Digital Media

Yahoo and Google have extended their Wednesday deadline for antitrust regulators to issue a decision on whether to block the controversial search advertising deal to proceed, according to a source familiar with the talks.

And at this point, it remains to be seen whether a definitive decision to block the agreement, or allow it with remedies as part of a settlement, will occur before the Thanksgiving holiday.

"Wouldn't it be nice to get it resolved, one way or another, before Thanksgiving?" said the source.

Previously, a deadline had been set for Wednesday for antitrust regulators to make a decision on whether to challenge the deal, or allow it proceed. That revised deadline was extended from October 8, in order to give regulators additional time to review the search advertising agreement.

Under the agreement, Yahoo's search result pages would also include ads from Google's advertisers. Yahoo previously noted it expects to generate $800 million in revenue in its first year from the non-exclusive deal and that Google's ads would likely appear on its search pages that have few to no ads from Yahoo advertisers.

But advertisers have voiced their opposition to the deal, citing concerns that prices could rise and that Yahoo may one day opt to exit the search advertising business altogether. Those concerns are similar to those voiced by federal antitrust regulators, sources previously have said.

Although the companies are again extending the deadline, such a move is somewhat common when the parties are hashing over things. One source had noted that companies will often grant regulators as much time as they need to review a deal, rather than forcing their hand, if it appears their decision will be unfavorable to the companies.

Updated at 8:15 a.m. PDT with Google comment. Updated at 8:36 a.m. with comments from Silver Financial's Darren Nix.

With a deadline looming next week for federal antitrust regulators to approve or challenge Yahoo and Google's controversial search advertising partnership, the search giant has apparently been busy trying to drum up large advertisers to provide public testimonials in support of the deal, according to a report in TechCrunch.

Such efforts could offset concerns expressed by Department of Justice antitrust regulators over a potential price increase to advertisers as well as reduced competition should Yahoo over time exit the search advertising market. A number of advertisers and a major advertising trade group have already weighed against the partnership.

Google apparently had its outside law firm, Cleary Gottlieb, reach out to its own advertisers such as Darren Nix, president of Silver Financial, which also does business as Reverse Mortgage Guides.

Cleary Gottlieb's Donald Burke reportedly called Nix to ask him to provide a public testimonial supporting the search advertising deal, according to TechCrunch's comments from Nix:

I received a voicemail from an attorney representing Google yesterday so of course I called back. We spend about $100,000 a month on AdWords so we'd apparently been targeted because of that. He was looking for large advertisers who use both Google and Yahoo (we do) who would be willing to provide public testimonials in support of outsourcing Yahoo's search ads to Google. I told him I'm a free-market competition kind of guy so he tried to address my concerns for about 15 minutes and then called it quits.

Nix, when interviewed by CNET News, said he was specifically concerned about the potential for prices to rise under the deal, especially if Yahoo finds it's more lucrative to use only Google ads and exits the search advertising business. Publishers receive a revenue split with Google and without Yahoo in the search market, Google may increase its cut of the revenue split, Nix said.

He added he's also concerned that Google may have little incentive to accelerate its innovation, without Yahoo as a viable competitor.

Burke declined to comment. But Google noted in a statement:

"Over the past few weeks we have been reaching out to various Google advertisers to inform them about how the Yahoo ad agreement will work. Since a normal part of the regulatory review process is for government regulators to consider the views of customers, we have asked those advertisers who have expressed support for the agreement if they would be willing to share their views with the Department of Justice. This is a customary part of the regulatory process, and we're happy that many advertisers have expressed their support for this agreement."

Google CEO Eric Schmidt on Thursday, while discussing the company's third-quarter profit, sidestepped questions about advertisers' reactions to the search-ad deal with Yahoo.

"We've got some large advertisers who complain, and other large advertisers say it's good for business," he said.

Schmidt also said Google has been trying to educate people, even its own advertisers, about the underlying system to try to bring people around to its view of affairs, even dispatching chief economist Hal Varian to explain the basics of auction-based ad pricing in a blog post.

CNET News' Stephen Shankland contributed to this report.

Update 10:05 a.m. PDT: Adds Yahoo director Carl Icahn's comments from a CNBC report on Wednesday and more information..

Update 10:42 a.m. PDT: Adds Microsoft statement downplaying Ballmer's remarks.

Here we go again...

Microsoft CEO Steve Ballmer is still paying attention to Yahoo and noted in a keynote presentation Thursday at the Gartner ITXpo in Orlando, Fla., that it would still make sense for the software giant to acquire the Internet search pioneer, at the right price.

