• by Wendy Davis  @wendyndavis, September 24, 2008

Yahoo's plan to outsource some paid search ads to Google should only go forward if the government imposes conditions aimed at preserving Yahoo's independence. That's the conclusion of the non-profit think tank American Antitrust Institute, which issued a report Tuesday about the deal.

Despite mounting opposition, Google CEO Eric Schmidt said recently that the companies still intend to go forward early next month.

AAI described the Google-Yahoo deal as "inherently suspect," but warned that prohibiting it could also lead to an undesirable result--Yahoo's exit from the market altogether. "We believe that the transaction could be blocked on antitrust grounds," the group wrote. But, it added, "simply prohibiting the agreement between Google and Yahoo would eliminate the potentially positive effects of the proposal."

Earlier this year, Google and Yahoo announced a deal for Google to power some paid search ads for Yahoo. At the time, the companies said they would delay implementation to give the authorities time to review the agreement. Since then, several organizations--including the Association of National Advertisers, World Federation of Advertisers and World Association of Newspapers--have weighed in against the deal.

Yahoo entered into the agreement as part of its efforts to fend off a hostile takeover bid by Microsoft. Because the deal could allow Yahoo to remain independent, the American Antitrust Institute views the arrangement as having some pro-competitive effects. But because it also potentially helps strengthen Google, which already dominates the search market, the group also sees the deal as potentially negative.

Institute president Bert Foer said that it's difficult to balance the risk of Yahoo getting swallowed by Microsoft with the chance that Google will grow even more powerful in search advertising. "We're making guesses about the future," he said. "Is this about the survival of Yahoo as a future player? Is it about the growth of Google. And could it also be about the growth of Microsoft, if this deal doesn't go through?"

To complicate the issue, some of the deal's terms remain secret. While a version of the agreement was filed with the Securities and Exchange Commission, many details had been redacted. Foer said the institute requested more information from the companies, but did not get a response.

The whitepaper, authored by Western Michigan University Professor Norman Hawker, concludes that the possible benefits of the deal will only outweigh the potential harm to competition if certain conditions are imposed. One proposed term is that Google and Yahoo be prohibited from setting minimum prices for search ads.

The institute also urged the government to ban Yahoo from showing Google search ads on any pages other than organic search results in North America. In addition, the institute said Yahoo should not be allowed to display Google ads if Yahoo "has a sufficient number of ads of its own to fill the white space surrounding an organic search result." And the group said that Yahoo's share of revenue from Google ads should be constant, meaning that the company would not receive a higher share of revenue for using more Google ads.

Google said in a statement that it disagreed with the institute's conclusions. "We believe strongly that this deal is good for competition and will benefit advertisers, website publishers, and consumers."