Senator Raises Red Flag Over Google-Yahoo Ad Deal

Of all the protests mounted against the pending ad partnership between Google (Nasdaq: GOOG) and Yahoo (Nasdaq: YHOO), the one lodged by Sen. Herb Kohl, D-Wis., is bound to be among the most worrisome.

Kohl, who oversees the Senate Antitrust Subcommittee, has asked the U.S. Department of Justice to continue to monitor the competitive landscape of the online advertising industry no matter what its initial findings on this particular deal might be.

"If, over time, you determine that Google is gaining a dominant market position as a result of the Google-Yahoo agreement, then we would encourage the Justice Department to intervene to protect competition," Kohl wrote. "Even should you conclude at present that this deal is not contrary to antitrust law, the Department must be sure that this deal never in the future crosses the line into an unacceptable, anticompetitive collaboration among competitors which will harm consumers and advertisers."

This is sure to be a blow to the two companies, which exuded such confidence regarding the legality of their proposed tie-up. When they first announced the deal in June, they said they would delay moving forward with the partnership for up to three and a half months to give the U.S. Department of Justice time to review it -- even though they were not required to do so.

Murky Future

Congress -- namely Kohl's subcommittee -- has also made inquiries into the pending agreement, but it is the Justice Department that has the most direct shot at blocking the deal, despite its partnership nature and structure.

Rumors are circulating that the DoJ is set to announce it decision next week. However, Kohl's letter was not timed to coincide with that event, Rohit Mahajan, a spokesperson for the senator, told the E-Commerce Times.

"It was sent because the contract is going to be implemented this month," he said. Even if Justice gives the agreement the okay, "the Senator's goal is to make sure that it doesn't cross the line into anticompetitive collaboration later down the road," Mahajan said.

Indeed, the impact of the agreement may not become entirely clear right away, as Kohl pointed out. Critics of the agreement who have testified to the subcommittee "fear the transaction will lead to higher advertising prices and create unfair market conditions," he wrote.

"In addition, many interested parties are also apprehensive that if the transaction is consummated, Yahoo will have less incentive to compete against Google, as it will rely upon its main competitor for a significant increase in its revenue."

Advertisers no doubt are worried that the transaction will ultimately result in fewer options and higher prices as Google -- when it comes to online search advertising -- essentially swallows Yahoo, Chris Karagheuzoff, a partner at Dorsey & Whitney, told the E-Commerce Times. "But by no means does there appear to be any consensus, at least among lawmakers, that the partnership is necessarily anticompetitive, and that a suit to block it won't ultimately stifle online market growth and innovation," he said.

Door No. 1

Still, it may be that Kohl's urgings to the Justice Department were not necessary. The agency essentially has three options, Karagheuzoff explained: It can sue to block the transaction; it can attempt to negotiate restrictions with Google and Yahoo that might diminish potential anticompetitive effects; or it can adopt a "wait-and-see" approach, instructing that if, in fact, the harms that the proposed partnership's detractors fear do come to pass, then the government can act at that time.

Some signals are pointing toward litigation. "Google and Yahoo are eager to consummate this deal," said Karagheuzoff, "and the Department of Justice took the unusual step not long ago of hiring special counsel to evaluate the partnership."

In the end, given the stakes for all parties, "a more likely scenario may be some type of negotiated resolution, with or without the threat of future continued scrutiny of the effects of the deal," he concluded.