Initial indications are that the U.S. Department of Justice will try to block the new Yahoo-Google ad deal if compromise is not reached

When Google and Yahoo first announced that they were forming an advertising partnership, the industry warmly embraced the news, though it unsettled some competitors, such as Microsoft.  The trial runs of the deal went quite well -- Yahoo got more advertising revenue and Google inched closer to gaining complete control of the online ad market, which it already overwhelmingly dominated.

The only dark cloud in the deal's sunny sky was the looming prospect of a regulatory review of the more permanent partnership the pair agreed to pursue.  After no word for months, Yahoo and Google continued to forge ahead until they were rocked by the news that the U.S. Department of Justice who was examining the deal was considering antitrust litigation to break it up.  The DOJ feared that the deal would give Google an abusive position of power which it could use to squash smaller competitors, a view backed by Microsoft, which once was subject to similar antitrust litigation in the OS market itself.

Now Google and Yahoo are trying to race the clock to work out a deal with the DOJ, before it breaks up theirs.  According to lawyers familiar with the negotiations, they are in a very early stage.

While it's willing to work with the pair to try to cut a deal, the Department of Justice is compiling more evidence to use in a potential case.  It aims to be able to clearly prove its view that the deal would give Google too much power.  This view is backed by numerous online advertisers who complained to the DOJ.  According to these advertisers, the Google deal will kill the free market in online advertising, by limiting competition, raising prices and reducing choices.

Under the new deal, Yahoo would begin to display ads sold by Google.  Yahoo would get more revenue as Google's ads are a big cash draw.  Google would gain a tighter grip on the market and might be able to get more from its advertising partners, arguing that it now offers wider market penetration.  The alliance would help to ward of the failed advances of Microsoft on Yahoo, and help Google to apply pressure on Microsoft's third place advertising position.

Google and Yahoo are hoping sweeteners will convince the DOJ to allow the deal.  Among these, the pair is considering offering to put a cap on the number of ads sold, as well as assuring that Yahoo would continue to compete for ads.  They also would agree to be monitoring to ensure compliance, according to those familiar with the negotiations.

Both Yahoo and Google decline comment on the talks, stating that they believed the deal was legal and good for competition.  The DOJ also refused comment, with a spokeswoman only stating, "Our investigation is ongoing".

The real question is whether the concession could lead to a change of heart from Google or Yahoo management.  Both companies closely guard their advertising mechanic secrets, and the release of reports would spill much of that information into the public eye.  Ad caps would limit Yahoo's financial gains from the deal.  Further, critics like Microsoft have argued that online advertising is too dynamic to effectively monitor such a deal.

Also, the filing of a deal would establish a legal record, acknowledging Google's dominant position.  This could make it a target for private antitrust suits.

Despite attempts to reach a deal, lawyers and executives contacted by the government say that the Department of Justice is preparing an elite trial team for a potential antitrust trial.  They have already taken a deposition from Google Chief Executive Eric Schmidt and other key figures.  Microsoft eagerly submitted to deposition and offered evidence that it feels would strengthen the DOJ's case against Google-Yahoo.  The deal is also under investigation by various states.  The pair has consented to staying the deal till at least October 22, giving the DOJ time to make an official decision.

The loss of the deal would be a bitter pill for Yahoo, who is counting on the deal as a lone ray of sunshine amid falling profits and steep stock devaluation.  With the fate of the internet in the balance many are nervously anticipating the DOJ's decision and wondering -- is this the start of the end for Googlehoo or just the beginning?

"Spreading the rumors, it's very easy because the people who write about Apple want that story, and you can claim its credible because you spoke to someone at Apple." -- Investment guru Jim Cramer

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