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Despite a hectic past two months fighting off a proxy battle with investor Carl Icahn, Yahoo is rumored to be sending out buyout feelers for social-networks company Demand Media.

Yahoo's Hilary Schneider, who was recently promoted to oversee the company's U.S. go-to market operations, traveled to Demand Media's Santa Monica, Calif., offices a couple weeks ago to gauge Demand's interest in a $1.5 billion to $2 billion buyout, TechCrunch reports, citing unnamed sources.

But Demand Media didn't bite, TechCrunch notes, adding that company founder Richard Rosenblatt is said to be seeking a price in the $3 billion range.

A post in All Things Digital casts a different perspective on that meeting.

In an interview with All Things Digital, the Demand Media founder said: "There is a lot of potential here, and I want to build a big company for the long-term."

All Things Digital also cites Yahoo sources as saying there has been "no offer floated" to acquire Demand Media.

But both reports note that a hook-up between the companies wouldn't be a bad idea.

Says TechCrunch:

It just so happens that what Demand Media is good at--generating lots of advertising impressions and creating niche social networks for media sites, may be a perfect fit for at least some of what ails Yahoo.

But should Yahoo want to make a play for the company and force a deal, Demand Media doesn't have the same pressures as Yahoo, which is in its own fix with Icahn. Demand Media isn't publicly traded, at least yet...

Updated at 7:40 a.m. PDT Wednesday with comments from a former Department of Justice antitrust attorney, and a Department of Justice spokeswoman.

The U.S. Department of Justice plans to gather information from third parties in a probe of the advertising deal struck last month between Google and Yahoo, according to sources familiar with these types of investigations.

Within the next week, the Justice Department is expected to issue civil investigative demands (CIDs) that seek documents from the third parties, said one source, noting the information requested could range from a general request on the competitive landscape to very specific requests involving Yahoo and Google.

Third parties that are expected to receive the CIDs include competitors, customers such as major advertisers, and potential partners, the source added.

Representatives for Yahoo and Google did not immediately return requests for comment. But the Justice Department made a brief statement.

"We're looking at the proposed transaction. We're conducting a civil investigation," spokeswoman Gina Talamona said, declining to offer details about the process or how long it would take.

Yahoo announced the nonexclusive partnership in June under which rival Google would supply it with some search ads, a move that could increase Yahoo search revenue but that also gives Google even more power in the market. Yahoo expects the 10-year deal to raise revenue by $800 million in its first year and to provide an extra $250 million to $450 million in incremental operating cash flow.

The partnership idea came to light during Microsoft's attempt to acquire Yahoo, which put more pressure on the Internet company to improve its financial results.

Faced with that financial challenge and a desire to push the Google ad deal through, Yahoo proposed to regulators that it subject the search advertising deal to a review process similar to one used for major mergers under the Hart-Scott-Rodino Act, said a source familiar with Yahoo.

Under the proposal, which was made to regulators when Microsoft still had a buyout offer on the table for Yahoo, the Internet search pioneer said it would give the Justice Department three and half months to review the deal before it implements the search advertising partnership.

After Microsoft's offer to acquire all of Yahoo was withdrawn, Yahoo could not tell the Justice Department it would not honor its earlier proposal, said the source familiar with the Internet company. The Justice Department and Yahoo later signed a memorandum of understanding that would give regulators time to review documents and interview executives and board members.

"This has been a formal investigation since day one, given its high-profile. There was never the option to have an informal investigation done," said the source, noting a formal investigation entails the Justice Department staff receiving the blessing from a superior like the assistant attorney general in the antitrust division. "And it would be negligent not to issue CIDs to third parties, when conducting a formal investigation."

Only general document requests made so far
The Justice Department has made very general document requests of Yahoo, noted the source. Such requests range from the paperwork and correspondence of executives and board members that address how a transaction or agreement would affect competition to documents on the search market and competitors. And while the document requests are currently general in nature, Yahoo will likely see more specific type of requests in the next 30 to 40 days, added the source.

To date, the Justice Department has not yet interviewed Yahoo executives or board members, but such requests are expected to be made between now and the first week in August, the source noted.

If the Yahoo-Google investigation moves at a pace similar to that of other antitrust cases, the Justice Department may get down to specific issues it wants to address within four to five weeks after Labor Day.

"When the DOJ says, 'We have concerns about...,' it usually means the field has been narrowed," said the source.

