Is Google Playing Chicken With the Justice Department?

Published on October 31, 2008
by Kara Swisher

Are Google and Yahoo thinking of walking of away from their controversial search advertising deal, as reported in an amusingly hedged report in The Wall Street Journal last night?

How’s this for covering your bases in a story: “Following a meeting Thursday with the Justice Department, the companies could announce a decision to back away from the partnership–or a last-minute resolution, if one is reached–by the middle of next week, according to these sources.”

So they will back away unless, of course, they don’t and soon?

I would bet my Barry Manilow record collection, based on rumblings on Wednesday among those close to the case, that Google (GOOG) is a key whispery source here, sending a very public signal to the Justice Department that it would walk if pushed too far and leave regulators with egg on their faces for not letting the search giant help the struggling Yahoo.

But, let me be even more concrete, since The Journal report is dead wrong on at least one count. I can tell you for sure, based on many sources close to Yahoo (YHOO) that walking away is its last option, outside of a lawsuit, and it still hopes to make the partnership work.

That was underlined last night in a statement by Washington D.C.-based Yahoo spokeswoman Tracy Schmaler:

“We have been working with the Department of Justice regarding our agreement with Google and those discussions are ongoing. As we have said, we believe strongly that this agreement will strengthen Yahoo!’s competitive position in online advertising and will help to drive a more robust, higher quality Yahoo! marketplace for our advertisers, publishers and users.”

And I do not believe she is spinning here, even though that is her job.

Indeed, Yahoo can ill afford to pull out so easily, because it needs the revenue the deal might provide and simply cannot take the hit to its stock the collapse of the partnership would entail.

Such a series of one-two punches after its already tumultuous year would be devastating. It would also put Yahoo in the direct crosshairs of Microsoft CEO Steve Ballmer as its only partnering alternative in search.

Going it alone, of course, while preferable, is no longer an easy option for Yahoo, since keeping its No. 2 position in search would be expensive and brutal, especially sandwiched by No. 1 Google and No. 3 Microsoft (MSFT).

And, even more vexing, several sources at Time Warner (TWX) told me they are waiting until the resolution of the Yahoogle situation before consummating the ongoing merger discussions with Yahoo, because of the uncertainty of the impact on the Internet giant.

“It is linked to and just overhangs everything,” said one Yahoo exec about the long-pending Google partnership. “We want and need this deal, and would not be the ones to walk away first.”

As I have written, that would be Google, which benefits a lot from the will-they-or-won’t-they speculation here and cannot mind letting its intentions get some play (along with state attorneys general, who were also present at the Thursday meeting, and for whom leaking for simple self-aggrandizement is a basic character trait).

In fact, there was already much chatter that reached me on Wednesday that Google was sprinkling crumbs here and there to the media pigeons, all centered around the fact that it might balk at any onerous Justice Department demands, such as caps on search it could serve, or a consent decree that would require monitoring.

The Journal story mentioned the consent decree, which would be welcomed at Googleplex in Mountain view, Calif., like nonorganic mango nectar and bleached flour. The idea of regulators ferreting around its servers is simply not an option for the secretive company.

As I wrote early yesterday about the possibility of Google walking, in a predictive laundry list of options for Yahoogle earlier yesterday:

It seems far more likely that Google would do this than Yahoo, given its corporate culture is impatient with moving forward illogically (think Spock and you have the right picture of Google’s mindset).

I would imagine Google execs do not want to accept any caps or changes to the deal at all, and might conclude such restrictions make it not as worthwhile…

Plus, the joy of government regulators breathing down your neck 24/7 is, well, priceless, especially after Google CEO Eric Schmidt told regulators he would move forward with or without them.

While Google has now perhaps permanently put the government on notice that is must be more scrutinized than ever going forward with that unfortunate statement, I would be surprised if Google accepted any substantial changes to the deal.”

And, while it might be testing the Justice Department in hopes of salvaging the deal, I suspect Google–as much as its founders want to help out Yahoo CEO Jerry Yang and block Microsoft at the same time–is just now figuring out that walking might actually be the best move.

First off, even though it moved forward with the partnership, many top execs at the company were dead set against it, mostly due to the undue scrutiny it would bring to Google.

In fact, early on, some of its own operatives in D.C. expressed worry–largely ignored at HQ, where execs really do see themselves as not evil–about Google’s growing image as a scary behemoth.

Second, while Google seldom runs from a good fight–in fact, it often runs directly towards them–tangling with the federal government might be like crossing the 38th Parallel in Korea for the company. And you know how that went for General Douglas MacArthur!

It would certainly put the full attention of regulators on every move Google might make in the future, which is not good.

Third, the Yahoogle controversy, while being stoked by Microsoft’s relentless lobbying, has also brought into the light exactly how scared of Google’s power advertisers truly are.

And that would be terrified.

The company cannot simply blame Microsoft for manufacturing this fuss–even though it has surely pulled out all the stops in its bag of tricks.

In truth, whether Google chooses to accept this stark reality or not, many advertisers, publishers and public interest groups have been raising some real concerns about its dominance, which it ignores at its peril.

Lastly and perhaps most importantly, times have changed drastically as the economy has tanked.

Thus, Google–like a lot of other tech firms–has been engaged in a very serious company-wide appraisal of its business in the downturn.

One of Google’s internal mantras, I have been told by many inside and outside the company, is a variation of this phrase: Feed the winners, starve the losers.

It would come as no surprise, given the initial internal doubt about the partnership, that the Yahoogle deal might have suddenly become perceived at the company as a loser, and access to Google’s fabulous cafeteria might be about to be cut off.

Whatever Google’s true intentions, in playing chicken, it is courting danger.

According to Wikipedia, “the principle of the game is that while each player prefers not to yield to the other, the outcome where neither player yields is the worst possible one for both players.”

As in, if everyone is trying to win, it always ends in a fatal crash.

Please see this disclosure related to me and Google.

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