Said Ballmer:

We offered $33 bucks (for Yahoo) and it's $11 today. It's clear Yahoo didn't want to sell. They probably still think it's worth more than $33 a share.

I still think it makes sense for their shareholders and ours.

Shares of Yahoo, which have been trading near its five-year low and dipped into the $11 a share range Wednesday, shot up 13.8 percent in intraday trading Thursday to about $13.35 a share.

In a statement, Microsoft tried to downplay Ballmer's remarks.

"Our position hasn't changed," Microsoft said in the statement. "Microsoft has no interest in acquiring Yahoo!; there are no discussions between the companies."

Yahoo shares soared Thursday immediately after Steve Ballmer's remarks.

(Credit: FinancialContent.com)

But there's at least one person outside Redmond who believes a Yahoo-Microsoft deal makes sense.

Yahoo director Carl Icahn--a former shareholder activist who waged a proxy fight against Yahoo to push the two companies closer together--expressed a similar sentiment Wednesday during an appearance on CNBC.

In the televised discussion, Icahn said:

I will say and I continue to say that sooner or later there's got to be a deal with Microsoft and Yahoo of some type. I really believe that very strongly.

Before reaching a settlement in his proxy fight with Yahoo, Icahn teamed up with Microsoft to make a joint offer for the software giant to acquire just Yahoo's search business. Yahoo rejected that offer.

When Microsoft initially made its offer to buy only Yahoo's search business, the Redmond giant offered a deal valued around $9 billion. Yahoo's stock on Wednesday was in the $11 range, giving the company a market capitalization of $16.3 billion.

Yahoo's stock has been trending downward since the spring.

(Credit: Yahoo Finance)

Yahoo shares broke through another psychological barrier Wednesday, edging down into the $13-a-share range.

Yahoo fell as low as $13.62 a share during intraday trading, down more than 6 percent from the previous day's close. Although Yahoo's shares continue to give up ground, the company's performance during the trading session has largely mirrored the broader markets.

With its shares dipping into the $13 range, Yahoo not only sets a new 52-week low but also reaches a trading level not seen since late May 2003.

Yahoo, as a result, also now has a market cap of $19.35 billion.

Last May, Microsoft walked away from its buyout offer of $47.5 billion to snap up all of Yahoo, only later to return with a partial buyout offer of $9 billion to acquire just the company's search assets.

At this rate, Microsoft may be able to acquire the entire company for what it was willing to pay for just the search business, should it decide to make another run at the company.

Analyst Rob Sanderson with American Technology Research, meanwhile, believes Microsoft may make another run at Yahoo, but at a "significantly" lower offer.

Said Sanderson in a research note Wednesday:

Since "walking away" from the previous Yahoo offer, the OSB (online services business) division of Microsoft has not come close to meeting expectations. Organic revenue growth has decelerated from 16 percent in March to 2 percent in June, according to our estimates. Losses have nearly doubled sequentially, from $1 billion operating loss run-rate in March to nearly a $2 billion loss run-rate in June.

At its July analyst day, Ballmer emphasized the importance of traffic and scale in the online search business...

OSB leadership and organizational structure remain in flux following the departure of Platform & Services President Kevin Johnson and the re-organization in July. Two months later, Microsoft has yet to name a new head of OSB. Other senior managers have also jumped ship with the general manager of digital advertising solutions leaving for Amazon and its media network VP & chief marketing officer going to Yahoo.

Meanwhile, Microsoft's organic efforts in search are falling further each month. ComScore reports that MSN has lost 260bps of U.S. search query share from a year ago to only 6.4 percent in August. This represents a greater than 30 percent drop in market share in one year.

Sanderson noted that because Yahoo's third quarter is expected to be weak, he's cutting his price target for the company and financial outlook.

His new 12-month price target for Yahoo is $22 a share, verses his previous forecast of $33 a share.

On the revenue front, Sanderson expects Yahoo to pull in $1.78 billion in the third quarter, slicing that projection down from his previous forecast of $1.85 billion. Similarly, for the year, the analyst revised his earlier estimates to $7.34 billion from his previous projection of $7.62 billion.

Sanderson also lowered his earnings estimates for the company to 8 cents a share for the quarter, compared with 9 cents under his earlier forecast, and an earnings per share of 67 cents for the year, verses his earlier projection of 69 cents a share.

Yahoo's price target was snipped to $21 a share from $24 on Monday by a Wall Street analyst, following the Internet search pioneer's confirmation that it is delaying its controversial search-advertising deal with Google.