One former Justice Department antitrust attorney said the regulators will likely focus on one of two issues, or both--whether Yahoo will have an incentive not to compete as hard as it previously did against Google and whether there is a coordination of competition.

In an effort to dispel antitrust concerns surrounding the deal, Yahoo CEO Jerry Yang went to Capitol Hill in June and met with Sen. Herb Kohl (D-Wis.), who chairs the Senate Antitrust Subcommittee.

Kohl had previously expressed concerns that the deal between two technology search rivals could affect competition and have ramifications for advertisers and consumers. He said at the time that the antitrust subcommittee would investigate the competitive and privacy implications of the deal.

A congressional investigation, however, is separate from a Justice Department investigation.

In this particular case, which is not a merger of two companies, the Justice Department can't force Yahoo and Google to comply with its wishes in order to receive clearance on the deal. Instead, the regulators can either file a lawsuit before, during, or after Yahoo and Google begin their search advertising partnership.

In April, a limited two-week search ad deal was declared a success by Google and Yahoo, but even the limited partnership raised antitrust hackles at Microsoft. Microsoft brought up antitrust concerns when the search ad test began, saying the move would reinforce Google's dominance in the search ad business.

Google countered that search ads are only a narrow part of the online ad market and that Yahoo is the strongest company when it comes to the graphical "display" ads.

Google's share of the U.S. search market reached 68.29 percent in May, according to Hitwise's most recent numbers. Yahoo's share of the market declined to 19.95 percent from 20.28 percent at the same time.

The Washington Post first reported news of the CIDs on its Web site Tuesday evening, citing sources close to the inquiry.

CNET News.com's Dawn Kawamoto and Stephen Shankland contributed to this report.

In a case that spotlights the growing importance of search engines to commerce, NameSafe has sued a competitor, LifeLock, for trademark infringement involving ads placed next to search results.

NameSafe, which like LifeLock sells services designed to protect customers against identity theft, alleged its rival used NameSafe's name in deceptive search ads on Google, Yahoo, and other search engines.

"The ads created by defendant deceptively contain the words 'NameSafe' and 'NameSafe.com' and those marks are often displayed as hyperlinks. Consumers following the hyperlinks are wrongfully and deceptively directed to the defendant's Web site," the suit said. "Thus, consumers are confused and mislead as to origin of NameSafe's services since defendant's ads result in the appearance of an affiliation between NameSafe and defendant."

This exhibit in the lawsuit purports to show a search for 'Namesafe' that shows Namesafe's name as the top sponsored result, along with a link to rival LifeLock's Web site.

LifeLock denied buying keyword search terms itself that use a rival's trademark, but blamed the issue on one of its 3,000 partners that resell its services.

"We have contacted our reseller network to remind them of the importance of compliance with LifeLock's requirements. We have been informed that a non-compliant reseller purchased the term 'NameSafe.' The reseller has subsequently been terminated," the company said in a statement. "LifeLock will not tolerate violations of our compliance guidelines from any independent reseller."

The suit, filed Wednesday in federal court in the middle district of Tennessee, also accuses Lifelock.com of violating the Tennessee Consumer Protection Act. Namesafe is seeking payment for damages and attorney fees and an injunction that would prohibit LifeLock from using Namesafe's trademarks confusingly in advertisements.

Search: Now a part of business
The issue shows the ever-increasing influence that search engines have over the business world. Because such sites are gateways that lead potential customers to companies, the commercial world naturally is powerfully interested in the search results, both the paid results determined by the winning bidders for search keywords and the "organic" results in the search engine itself.

One earlier paid-search controversy is whether a company may bid for a rival's name as a keyword. The NameSafe case sidesteps this particular issue, though: the company is objecting to the text of the ads, not the keyword itself.

A Yahoo search for 'NameSafe" on Friday included an ad that led to LifeLock's Web site.

LifeLock denied buying the "NameSafe" search term, "We as a company have never bought any branded search terms belonging to any other company. In fact, we have been the victim of many other companies trying to capitalize on the success of LifeLock by buying the term 'LifeLock,'" the company said.

But an exhibit in NameSafe's complaint shows ads that indicate somebody seemed to be winning bids for it. For example, the exhibit showed an ad sponsored accompanying search result that said "Namesafe. Proactive identity theft protection. Save 10% Today. Enroll Now. www.livelock.com."

