Pending Yahoo-Google deal will stifle choice, competition

You may be one of the dwindling number of Americans who prefer newspapers to the Internet. But regardless of your information source, you should know about the pending Google-Yahoo deal now afloat in cyberspace.

These two firms are the dominant providers of Internet search engines, the tool that facilitates online searches for information or for a product or service. Google has roughly 70 percent of the search-engine market; Yahoo has roughly 20 percent (Microsoft and a few other firms share the remaining 10 percent). Search engines are triggered when the user types in a key word or phrase. To make money from these Internet search tools, the firms sell advertising on the search sites.

John Wanamaker, who more than a century ago pioneered department-store ads, complained that he was wasting half his advertising dollars. "The trouble is," he said, "I don't know which half."

Search advertising offers an answer. A search engine provides a list of results on one side of the page and, usually above and to the right of this list, targeted ads for the very item being researched. The advertiser pays each time an Internet user clicks on the ad.

Because of its ability to home in on interested buyers, this is one of the most powerful and rapidly growing forms of Internet advertising. In 2007, roughly $8.6 billion was spent on search ads in the United States.

The pending deal will allow Yahoo to post on its site ads that sellers place with Google. In return, Google will compensate Yahoo Both firms expect to make money from this arrangement. Advertisers that buy Google search advertising will potentially reach larger numbers of customers — those using either firm's search engine. So everyone will benefit, right?

Not so fast. In fact, important buyers of advertising oppose the arrangement. They say it will reduce competition, offering buyers of search ads fewer choices at higher prices. The opportunity to shop between the two large firms may be effectively lost — Yahoo will have little incentive to place a seller's ad on its search sites if a Google ad will offer a higher return.

Yahoo's president has conceded as much (Yahoo will use Google's ads when they "monetize" better). Yahoo may be unhappy with its 20 percent market share — and happy to charge higher prices for the ads it does run — but this leaves advertisers with fewer choices and higher ad costs to pass on to consumers.

The importance of continued competition is heightened because this industry operates with a high degree of secrecy. The advertiser gets to make a bid in an auction to determine whose ad gets favorable placement. It's not, however, a public auction. The advertisers don't know what factors are weighed in a placement decision — only the search-engine firm knows this information.

The pernicious effects of this secrecy might be mitigated if search-engine providers aggressively compete through price and non-price offerings. If the deal to cooperatively sell ads goes through, the incentives for hard-nosed competition would be dampened. Worse, the essential terms of the pending deal that could affect these incentives have not been disclosed. That, too, remains a secret.

The Justice Department's Antitrust Division is investigating this deal and has taken the unusual step of hiring an outside consultant — former Antitrust Division chief Sanford J. Litvack (who served during the Carter presidency) — to assist it. Whatever the Antitrust Division decides, its analysis should be revealed so that advertisers, consumers and antitrust experts can fairly evaluate the decision.

The Antitrust Division's record in making meaningful disclosure has been unsatisfactory, particularly when a decision is made to drop an investigation of a planned merger or joint venture. That's not good government, especially in a high-stakes arrangement between the two most powerful and collectively dominant firms in Internet searches.