Google pointed to continued concerns from U.S. regulators and Internet advertisers, although it did not say directly that the DOJ was planning to block the deal. The deal would have lead to a "lengthy legal battle," Google said.
The deal, first announced in June, would have allowed Yahoo to run Google advertising on its search pages, and it was projected to add $800 million to Yahoo's annual revenue.
Yahoo, in a statement, said it was disappointed that Google backed out of the deal. "Yahoo continues to believe in the benefits of the agreement and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court," the company said. "Google notified Yahoo of its refusal to move forward with implementation of the agreement following indication from the Department of Justice that it would seek to block it, despite Yahoo's proposed revisions to address the DOJ's concerns."
The controversy over the proposed ad deal with Yahoo had become a distraction, Google said.
"After four months of review, including discussions of various possible changes to the agreement, it's clear that government regulators and some advertisers continue to have concerns about the agreement," David Drummond, Google's senior vice president and chief legal officer, wrote on the Google public policy blog. "Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn't have been in the long-term interests of Google or our users, so we have decided to end the agreement."
Drummond said Google is also disappointed that the deal won't move forward. "We're not going to let the prospect of a lengthy legal battle distract us from our core mission," he wrote. "That would be like trying to drive down the road of innovation with the parking brake on. Google's continued success depends on staying focused on what we do best: creating useful products for our users and partners."
Google and Yahoo had voluntarily submitted the deal to the DOJ, but the agency had yet to approve the proposal. Groups of Web advertisers had expressed concerns that the deal would lead to fewer options for Internet advertising and higher advertising rates, although Google denied those charges. Google rival Microsoft also lobbied hard against the deal.
The DOJ said the decision to call off the deal will preserve competition in search advertising. "The companies' decision to abandon their agreement eliminates the competitive concerns identified during our investigation and eliminates the need to file an enforcement action," Thomas Barnett, assistant attorney general in charge of the DOJ's Antitrust Division, said in a statement. "The arrangement likely would have denied consumers the benefits of competition--lower prices, better service and greater innovation."
The deal, as proposed, would have likely caused anticompetitive harm in the Internet search advertising and search syndication markets, the DOJ said in a news release. "Yahoo is by far Google's most significant competitor in both markets, with combined market shares of 90% and 95% in the search advertising and search syndication markets, respectively," the DOJ said. "Yahoo provides an alternative to Google for many advertisers and syndication partners, and Yahoo recently had begun making significant investments in order to compete more effectively against Google."
One observer of the DOJ's focus on the deal said he was amazed that the DOJ was "so focused on these companies doing a non-merger" when it has let multiple mergers happen in many other industries. The observer, speaking on background, said it appeared that the DOJ was rewarding Microsoft and punishing Google for its lack of support for President George Bush's administration.
The proposed ad deal was an attempt by Google to prevent Microsoft from buying Yahoo. Microsoft made several offers for Yahoo earlier this year. "Some of the goals of the deal may have been accomplished by frustrating Microsoft," the observer said.
Google and Yahoo denied that the deal would harm competition. Yahoo could chose to run Google ads, but would not be required to, the companies said. Yahoo's search results would continue to be independent of Google's, and ad prices would continue to be set through online auctions, the companies said.
The deal would have been good for publishers, advertisers and Internet users, Drummond said. "Why? Because it would have allowed Yahoo (and its existing publisher partners) to show more relevant ads for queries that currently generate few or no advertisements," he wrote. "Better ads are more useful for users, more efficient for advertisers, and more valuable for publishers."
Yahoo will move forward with its business plans, the company said. "This deal was incremental to Yahoo's product road map and does not change Yahoo's commitment to innovation and growth in search," the statement said. "The fundamental building blocks of a stronger Yahoo in both sponsored and algorithmic search were put in place independent of the agreement."
Jeffrey Chester, executive director of the Center for Digital Democracy, a group focused on rights for Internet users, said he was happy to see the deal collapse.
"We are pleased that Google finally understood that the proposed alliance with its leading competitor threatened competition. Much is at stake over the competitive landscape for online advertising," he said in an e-mail. "For too long, policymakers and regulators have failed to address the growing consolidation of control in the online advertising market. Today's announcement in its own way underscores what we have been telling officials: that a very tiny handful of global digital giants -- particularly Google -- is increasingly dominating the most prevalent way online publishing is financially supported."