Also, a search on Google for "NameSafe" on Friday morning showed an ad from LifeLock as the top sponsored result. However, later in the morning, no Lifelock-sponsored ads appeared.

Another Google and Yahoo paid-search response for the "NameSafe" search term was for Identity Theft Labs, which describes itself as "a contracted affiliate of LifeLock, LoudSiren, Debix, and TrustedId," four identity theft services.

Search trademark rules
Search engines have rules about use of another company's trademark in search ads. "Yahoo Search Marketing...requires advertisers to agree that their search terms, their listing titles and descriptions, and the content of their Web sites do not violate the trademark rights of others," Yahoo's rules say. "Advertisers are responsible for the keywords and ad text that they choose to use. Accordingly, Google encourages trademark owners to resolve their disputes directly with the advertiser, particularly because the advertiser may have similar ads on other sites," Google's trademark rules say. Both companies also offer mechanisms to lodge complaints.

But that process didn't satisfy Namesafe founder and Chief Executive David Ridings.

When NameSafe found the LifeLock ads, "We handled it with a complaint through the search engine informal complaint process," he said in an interview. "It did not have any effect. We had no other alternative but to file the lawsuit."

The complaint doesn't show any exhibits with a Google search, but the search ads were shown at the site, Ridings added. "We have evidence they were displayed on Google," he said.

The complaint process at the search engines didn't do the trick for Ridings, but the lawsuit apparently did. NameSafe filed its suit after hours on Wednesday, and it became public at 8 a.m. Thursday, he said. The ads were gone by 9 a.m., he said.

Yahoo is trying to show that it's taking hold of its own destiny again.

Phase 1 was the ad deal, under which Yahoo expects more cash by showing Google's more lucrative ads next to Yahoo search results. Phase 2 came Thursday with a Yahoo management makeover, supposedly under way for months.

Jerry Yang

(Credit: Yahoo)

But two big factors make it clear Chief Executive Jerry Yang and his allies have a long way to go before Yahoo achieves independence.

First on the agenda is the possibility of some partnership with another rival, Microsoft. Despite proclamations on two occasions that its interest in Yahoo was over, it appears Microsoft is still interested, and investors are agitating for a deal.

Second is the pressure by activist investor Carl Icahn, who disclosed Thursday he controls a 5 percent stake in the company. Icahn has proposed a dissident slate of directors and made clear his recommendations should they be elected Aug. 1: move Yang back to his chief Yahoo role and hire a new CEO, open the door to a Microsoft acquisition or partnership, and scrap an expensive severance plan that would kick in if somebody acquired Yahoo.

It looks like Yahoo is showing a bit more of its fighting spirit with the Google deal and reorganization. The moves are somewhat reactive, to be sure, but they also show the company trying to let someone inside the company determine its fate.

Fixes through a reorg?
The reorganization has the potential to clean up some of the company's overlapping structure.

Susan Decker

(Credit: Yahoo)

The move creates some new groups reporting to President Sue Decker--notably a business and advertising group for the U.S. region under Hilary Schneider and a group for products such as Mail, Flickr, and My Yahoo under Ash Patel. Also new is the audience technology group, led by Venkat Panchapakesan, which reports to Chief Technology Officer Ari Balogh.

Panchapakesan's engineers at the audience technology group will work closely with their counterparts in Patel's audience products group.

"Together we shape the product," said Scott Dietzsen, the new leader of Yahoo Mail and Messaging. "We're in different organizations, but we ultimately function like a single team. I'm so committed to tightly integrated product management and engineering. That's how you do great work."

But it better be tight integration with high interdepartmental communication bandwidth. For Internet companies, technological constraints and possibilities are central to product management.

Hilary Schneider

(Credit: Stephen Shankland/CNET News.com)

Monetization will be the responsibility of Schneider and her three regional peers, which raises another potential problem. We've heard of Yahoo tensions before between product groups and monetization groups, with Decker mediating the disputes, and the new Yahoo structures at least at first glance does nothing to change that.

"Monetization and product have always been at odds," said one source familiar with Yahoo's inner workings. "Product people by nature don't like ads. Monetization people think Yahoo needs more of them."

But there are a lot of new faces running the show, including in product management, where Patel largely replaces now-departed Jeff Weiner and Dietzen is taking over much of soon-to-be-departed Brad Garlinghouse's job.

