• by Wendy Davis  @wendyndavis, October 2, 2008

The chairman of the Senate Antitrust Subcommittee is asking the Department of Justice to scrutinize Yahoo's plan to outsource some search ads to Google and to monitor the deal if it goes forward.

"We conclude that important competition issues are raised by this transaction," Sen. Herbert Kohl (D-Wis.) wrote Thursday in a letter to assistant attorney general Thomas Barnett.

But Kohl stopped short of calling for the DOJ to block the deal or impose conditions on it. Instead, he asked officials to keep an eye on the situation in the future. "Even should you conclude at present that this deal is not contrary to antitrust law, the Department must be sure that this deal never in the future crosses the line into an unacceptable, anti-competitive collaboration among competitors which will harm consumers and advertisers."

Google and Yahoo, which together account for around 80% of the search market, said in June that they had forged a deal for Google to serve some paid search ads that would appear on Yahoo. The companies delayed the deal until this month to give the authorities time to investigate.

The Association of National Advertisers, World Federation of Advertisers and World Association of Newspapers have all opposed the deal, but the DOJ has not yet said whether it intends to take action. The American Antitrust Institute, a nonprofit think tank that advocates for the enforcement of antitrust laws, recently issued a report recommending that the deal go forward only with conditions aimed at preserving Yahoo's independence.

Like the report American Antitrust Institute report, Kohl's letter raises the possibility that Yahoo could exit the market as an independent search player. The deal could lead to that scenario if Google grows so strong that no other companies can compete with it. But it could also happen if the deal is blocked and Microsoft purchases Yahoo.

Yahoo only entered into this arrangement after Microsoft made an unsolicited takeover bid for the company. Some industry observers believe that if Yahoo's deal with Google is blocked, Microsoft will revive its bid for all or part of Yahoo.

Among the issues that Kohl asked the DOJ to examine are "whether this transaction will strengthen Yahoo as a competitor or perpetuate its decline and even exit from this market."

Ultimately, Kohl said he did not have enough information to determine whether the Google-Yahoo deal will hurt competition. "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 and advertiser behavior. Determining the competitive effects of this transaction, moreover, requires us to predict the future of a young and dynamic market," Kohl wrote.