Sanford C. Bernstein analyst Jeffrey Lindsay noted in a research note that despite reports that Yahoo is in talks with Time Warner, the probability of a deal between the media conglomerate's struggling AOL unit and Yahoo remains relatively low, in part due to antitrust regulators' concerns about the proposed Yahoo-Google deal.

In his research noted, Lindsay stated:

Regulators might not allow the AOL-GOOG paid-search deal to pass to YHOO, which would wipe out the other synergies--creating a large risk for both sides. We are reducing our YHOO price target to $21 but maintain TWX (Time Warner) at $18.50.

In addition, Lindsay points out that stock transactions over $3.4 billion are dilutive to Yahoo's shareholders and that Time Warner was likely hoping to receive $6 billion to $8 billion for AOL, which is possible only if Yahoo can gain some synergies from the transaction.

A third point Lindsay raises:

The primary source of synergies is staff reductions, where YHOO has (an) unimpressive track record. Other benefits, such as pricing power in display, and combining Advertising.com with Right Media Exchange, will not drive short-term incremental revenues.

Yahoo's stock on Friday closed at $16 a share, slightly up from $15.58 a share the day before.

Updated at 2:21 p.m. PDT, with information on Yahoo's stock performance and a letter sent by Sen. Herb Kohl to the head of the antitrust unit for the U.S. Department of Justice.

Yahoo is contemplating another round of layoffs, according to a report in Silicon Alley Insider.

Any carnage count would likely be less than 20 percent of the workforce, SIA notes, citing people familiar with the company's financial health. According to the report:

While our Henry Blodget has called on Yahoo to can 3,018 people (that's more than 20 percent of the workforce), the odds that Yahoo will make cuts on that scale are very low, we're told by people familiar with the company's thinking. But we're also told that another round of layoffs are indeed on the drawing board, prompted by a grim financial forecast.

Yahoo plans to report its third-quarter results on October 21.

Yahoo's stock is already under great pressure, closing Thursday at $15.58 a share, down 8.14 percent over the previous day's close and dropping to a level that hasn't been seen since August 2003.

While the broader markets were also down on Thursday, Yahoo's descent was particularly steeper toward the last hour of trading.

Sen. Herb Kohl, chairman of the congressional subcommittee on antitrust, competition policy and consumer rights, sent a letter Thursday to the head of the antitrust division for the U.S. Department of Justice, requesting a close examination of the controversial Google-Yahoo search advertising partnership be undertaken.

Kohl's antitrust committee held a hearing in mid-July to examine the nonexclusive agreement, which calls for Google to place some of its ads on Yahoo search page results.

In his letter to the Justice Department's antitrust chief Thomas Barnett, Kohl stated:

The parties assert the transaction is in the advertisers' best interests since it will create a more efficient marketplace.

While we have conducted a careful review of this transaction, we do not have the benefit of the confidential business information supplied by the companies to the Department nor the economic models necessary to predict consumer behavior...nonetheless, we conclude that important competition issues are raised by this transaction. Should the amount of advertising outsourced by Yahoo to Google grow significantly, we believe the threat to competition will also increase.

The deal is currently in the final stages of an investigation by the Department of Justice, which will indicate whether it will seek to block the partnership by filing a lawsuit, or allow it proceed with or without remedies.

Update at 10:43 a.m. PDT: Additional information added relating to Google's FAQ Web site.

Google and Yahoo's controversial search advertising partnership deal took another hit Thursday, as consumer and public interest group Center for Digital Democracy fired off an opposition letter (PDF) to the chairman of the Senate antitrust committee.

The Center for Digital Democracy asked Sen. Herb Kohl (D-Wis.), to call on the Department of Justice to oppose the partnership between the two companies, or at a minimum establish "meaningful safeguards" to the arrangement.

The organization, which is known for taking positions on issues like privacy, asked Kohl to press antitrust regulators to address potential privacy issues arising out of the search advertising partnership, as well as concerns about the deal reducing competition in the market. According to the letter:

It is crucial that the U.S. do everything it can to promote competition in the key digital advertising market, especially given its emerging core role as the principal means supporting online editorial content. Unless action is taken--the deal opposed or, at the very least, meaningful conditions imposed, serious competitive harm will be inflicted on this vital sector of the U.S. economy.

The letter to Kohl also notes that the group had already issued its complaints to the Justice Department last July.

Federal antitrust regulators have recently narrowed their focus on the proposed transaction to whether it will lead to increased prices for advertisers in the short term and, in the longer term, lead to Yahoo exiting the online search advertising market altogether. Privacy is not a topic of interest for the antitrust regulators, much to the dismay of the Center for Digital Democracy.