Some responsibilities at Yahoo still seem fuzzy. One is the Yahoo Open Strategy transformation--important work that could help Yahoo recover lost ground lost to rivals in the fast-changing vanguard of Internet businesses.

Ash Patel

(Credit: Stephen Shankland/CNET News.com)

On the flip side, Yahoo set up a specific group to try to get a handle on the important area of cloud computing, in which applications run on central servers. "We have bits and pieces everywhere. This brings it together into one organization," said Balogh, who oversees the group.

Reclaiming the initiative?
Even if the management changes are effective and Yahoo brings its various strategies to fruition--and those are big ifs--there's a problem: time.

The outside pressures on Yahoo, from Icahn and Microsoft, along with potential internal pressures from Yahoo's own board, will come to a boil in the next month as the annual shareholder meeting draws closer.

A good quarter could give Yang and Decker more breathing room. It wouldn't make Icahn go away, but it could make it harder for him to enlist support among other shareholders.

But even with a good quarter, Yahoo's new structure won't change the company overnight, and the Google ad deal won't begin generating revenue for another three months or so even if Yahoo vaults cleanly over the antitrust hurdles.

So at least for now, Yang and Decker don't get to keep the Yahoo reins to themselves.

Google announced a tool called Ad Planner on Tuesday that lets advertisers find Web sites whose visitors match various demographic attributes.

Google Ad Planner lets advertisers scrutinize Web site characteristics.

(Credit: Google)

"Enter demographics and sites associated with your target audience, and the tool will return information about sites (both on and off the Google content network) that your audience is likely to visit," the company said on its AdWords blog.

The tool, which was expected, also can show in detail how many people visit a particular Web site. The tool competes with offerings from companies including ComScore and Nielsen Online.

Right now, Google's tool is available by invitation only, however.

Data can be exported into a spreadsheet for further analysis or for import into Google's DoubleClick MediaVisor tool for managing ad campaigns, Google said.

The site is a more specific tool than the publicly available Google Trends tool, unveiled last week, that shows relative Web site traffic for various Web sites.

Google is expected to unveil on Tuesday a tool that measures Internet use to help advertisers identify the best places to buy ads that will reach their target audiences, according to a Wall Street Journal report.

The measurement tool, which will be offered free to advertisers and their agencies, will compete with services offered by established leaders Nielsen and ComScore. While those services base their estimations on selective surveys or customer panels, the newspaper said, Google's results will be based on data collected from Web servers, providing a deeper and broader picture of Internet behavior. By giving away the new tool, Google could attract more advertising business.

The announcement follows one last week about Google Trends' new service, which lets people type in specific domains and compare basic traffic information about any .com site using nothing more than organic user searches. Included are daily traffic numbers in users (sent from Google search), where the users are coming from, and related sites that were either searched for or visited in that same session.

After news of the planned tool hit the Web on Monday, ComScore shares fell $1.69, or 6.1 percent, to $26 after-hours trading. Nielsen is a privately owned company.

Despite having access to a treasure trove of data about people's hobbies, demographics, and friends, social networks can find it tough to sell banners ads for more than the price of a stick of gum.

So ad start-ups such as 33Across are trying to take advantage of profile data on social-network members to create the next generation of behavioral ad targeting. Or behavioral ads 2.0. (For a portrait of another start-up targeting the intersection of social networks and advertising, with an announcement due Monday, see "SocialMedia to unveil 'friendship ranks'.")

New York-based 33Across has developed an analytical engine that can look at behavior patterns of members of a social site in order to track who, in the so-called social graph of friends, is most influential to others. It examines things like how many messages a person sends or receives, how many people he or she has befriended, or whether that person tags photos, blogs, or forwards links to friends.

With that information, it can pinpoint who are so-called viral propagators, or the people most likely to "start a viral cascade" about a product or service, according to CEO and founder Eric Wheeler, a former ad executive from Ogilvy.

"We understand where a person sits among their friends and friends of friends...and the likelihood of how viral they would be," Wheeler said.

Meebo partnership
In recent weeks, 33Across signed its first major customer, Meebo, a social site that synthesizes multiple chat applications into a single browser interface.

Martin Green, Meebo's vice president of business, said the company is using 33Across to provide better analysis and research for advertising clients such as Universal Pictures. It is not using the 33Across self-service ad technology to target ads yet, though it is talking to 33Across about adding that functionality.

