Yahoo Runs Into Google’s Arms

Yahoo and Google have confirmed that they are indeed entering into a partnership around search advertising, a story we broke earlier today. Google’s blog post on the agreement is here.

—The deal is non-exclusive. Yahoo will be able to run Google ads alongside Yahoo ads or other ad providers.
—The deal is expected to add $800 million a year in revenues and $250 million to $450 million in operating cash flow.
—The deal only applies to paid search and contextual ads, not to algorithmic search.

This arrangement will no doubt intensify the scrutiny from Washington, where the Justice Department has already launched an investigation into antitrust issues arising from Yahoo and Google merely testing the waters for today’s partnership. Congress might want to hold hearings as well. Back in April, Citi analyst Mark Mahaney estimated that a Google deal could increase Yahoo’s cash flows by more than $1 billion a year. It turns it will be less than that. But given the antitrust scrutiny, the deal is necessarily structured in a creative way. As part of the deal, Yahoo can decide to go with Google only for those search queries where it will get the most bang for the buck.

On Wednesday, when asked by Fox News about the antitrust issues surrounding a possible search deal with Yahoo, Schmidt responded:

Well you are presuming that there’s an issue there.

If there were an issue, it’s perfectly possible that you can do commercial deals that look like outsourcing deals which are not exclusive and where industry structures allow everybody to win. If you look in the automobile industry and lots and lots of industries like that, you have suppliers who supply other people. So if there were a deal, it would be based on those sorts of principles.

As long as the relationship is competitive, it might pass regulatory scrutiny. That is, if Microsoft can bid for Yahoo’s search advertising business as well, then whoever can deliver the most cash to Yahoo will win the business. In reality, we all know who that will be: Google. Neither Microsoft nor Yahoo can match the search dollars that Google can deliver.