Google and Yahoo Cave

Facing almost certain opposition from the Justice Department, Google and Yahoo submitted substantial revisions to their no-longer-multibillion-dollar plan to post Google ads on Yahoo search results. The companies offered to cut the length of the deal from 10 years to two and agreed to cap Yahoo's revenue to 25 percent of its total search ad cash flow. In addition, reports the Wall Street Journal, advertisers can now refuse to let their ads appear next to Yahoo searches.

The ad arrangement is key to Yahoo, which has seen its stock plummet in the months after rejecting an acquisition offer from Microsoft. It's considerably less clear why Google has been pushing so hard for this deal, since the company already dominates more than 60 percent of the search market, taking a piece of Yahoo's share each month until September. Some analysts have suggested that with this deal, Yahoo will increasingly rely on Google ads until it gives up the search-ad game altogether; others argue that Google dangled this deal in front of Yahoo only to keep the company from merging with Microsoft, its other main rival. But, as the New York Times points out, the scrutiny from this deal has focused unwanted attention on Google's near-monopoly dominance of the search market. "A more limited deal would also be a setback, but would most likely be worth pursuing if it averted a showdown with regulators over the company's growing power," writes the Times' Miguel Helft.

But will these new limitations appease Justice and the army of advertisers that have come to see Google as a possibly dangerous monopoly? Not if the blogosphere's skepticism is any indication. Over at TechCrunch, Erick Schonfeld suspects that Google is just stalling for time until Barack Obama, with whom Google CEO Eric Schmidt has gotten awfully cozy, strikes a new tone in the Justice Department.

Alley Insider's Henry Blodget still insists that the ultimate goal of the deal is to give Yahoo a process by which is cedes its search advertising to Google, creating an unbreakable monopoly and freeing Yahoo to pursue other projects. Moreover, he claims, this last-minute deal may just give everyone two years to get used to the Google-Yahoo scheme, and before it expires, the two companies could negotiate something more permanent.

"Despite Yahoo's assertions to the contrary, the real potential value of the original deal was the possibility that Yahoo might eventually be able to get out of the search engineering and serving business altogether," Blodget writes. "Google already owns this business, and Yahoo will never have the scale or resources to compete. ... We suspect, however, that the companies are just banking on the ability to extend the deal under better terms in a year or so."

Finally, Blodget notes—and this may be the most critical point—the compromise may satisfy Justice enough to let Google squirm out of signing a consent decree, which would have required giving federal regulators the power to poke around in the notoriously secretive company's business. This, in the end, may be behind Google's newfound flexibility.