In a nod to potential privacy concerns, Green said Meebo is prepared to disclose its practices to members and give them a way to opt out.

Under the deal, Meebo gives 33Across information about its roughly 36 million monthly active users, excluding names, phone numbers, and addresses. With that data, Meebo and 33Across can see how a marketing promotion spreads throughout the members of its service by looking at which members are sending links to friends on the The Incredible Hulk, for example.

Meebo can study those users' demographics, how many "buddies" they have, whether they're influential among a group, and whether they typically shy away from sending links but are apparently inspired by a certain campaign.

"We're giving advertisers more information on how their ads are pervading the network," Green said. "We're looking at the nature of the people who shared that studio's trailer or content with friends. Are they (the) same 'connectors' in the network? Or did you appeal to people who don't normally act on promotions?"

Whereas most advertisers pay as low as five cents to reach a thousand viewers on an ad network, Meebo is charging a list price of $12.50 per thousand impressions using 33Across' technology, Green said.

Tracking social patterns
Technologists have long talked up the ability to track people's behavior across the Web, create individual profiles, and then better target ads for higher rates. And the trend took off with behavioral-ad start-ups like Revenue Science and Tacoda Systems, the latter of which has since been bought by AOL. Now, with the rise of social networks, a new crop of companies is trying to mine even more profile data about people by analyzing their social patterns.

33Across, which has raised more than $1 million from backers such as First Round Capital and former Tacoda CEO Dave Morgan, eventually plans to use data on people's relationships and influence in social networks to better target ads to them on mainstream sites.

33Across' Influence Map shows more influential people in warmer colors (red, orange, yellow) and less influential in darker colors (blue).

(Credit: 33Across)

Wheeler said 33Across cross-site tracking would work like behavioral ad targeting, in which partners of 33Across would place a tracking pixel on their page and that piece of technology would call its servers to place a cookie. The cookie would identify that person without linking his or her name, address, or phone number. That way, 33Across could target an ad to a person on a hypothetical partner site such as eBay, based on the behaviors at Meebo, for example.

Wheeler said today, people don't need to opt out of 33Across' site-wide ad program because it's not in operation yet. But the company plans to announce new partners in the coming weeks, and that could prompt the start of its cross-site tracking and ad delivery system. When that happens, he said, 33Across will give people the ability to opt out of the service at its Web site. (He did not say that program would be imminent, however.)

So how does all this friend and influencer targeting work? Much of it is based on machine-learning algorithms for social networks that have yet to be proven.

One issue with this technology is that it can be hard to track down who's most influential in a group. That person may be influential among friends, when it comes to autos, but he or she might not hold sway, when it comes to travel. Pinpointing expertise can be tough, and influential people might be the same for each category.

And then there are the privacy qualms.

"The issue with social networking and advertising is largely not a technical problem; it's a cultural one. When you're out there with your friends and interacting, people are somewhat resistant to ads. It's a different context, and people can get pissed off," said Jeffrey Davitz, program manager and director of the social-computing group in SRI International's Artificial Intelligence Center.

At SRI, Davitz has researched machine learning in social networks as part of a multimillion-dollar project funded by the Defense Advanced Research Projects Agency, or DARPA. Specifically, he developed an application that could automatically monitor people's interests and influence in military communities such as Company Command (for captains).

The idea was to identify influencers who care about specific topics, such as attacks involving improvised explosive devices in Iraq, and then ensure that they see relevant information in a news feed to that topic, such as an officer posting a document to the site pertaining to explosive devices.

That's what's called "smart push," he said. The technology is currently deployed on three military sites, but SRI is looking at commercial applications for it, not related to advertising.

"You clearly can learn more about people from MySpace and Facebook," said Davitz. "The question is whether or not people will accept that kind of advertising. People feel it's kind of creepy," he said.

Know how to win friends and influence people? Advertisers want you to peddle their stuff to peers on Facebook and MySpace.

Internet start-ups out to crack the problem of advertising on social networks are developing ad technology that can analyze which people are most influential to their friends on social networks so that they can target those people with pass-it-on messages about Apple's latest iPhone or The Incredible Hulk movie.

The upstarts are basically scouting for the social-media equivalent of a Typhoid Mary who can spread a message, with effectiveness, to friends on sites like MySpace or Facebook.

