WASHINGTON (Associated Press)- 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.
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