itself.

The Google-ahoo deal had come under intense fire from The Association of National Advertisers, a trade association that represents 375 companies with 9,000 brands who collectively spend over $150 billion in marketing communications and advertising who charged "that the partnership will likely diminish competition, increase concentration of market power, limit choices currently available and potentially raise prices to advertisers for high quality, affordable search advertising." (See: Advertisers opposes Yahoo-Google ad deal; authorities may take antitrust action) 

It is reported that Microsoft, derided as the ''big bad wolf'' of software monopoly by competitors, had spent a substantial amount of money in lobbying regulators to scuttle the Yahoo-Google deal after Yahoo spurned Microsoft's unsolicited offer for Yahoo.
In its effort to stymie the deal, Microsoft had contacted advocacy groups that work to influence policy in Washington. (See: Microsoft opposes Yahoo-Google deal, reveals another rejected stake plus search offer)

''The Department of Justice's finding is significant for advertisers, publishers and consumers, who voiced overwhelming concern about this illegal deal to law enforcement and policy makers,'' Microsoft said in a statement (See: Microsoft opposes Yahoo-Google deal, reveals another rejected stake plus search offer)

The decision of the department of justice is not surprising as the regulators were against the deal right from the beginning and were testing Google's resolve to pursue the deal.

In a desperate bid to let the deal through, the two companies offered to significantly narrow the scope of the planned partnership by revising the terms of the agreement with a two-year cap instead of 10 years In addition, the amount that Yahoo could earn from ads placed by Google would be capped at 25 per cent of Yahoo's search advertising revenue. Previously, Yahoo had the discretion to decide how much of its search ads to turn over to Google. (See: Yahoo, Google offer to water down advertising deal to get regulatory approval)

This 'give and take' did not cut any ice with the regulators as they did not think their role was to advise the companies on how to get the deal passed but their job was to evaluate the deal, as it was presented to them.

Yahoo chief executive officer Jerry Yang will now have to come up with other innovative ways to prop up his company and keep at bay its angry shareholders who had welocmed Microsoft's merger offer right from the start.

He has two obvious options now - buying AOL or selling out to to Microsoft in whole or in part, though Microsoft is perfectly well aware that Yahoo has hardly any choices for other possibloe alliances.

Even though Microsoft CEO Steve Ballmer has categorically stated that it was no longer interested in acquiring Yahoo, commentators still say one of Yahoo's options is to go back to the negotiating table with Microsoft.

Yahoo will also have to tie up its earlier proposed deal with Time Warner for its AOL unit although such a deal would be difficult as Time Warner wants $10 billion for selling AOL, which is not acceptable to Yahoo, even though  tha acquisition could help Yahoo cut costs by consolidating advertising sales forces and technology.