Two such start-ups, SocialMedia Networks and 33Across, are on track to deliver those influencer services with the goal of becoming the advertising players of the social-media age--that is, if they can carefully navigate privacy concerns. Though they have different business models, their technology is part of a lineage of online ad targeting.

"We're trying to make ads suck less in social networks," said Seth Goldstein, founder of San Francisco-based SocialMedia Networks. (Are SocialMedia and 33Across on a collision course? Read more about 33Across here).

On Monday, Goldstein is expected to announce "social banners," or display ads that turn you or your friends into the hook of a marketing message. In tandem, SocialMedia will announce that it's developed a patent-pending algorithm called FriendRank to power those social banners. It's like Google's PageRank, but instead of ranking pages for their popularity, it ranks friendships.

The company looks at how people interact with Facebook or MySpace applications--those 5,000 widgets in its advertising developer network--to determine who, among someone's 100 or so friends, are most important to them. It might infer relationships by seeing who you've played Scrabulous with or turned into a vampire. (The company said that it works within Facebook's terms of service so as not to collect and store someone's profile data.)

"FriendRank basically helps us choose which friends to put in the ad," Goldstein said in an interview. Beyond that, he wouldn't describe the secret sauce behind the technology.

For example, instead of a banner advertising The Incredible Hulk movie, a social banner would ask which of your close Facebook friends, among a short list, you'd like to invite to see the movie. Or a social banner might inform you that a friend Jim just ranked Iron Man with three stars, and it might ask to "click here to buy tickets at Fandango."

Understanding people's relationships
Of course, online advertising has taken many shapes over the years, and this is just the newest twist. Companies have targeted Web ads to people's demographics, geographies, and behaviors. They've also targeted ads--and it's met with the most success--to keywords typed into the search box or the content of a story page. Those ad models are still in practice, but now that social networks are taking up so much of people's time, a new breed of advertising is taking shape.

"The next step is to understand people's relationships," said Martin Green, vice president of business at social instant-chat site Meebo. Last week, Meebo signed an ad partnership with Mountain View, Calif.-based 33Across to monitor the effect of advertising promotions from Universal Pictures. 33Across is helping Meebo understand which types of people--mavens or influencers--respond to which ads.

Certainly, everyone from Google to Facebook to widget makers is trying to figure out how to better sell ads on social sites, at higher rates than their lows of 5 cents per thousand impressions.

Despite the millions who regularly spend hours on social networks and sites like Flickr or YouTube, advertising spending in the category is worth less than $2 billion annually. (Projections from research firm eMarketer were recently downgraded because of an expected ad shortfall from MySpace.) That's less than 2 percent of the total advertising spending in the United States.

The problem with social advertising is twofold. People aren't very receptive to advertisements in the first place, but they're even less so when "hanging out" with friends virtually on MySpace or sending photos on Flickr. Traditional advertisers, the big spenders on commercials and brand advertising, are cautious when it comes to placing their logo next to racy or potentially inflammatory images. Technology and media companies must find a way around both of these issues.

Goldstein, a veteran Internet advertising entrepreneur, founded SocialMedia in April of last year to initially be a widget developer for social networks. One of its first widgets, Appsoholic, measured how people respond to other applications on the site. With that data, the company realized that it would be better off helping other developers make money from their applications, given that the popularity of widgets can be fleeting.

So it built an automated ad system to sell banner, text, or Flash ads for as many as 5,000 applications running on Facebook, among others. SocialMedia advertisers can target people based on "appographic" parameters like people who've installed dating, car, or travel widgets.

Typical run-of-site banner ads on social networks can cost as little as 5 cents per thousand people they reach, or cost per thousand (CPM), and can go as high as 20 cents per CPM for targeted ads based on someone's profile or interests. Application ads can run as high as 50 cents, according to Goldstein, who's trying to break the dollar mark with social banners.

SocialMedia has tested social banners with BMW in a campaign worth more than $100,000. It created an application for the car company that allows people on Facebook to customize the features of a BMW 1 Series, or create a "dream ride." The related social banners, for example, advertised to Seth's closest friends in their news feeds that "Seth is taking a joyride in a BMW 1 Series on the Autobahn. Would you like to join him?"

SocialMedia's also been experimenting with the ads for Universal Pictures, among others. In early tests, the company has shown that people are 200 times more likely to respond to the social ad. (A non-social ad might command a click-through rate of 0.15 percent vs. a social banner at 0.5 percent.)

