Google drops Yahoo advertising partnership

WASHINGTON - Google Inc. has scrapped its
Internet advertising partnership with struggling rival Yahoo Inc.,
abandoning attempts to overcome the objections of antitrust regulators
and customers who believed the alliance would give Google too much
power over online commerce.

The
retreat announced Wednesday represented another setback for Yahoo,
which had been counting on the Google deal to boost its finances and
placate shareholders still incensed by management’s decision to reject
a $47.5 billion takeover bid from Microsoft Corp. six months ago.

To
Yahoo’s dismay, Google backed off to avoid a challenge from the U.S.
Justice Department, which said it would sue to block the Yahoo deal to
preserve competition in Internet advertising.

“The arrangement likely would have denied
consumers the benefits of competition — lower prices, better service
and greater innovation,” said Thomas Barnett, an assistant attorney
general who oversees the Justice Department’s antitrust division.

Without
Google’s help, Yahoo now might feel more pressure to renew talks with
Microsoft and ultimately sell itself for much less than the $33 per
share that Microsoft offered in May. Yahoo shares were trading
Wednesday afternoon at $14.20, gaining more than 6 percent in a move
reflecting investor hopes that Microsoft might renew its pursuit.

(Msnbc.com is a joint venture of Microsoft and NBC Universal.)

Surrendering
the chance to sell ads on Yahoo’s popular Web site won’t be a
significant financial blow for Google, which already runs the
Internet’s largest and most prosperous advertising network.

The
Mountain View, Calif.-based company’s main incentive for entering the
deal was to keep Yahoo out of Microsoft’s hands. Google founders Larry
Page and Sergey Brin also wanted to help Yahoo founders Jerry Yang and
David Filo, who had encouraged them to turn their search engine into a
business more than a decade ago.

But
the capitulation marks a rare comedown for Google, which had been
insisting for more than four months that the Internet would be a better
place to do business if it were allowed to work with Yahoo.

“We’re
of course disappointed that this deal won’t be moving ahead,” David
Drummond, Google’s chief legal officer, wrote on a company blog. “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 it wanted to fight the Justice Department in court, though it
played down the impact Google’s retreat would have on its turnaround
efforts.

“This
deal was incremental to Yahoo’s product roadmap and does not change
Yahoo’s commitment to innovation and growth in search,” Yahoo President
Sue Decker told Yahoo employees in a Wednesday memo. “The fundamental
building blocks of a stronger Yahoo ... were put in place independent
of the agreement.”

Google’s
management took a risk by agreeing to the Yahoo partnership in June,
knowing the move would increase the government’s scrutiny of Google’s
market power. Even though it is now walking away empty-handed, Google
figures to remain in regulators’ sights as it tries to expand.

“For
the first time, Google has run into real opposition to its marketplace
goals,” said Jeff Chester, executive director of the Center for Digital
Democracy, a consumer advocacy group. “Google is aware that its
aggressive moves in the online advertising business are potentially
contributing to damaging its brand. The perception of Google has
changed.”

The collapse of the Google-Yahoo alliance could become a coup for Microsoft.