Google's Yahoo! Deal Rankles

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.

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