• by Wendy Davis , Staff Writer @wendyndavis, November 4, 2008

Google and Yahoo have reportedly downsized their search ad agreement in an effort to convince the Department of Justice to approve the deal.

The deal, calling for Google to power some paid search ads for Yahoo, is for an initial term of two years, not 10, and Yahoo has agreed to limit revenue from the deal to 25% of its total search revenue. Most significantly for search marketers, advertisers will be able to prevent their pay-per-click ads from running on Yahoo.

This last term is important because some marketers were willing to pay more for ads triggered by the same keywords -- "iPod," "laptop," etc. -- when those ads ran on Google rather than on Yahoo, on the theory that Google users were more likely to make a purchase. Marketers feared that without this term, they would have ended up paying Google prices for Yahoo ads.

At the same time, it's not clear that marketers' concerns were justified, given that they set ad prices by bidding for keywords at auction. If advertisers perceived that they weren't getting their money's worth for their ads, they could have simply lowered their bids.

Even with the recent concessions, it's not certain that the Department of Justice will approve this deal. Google still controls more than 60% of the search marketplace, and this deal arguably makes the company even more powerful.

As Google has grown, the company faces more and more challenges by people concerned that, despite the "Don't Be Evil" motto, it could indeed wreak havoc -- both with other businesses and consumers. While the FTC allowed the company to acquire DoubleClick, the merger sparked pushback from Congress and consumer advocates. Google's retention of users' IP addresses also poses problems, triggering a backlash to the company both in the U.S. and abroad.

Google recently agreed to cut the time it retains IP addresses to nine months instead of 18. That's still longer than the six months suggested by European regulators. Perhaps more significantly, it's still not clear why Google needs to store IP logs at all. Despite all of the company's talk about using IP logs to improve search results and to fight click fraud, it has never been able to convincingly explain why it needs to hold onto that information for any length of time to do so.

Perhaps if Google had made more concessions on other fronts, the company's deal with Yahoo would have sailed through by now.