Under the proposed deal, Google's paid ads would appear on Yahoo's search pages, an arrangement through which Yahoo expects to generate an additional $800 million in revenues within the first year. In terms of the competitive landscape, Google holds a substantial lead over its competitors Yahoo and Microsoft in the market for search advertising.

The Center for Digital Democracy also cited concerns that the transaction may undermine competition and could ultimately reduce payments to newspaper publishers, which receive revenue from the two companies' online search ads and related services.

Google, meanwhile, is not standing still as various organizations weigh in on its proposed transaction with Yahoo.

Google announced Thursday that it has launched a Web site about its deal with Yahoo to serve as a FAQ.

In its FAQ, Google addresses the pricing issue by noting:

Neither Google nor Yahoo! set ad prices. Ads are priced by an auction where an advertiser only bids what an ad is worth to them. And because of the wide variety of keywords and ads it is impossible for anyone to predict with certainty what might happen to prices for individual queries or even across the board. Furthermore, ad price is only one part of the story. A more important measure for advertisers large and small is the return on investment of their advertising dollar. The Google-Yahoo! agreement will help advertisers convert more clicks into customers by showing more relevant ads on Yahoo!, giving advertisers a better return for every dollar they invest.

And Google offered this perspective on whether Yahoo will eventually outsource an increasing volume of its ads to Google to the point where it would cease to be in that line of business:

Yahoo! has made clear that it will still use its own system to serve ads, and it will use extra revenue from this deal to improve its ad platform. The arrangement covers only the U.S. and Canada, and excludes the fast-growing mobile segment. Yahoo! also has an economic incentive to keep serving as many of its own ads as possible, since it gets to keep all of the revenue from those ads, while receiving only part of the revenue from ads served by Google.

Earlier this month, the Association of National Advertisers expressed similar concerns as the Digital Democracy, relating to potentially rising advertising prices and reduced competition in the marketplace over time.

But Yahoo, according to a letter (PDF) obtained by CNET News, had its U.S. executive vice president, Hilary Schneider, respond to the ANA concerns with this:

This is exactly the opposite of our business goals in pursuing this agreement. The essence of our strategy is to 1) enhance the search user experience by showing the most relevant ads, and 2) show ads that deliver the most value to advertisers and to Yahoo! For example, the agreement allows us to provide more valuable results to queries where we have no coverage or are under‐covered, and importantly to use the proceeds to develop products and services that scale and will strengthen our own marketplace.

In the coming days and weeks, it will become more clear whether the Department of Justice shares those views.

Yahoo's board gathered Tuesday in a rather subdued affair, yielding no new major decisions. But it did provide a cultural introduction to the company's adversaries-turned-directors Carl Icahn, Frank Biondi, and John Chapple, said a source familiar with the company.

Icahn, who earlier this year launched a proxy fight to unseat Yahoo's board before settling for three seats on the 11-member board, is no stranger to arriving at boardrooms as an interloper.

But in some of those cases, such as ImClone Systems, he came armed with specific ideas of how to change the company's operations and soon was named chairman, despite having minority representation on the board.

In the case of Yahoo, however, Icahn did not come to his first board meeting with a laundry list of suggested changes.

"It was the first meeting with Carl, and nothing major happened. The board talked about the three-year strategic plan and how to execute on it," said one source familiar with the company. "It was a way for him to also learn about the culture of the company."

The board meeting did not offer any greater clarity to Icahn and crew on whether Yahoo has the resolve to pursue its controversial search advertising agreement with Google, should the Department of Justice challenge the partnership on antitrust grounds.

No decision was made as to whether Yahoo would engage in fight or flight, should its Google transaction face a challenge by regulators, the source said.

And although published reports surfaced Tuesday that Yahoo's board had approved renewing talks with Time Warner's AOL, the source noted that no such vote was taken. The source, however, pointed out that on-and-off talks between the two companies have gone on for months now and nothing substantial has changed.

Yahoo spokeswoman Kim Rubey declined to comment on the company's board meetings and a representative for Icahn was not immediately available.

Meanwhile, a CNBC report on Wednesday cited an e-mail Yahoo CEO Jerry Yang sent to employees regarding the hiring of Bain & Co. and reportedly hinting at potential upcoming layoffs.

Yahoo spokeswoman Rubey, responded: "Yahoo! has been exploring ways to streamline our processes and bring new agility and efficiency to how we work as an organization. As part of this effort, we have engaged Bain & Co. to help us identify opportunities for improvement. This work is well underway, with the ultimate goal of positioning Yahoo! to achieve long-term, sustainable growth."

