Google Drops Out of Yahoo! Search Ad Deal

Yahoo! and Google entered a search advertising earlier this year --- but both sides always had an escape clause. And on Wednesday, Google exercised that clause, ending the deal.

The reason appears (mostly) to have been regulatory, rather than financial. It's been months since the deal was announced, and despite tweaking the agreement, Google and Yahoo! have been unable to satisfy regulators, as well as advertisers.

As late as Monday it was reported by the Wall Street Journal that the partners had had proposed restrictions, capping the number of search ads Yahoo could "outsource" to Google, but this announcement indicates that bid didn't fly.

In a blog post, David Drummond, Senior Vice President, Corporate Development and Chief Legal Officer, Google said:

We feel that the agreement would have been good for publishers, advertisers, and users -- as well, of course, for Yahoo! and Google. 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. Better ads are more useful for users, more efficient for advertisers, and more valuable for publishers.

However, 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. 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.

Yahoo! expressed disappointment in Google's decision, as well it should have. It had been counting on Google's ads, which generate higher revenue than Yahoo!'s own, to boost its revenue by as much as $800 million annually.

Given this, will Yahoo! see additional pressure to renew talks with Microsoft? You can bet on it. There is still a stinging pain among shareholders since Yahoo! decided to turn down an offer equivalent to $33 / share from Microsoft. Yahoo! (YHOO) shares finished up $13.92, up $0.57.