• by Wendy Davis , Staff Writer @wendyndavis, April 10, 2008

From the moment Microsoft went public with its $31 a share bid for Yahoo on Feb. 1, it was obvious the online ad industry was about to undergo a major transformation, but no one knew at the time exactly how it would play out.

Now, nine weeks later, we're still no closer to knowing whether we'll end up with MicroHoo, Yahoo-AOL, Yahoo-MySpace, or still some other combination.

Microsoft recently attempted to ratchet up the pressure on Yahoo by threatening to lower its bid if Yahoo didn't accept by April 26. Yahoo, rather than capitulating, responded by announcing it had arranged for Google to power 3% of paid search ads on Yahoo. That news immediately sparked reports that Yahoo and AOL were in talks and that News Corp. was considering joining Microsoft in a bid for Yahoo.

News of the Google-Yahoo search deal also spurred Microsoft to immediately raise antitrust concerns. Together, Google and Yahoo account for at least 80% of the search market, so a full-scale search outsourcing deal would give Google control of the vast majority of paid search.

Microsoft yesterday circulated article excerpts quoting people who speculated that a Google-Yahoo merger would raise antitrust regulators' hackles. But at least some of those opinions dealt with a full-scale merger -- which would combine paid search, organic search, and display advertising -- and not a more limited search outsourcing deal.

And, while authorities might be troubled by a Google-Yahoo merger, it's not clear that they would prevent one -- much less a more limited paid search deal. For regulators to block a paid search deal, they'd have to be concerned that paid search -- just one component of online advertising -- is in itself a marketplace.

There's also a long history of companies outsourcing paid search. Google currently powers paid search for AOL, Ask.com and MySpace -- and none of those deals triggered antitrust battles when they were announced. And in the past, Yahoo's Overture powered paid search for Microsoft.

Another factor that might weigh against an antitrust action is that paid search works on an auction system, so Google doesn't have 100% control over the price. Google sets minimum bids, but since marketers often pay more than the minimum, a Google-Yahoo paid search combo wouldn't necessarily result in one company controlling the price of almost all search ads.

Additionally, as The New York Timespoints out, Yahoo might not be contemplating outsourcing all of its paid search ads to Google. For now, the companies are only talking about 3% of the ads. Yahoo could ultimately outsource some to Google, some to other companies, and power some with its in-house Panama platform -- deals that raise far fewer antitrust concerns.

Far more troubling than a paid search deal is the possibility of Google powering organic search results on Yahoo as well as paid search. That really would give Google a near monopoly over how people access information online -- and could lead to a situation where Google could almost singlehandedly determine whether Web users can find particular Web sites.