Federal antitrust regulators have clearly laid out their concerns to Yahoo and Google regarding their controversial search advertising agreement, but discussions of potential remedies have yet to come up, according to a source familiar with the discussions.

Antitrust regulators with the Department of Justice have largely narrowed their concerns into two buckets, one centering on the potential affect on advertising pricing in the short run and to what extent there would be a negative impact on the industry, and the second being will the agreement eventually lead to Yahoo exiting the search advertising business altogether, the source noted.

Currently, the parties are discussing those concerns, but the conversations have not yet migrated to a point where the DOJ is saying they are illegal and the agency is contemplating filing a lawsuit to block the partnership, the source said.

In most cases, once the DOJ indicates it may file a lawsuit, the agency leaves it up to the companies to suggest possible remedies to mitigate regulators' concerns, said the source. Yahoo and Google have not offered up any potential remedies to mitigate the DOJ's concerns, according to the source.

Within the coming weeks, it will be clear whether such action is needed. The DOJ and a multi-state task force are rushing to come to a conclusion on whether they will oppose the Yahoo-Google search advertising deal, which the companies hope to launch by mid-October. Earlier this month, the DOJ hired antitrust litigator Sandy Litvack as a consultant in its networking and technology unit. Litvack was hired to weigh whether the DOJ's case could be won at trial, say sources.

A spokeswoman for the DOJ declined to comment, other than to note the investigation is ongoing.

Meanwhile, the American Antitrust Institute, a nonprofit think tank, announced Tuesday that the Yahoo-Google deal should be viewed as "presumptively anticompetitive" but may also contain some possible pro-competitive benefits. The group released a white paper on the topic.

The group, which tends to be viewed as pro-antitrust enforcement, took a slightly different view on the Yahoo-Google deal and did not come out with a blanket opposition to the agreement. The group, however, offered up several recommendations to regulators on how the Yahoo and Google agreement should be retooled:

The pro-competitive potential of the arrangement depends on Yahoo remaining in paid search.

The government cannot compel Yahoo to do this, however, the government can insist on legally enforceable requirements that will ensure that Yahoo has an incentive to continue to develop.

The AAI offered up four key recommendations:

• Prohibit Yahoo from using Google ads on organic search results outside North America and on any third-party Web sites.

• Prohibit Google and Yahoo from setting minimum bid or reserve prices.

• Prohibit Yahoo from using Google ads when Yahoo has a sufficient number of ads of its own to fill the white space surrounding an organic search result on Yahoo's site.

• Require the share of revenue that Yahoo receives from each click be constant, (for example), that the agreement does not reward Yahoo with a higher share of revenue for using more Google ads.

The AAI, however, further noted:

The AAI also found that the publicly available data, including briefings provided by Yahoo and Google, do not rebut the concerns that the alliance as proposed is anticompetitive.

Such concerns would arise in any case where the top two firms in a highly concentrated market reach an agreement that potentially gives the dominant firm a market share in excess of 90 percent. The parties' statements of good intent cannot be relied upon to override the economic incentives that may be generated by this agreement to engage in what may turn out to be anticompetitive conduct.

But Google and Yahoo differ on the AAI's conclusions that the deal would be anticompetitive without instituting the organization's recommended changes.

"While we disagree with AAI's conclusions, it is noteworthy that even a group that has opposed most deals acknowledges the pro-competitive elements of our agreement with Yahoo. We believe strongly that this deal is good for competition and will benefit advertisers, Web site publishers, and consumers," according to a statement from Google.

Yahoo made a similar statement, saying, "We believe strongly that this agreement will strengthen Yahoo's competitive position in online advertising and will help to drive a more robust, higher quality Yahoo marketplace for our advertisers, publishers, and users."

In sizing up the four key recommendations issued by the AAI, one source familiar with the deal noted the agreement between the two companies involves only North America, making the first suggested workaround irrelevant.

And in prohibiting a minimum bid, or reserve price, the issue it could create may be one where cheap, irrelevant ads begin showing up on search pages, since the bar would be set low, added the source.

The third recommendation would require the DOJ to monitor Yahoo as to whether its ad inventory was low enough to warrant allowing Google to place its ads on its search pages--a move that would amount to micromanaging for the agency, said the source.

And finally, the fourth recommendation is one that, in essence, prohibits allowing volume incentives with higher revenues. But the source noted such practices are common in a number of industries and are not anticompetitive.

But a spokesman for the AAI noted the organization is not married to its bullet points but wanted to illustrate some ways the companies could mitigate potential antitrust concerns.