NEW YORK While many agency executives are on vacation, some are busy teaching a crash course in ad economics. The students: attorneys with the Department of Justice.

In the next month, the DoJ is slated to decide whether to block the deal Google struck with Yahoo! to serve ads on some of its search results pages. With the companies set to implement the deal in early October, the department has queried a broad range of executives for input into what the deal will mean for the ad industry. Behind the scenes, Microsoft, which has accused Yahoo! of linking with Google specifically to scuttle a deal with the software giant, is urging agencies to come out against the agreement.

"We're concerned about the Yahoo! deal," said Rob Norman, CEO of WPP-owned GroupM North America. "For advertisers to prosper, they need competitive markets. We think Google is a fantastic company. Our sense is that if the transaction with Yahoo! proceeds, there's the potential the development of [Yahoo! ad system] Panama and other competing systems will atrophy over time."

Interviews with executives from shops large and small have mostly echoed these concerns. The respondents worry that the agreement will create higher prices, less competition and give Google a stranglehold on the search ad market. Only a few execs will speak publicly about their concerns, however, citing Google's outsized role in digital advertising. "It's too dicey," one executive said. "Google is a powerful partner."

Several moves by the Internet giant have given shops pause. These include: the hiring of Ogilvy & Mather co-president Andy Berndt; the purchase of DoubleClick; Google's pronouncements to Wall Street that it intends all media to run through its ad-placement system; and the near-monopoly it has established in search in Europe-and increasingly the U.S. Also on execs minds: nagging concerns that Google is going around agencies directly to clients.

At its core, the question before the DoJ is basic economics and antitrust law: Is Google using its corporate muscle to establish an impregnable position in Web advertising?

"We like to see a healthy market with lots of players and competition," said Sarah Fay, CEO of Aegis Media North America, who expects to talk to the department soon.

The deal hinges on the scale economics of the search market. Yahoo!! plans to show Google search results for an undefined subset of queries. Yahoo! head of North American ad sales David Karnstedt said those searches would mostly cover "tail" terms, or less frequently searched terms that Google handles better because of its larger marketplace. That means more clicks and conversions, he said. "If this gives more volume than converts, it's a good thing for advertisers," he said.

Yahoo! executives said they expect to generate $800 million in revenue from the deal. This aspect troubles many agencies. If Yahoo! is to generate all that extra money, where will it come from? For agencies, it's clear: higher prices.

An analysis by search management system provider SearchIgnite concluded prices on Yahoo! keywords funneled to Google would rise 22 percent. What's more, Google's more robust marketplace -- it has more advertisers, handles more searches and gets more clicks -- means it will surpass Yahoo! search ads in revenue generation in most instances, critics argued.



"The advertiser will find itself spending more for the same amount of clicks because they're coming from the most expensive part of the ecosystem," said Kevin Lee, CEO of Did-it.com, a New York search-marketing firm. "It's not rocket science."

The greater worry beyond a short-term spike in prices is that the deal would accelerate the "virtuous cycle" Google enjoys. Its ad platform already far outperforms Microsoft's and Yahoo!'s. With more advertisers and dollars in the system, the cycle would accelerate. Microsoft contends it would result in Google controlling up to 90 percent of the search ad market.

"Yahoo! will say they want to make more money," said a search agency executive. "They have a fiduciary responsibility to shareholders."

Yahoo! and Google dispute such assertions. Yahoo! is committed to remaining a major player in search, Karnstedt said, and found its results outperformed Google's for many search terms during a test this spring.

 "We don't know how much Yahoo is going to implement this," said Dana Wagner, competition counsel at Google. "We think this is making the pie bigger and helping advertisers by making sure their ads are matched better."

However, if more share migrates to Google, advertisers would be less likely to manage bids on the platforms operated by Yahoo! and Microsoft, according to search agency execs. And that would give Google a de facto monopoly. "What worries me is where's the R&D going into the next generation of search," said Norman.

The situation has exposed industry fault lines. Executives from IPG, WPP, Omnicom and Aegis all expressed discomfort with Google's growing clout. Yet Publicis Groupe stands apart. It and Google have a partnership, and Publicis last week purchased search shop Performics from Google. Concerns of other agencies are "pure speculation," in the words of Curt Hecht, president of the VivaKi Nerve Center, a unit Publicis recently set up to manage its digital assets.

"There's enough choice in the marketplace that if you want to find a consumer, you don't have to use search alone," he said.

One executive believes the back-and-forth won't matter in the end. The battle is more likely to be settled through the phalanx of lawyers and lobbyists deployed by Google and Microsoft. "It's not as much about the marketplace as you'd expect," said the holding company executive. "Microsoft and Google have a lot more at stake in this than Omnicom and WPP. It doesn't matter entirely what we say.