Possible privacy concerns
Still, with its social banners, SocialMedia could run into the same privacy concerns that Facebook encountered when it launched Beacon. Late last year, Facebook teamed with sites like eBay and Yelp so that when Facebook members performed an action on one of those sites, like buying a pair of shoes, Facebook would automatically alert their friends to it in their news feeds. After members reacted badly, the company backed off and made the program entirely opt-in for members.

SocialMedia isn't drawing data on people's behaviors from third-party sites, but it is using friendship data it collects to seed marketing messages. That could tick people off. Leslie Harris, president of the Center for Democracy and Technology, said the main issue with social ads like these is that people need to know how they're being targeted and be given the ability to opt out easily.

"People need to have clear notice and the clear opportunity not to participate," Harris said. "The lesson of Beacon (Facebook's controversial targeted-messaging project) was that people have no expectation that they will be linked to or targeted in any way outside of a social network."

Goldstein said SocialMedia will be sensitive to people's privacy, partly because of the backlash prompted by Facebook's Beacon program. People will be able to click a tab on a social banner to read about how it works and how to easily opt out of the program, he said.

At recent social-media conferences, Goldstein has said that programs like Beacon are the future of this type of conversational marketing.

"Technically people are collecting cookies all the time," Goldstein said. "What Beacon has shown us is that when you try to cross information between networks, the psyche isn't ready. But over the years to come you'll be able do this in any forum."

Yahoo's CEO Jerry Yang made the rounds on Capital Hill on Wednesday, in an effort to dispel antitrust concerns surrounding its search advertising deal with Google.

During his one-day visit, Yang met with Sen. Herb Kohl, D-Wisc., who chairs the Senate Antitrust Subcommittee.

Kohl has previously expressed concerns that the deal between two technology search rivals could affect competition and have ramifications for advertisers and consumers. He noted the antitrust subcommittee plans to investigate the competitive and privacy implications of the deal.

Sen. Joe Barton of the U.S. House Energy & Commerce Committee also weighed in on the issue Wednesday, issuing a statement (PDF) that expressed concern about the deal's effect on competition in search advertising.

While Barton was not available to meet with Yang on this trip, the senator indicated he would be available next week. And also on the meet-and-greet trip was Rep. Edward Markey, chair of the Telecommunications and the Internet subcommittee for the House Committee on Energy & Commerce.

Google's slice of the U.S. search market reached 68.29 percent in May, according to Hitwise. Yahoo's share of the market declined to 19.95 percent from 20.28 percent in the at same time.

Yahoo, however, has previously said its arrangement is non-exclusive and does not require Yahoo to use any certain number of Google ads on Yahoo's search results page, nor does it require to give Google's ads preferential treatment on where they appear on the right-side column of Yahoo's search results page, where the sponsored links appear.

Yahoo is hoping to benefit from serving up advertisements on its search results pages where there are few advertising links that appear on the right-side column with relevant ads. For example, conduct a search for Fresno and spa and eight advertisements show up on Yahoo, but only two are actually for spas in Fresno. Yahoo gets its advertising dollars only if a user clicks on an actual ad, so the more relevant ads it can post on its search results page, the better its revenues.

Yahoo is hoping to use Google's ads to populate those search results where it tends to have fewer ads. Should Yahoo have a competing ad or ads on the same search page, may the most relevant ad that can entice a user to click on it win.

Whereas Yahoo is looking to bolster its advertising inventory by allowing Google to post its ads on its search page, Google is going in the opposite direction by scaling back on the number of irrelevant ads it has on its search results page--adopting the view that less is more. The search giant on Wednesday also said it is rewarding advertisers with fast-loading advertisements.

Yahoo is giving the U.S. Department of Justice three-and-half months to review its Google partnership, before it implements the search advertising partnership. Regulators, however, may find it more useful to evaluate the partnership after it's been implemented when they can assess the before and after effect.

Yahoo, meanwhile, also addressed privacy concerns raised by the legislators.

"Yahoo is deeply committed to building on our established trust with users by continuing to provide clear, comprehensive privacy policies. We structured the agreement with Google so that Yahoo will not transfer any personally identifiable information to Google without user consent," Yahoo said in a statement. "We have also designed this agreement so that both companies have stayed within each of their existing privacy and data policies, such as Yahoo's policy regarding logs anonymization after 13 months."