• The New York Times, Monday, June 23, 2008 11:30 AM

The Google-Microsoft arms race is making advertising agency executives nervous, The New York Times says in a report from the Cannes international advertising festival. They worry that Google's recent search pact with Yahoo will only strengthen the Web giant's dominance of online advertising, and that Microsoft will continue to use its inexhaustible cash horde to keep up. Meanwhile, both companies are extending their reach into traditional advertising, which has long been the large agencies' bread and butter.

Google "clearly wants to replace the advertising industry in its totality," said Cindy Gallop, a former chief executive of the ad agency BBH, although she stopped short of saying that the Web giant would succeed, adding that it would be "fundamentally undermined" by its antipathy toward traditional advertising.

WPP Group CEO Sir Martin Sorrell lamented that the six large agency holding firms are being priced out by Google and Microsoft in their quest to acquire new advertising companies. Case in point: Microsoft's announcement of the acquisition of Navic during the Cannes Lions show. "We coveted them, too," Sorrell said during a panel discussion with representatives of Google, Microsoft, Yahoo and AOL. "But we didn't have the resources."

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