IE 11 is not supported. For an optimal experience visit our site on another browser.

Yahoo, Google to conduct ad experiment

Yahoo is surrendering some of its advertising space to Internet search leader Google in an unusual test that appears designed to frustrate Yahoo’s unsolicited suitor, Microsoft.
/ Source: The Associated Press

Yahoo Inc. is surrendering some of its advertising space to Internet search leader Google Inc. in an unusual test that appears designed to frustrate Yahoo’s unsolicited suitor, Microsoft Corp.

The two-week experiment announced Wednesday will allow Google to show ads tied to about 3 percent of the queries made in the United States through Yahoo’s search engine — the Internet’s second largest after Google’s.

Yahoo will still use its own technology — acquired and developed at a cost of more than $2 billion — to place ads next to the other search results on its Web site. The Sunnyvale-based company also will continue to distribute search ads to its own partners.

Together, Google and Yahoo control more than 80 percent of the U.S. search market, making it highly unlikely that antitrust regulators would allow the Silicon Valley rivals to form a long-term advertising alliance, analysts said.

A broader relationship between Yahoo and Google also would face intense political scrutiny, said Sen. Herb Kohl, D-Wisconsin, who chairs a committee overseeing antitrust issues.

By flirting with Google, Yahoo is trying to signal it has other options besides succumbing to Microsoft, said Standard and Poor’s equity analyst Scott Kessler. But Kessler doubts most investors will take the Google alternative seriously, given the antitrust obstacles.

“It doesn’t make a lot of sense for Yahoo to make an announcement like this when everyone knows a long-term relationship (with Google) can’t happen,” Kessler said. “It strikes me as somewhat desperate.”

Investors weren’t impressed with Yahoo’s latest maneuver. Yahoo shares dipped three cents in extended trading after gaining seven cents to finish the regular session at $27.77.

Yahoo’s dalliance with Google makes a friendly deal with Microsoft less likely and raises the odds that Microsoft will follow through on a recent threat to lower its bid, Kessler said.

Microsoft has said that if things can’t be worked out amicably, it is prepared to oust Yahoo’s 10-member board in a proxy contest that could prolong the drama into the summer.

If the Google tests were to begin immediately, they would be completed shortly before the April 26 deadline Microsoft has set for accepting its bid.

Yahoo didn’t specify when the trial run would begin, but said the test doesn’t mean it will join the thousands of other Web sites that rely on Google to place text-based advertising links next to search requests or their other content.

Google’s partnerships generated $5.8 billion in ad spending last year, with nearly $5 billion of that going to the Web sites participating in the network.

Drawing upon Google’s moneymaking prowess theoretically would help Yahoo bounce back from a two-year streak of declining profits that opened the door for Microsoft’s takeover bid, which was initially valued at $44.6 billion, or $31 per share.

Google reportedly approached Yahoo about a possible business relationship shortly after Microsoft announced its bid Feb. 1. Since then, Yahoo also has discussed deals with News Corp.’s popular online hangout, MySpace.Com, and with Time Warner Inc.’s fallen Internet star, AOL. Those talks so far haven’t panned out.

Yahoo maintains it is worth more than $45 billion, a point that it reinforced in a letter sent to Microsoft Chief Executive Steve Ballmer early this week. Before the Microsoft bid, Yahoo’s market value had sunk to roughly $27 billion, or $19.18 per share.

Microsoft has said it might trim its bid unless Yahoo capitulates by April 26. As it stands, the value of Microsoft’s offer has declined to about $42 billion because it wants to pay for half the purchase with its own stock, which has tumbled in the past two months.

In a statement Wednesday, Microsoft reiterated its bid is fair and pointed out the antitrust problems likely to prevent Google and Yahoo from working together.

Google and Yahoo together control about 81 percent of the U.S. search market, according to the most recent data from comScore Media Metrix.

“This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo,” said Brad Smith, Microsoft’s general counsel. “We will assess closely all of our options.”

A combination between Microsoft and Yahoo also would likely face an extensive regulatory review that could last anywhere from six months to a year, predicted Nate Eimer, a Chicago attorney specializing in antitrust law.

If Yahoo were sold to Microsoft, those two companies would have a combined 31 percent market share in the United States— far behind Google’s 59 percent, comScore said.