Which is worse Microsoft-Yahoo or Google-Yahoo; the question sounds silly, but its what regulators may have to decide

After being one of the most outspoken critics of the possible Microsoft-Yahoo merger, Google is now in the awkward position of wrestling with regulation concerns about its own potential deal with Yahoo.  While the Yahoo-Google deal is not an outright merger, it involves the pair heavily interacting and vests much advertising interest with Yahoo. 

For Yahoo, it’s a desperate attempt to ward of Microsoft, which has been circling it like a shark.  For Google, it’s a victory in advertising in some ways at the expense of its once rival, and another chance to one-up competitor Microsoft.

However, all is not honky dory with Yahoo and Google, as U.S. Justice Department has been questioning the pair about possible anticompetitive ramifications of their young deal.  The questions come as Yahoo completed its first two-week test of using Google's ad-sale system, with ads placed next to Yahoo search results.  Even 3 or 4 years ago, such a development would be considered laughable, but it’s just one more example of the extent of Google's ever increasing online presence and Yahoo's struggles.

Will the merger survive regulator critique?  Google believes strongly that it will.  After initially being wary of an advertising deal, the giant is now very interested in it.  Google's leadership says that the deal will likely satisfy regulators in that it is "non-exclusive" and is not a merger, merely a business partnership.  The source also pointed out that Yahoo has other similar existing partnerships with Time Warner Inc's AOL and IAC/InterActiveCorp, though the Google partnership may eventually be Yahoo's largest.

Google still insists that while its deal is not anticompetitive or monopolistic, a Microsoft-Yahoo merger would be.  Google argues that such a merger would essentially create monopolies or overly dominant shares in Web mail to instant messaging, among other sectors.  Though they do not say it, it seems that Google believes that its ad deal is the lesser of two evils in terms of effect on competition.

Fortunately for Google's hopes, Yahoo has been very enthusiastic about the deal; in fact it was Yahoo who initiated it in the first place.  Yahoo and Google both have been working together to satisfy the Justice Department's questions.

Some critics have been crying foul over the fact that Google's AdSense has not been added to the second largest search engine, giving it a very large market share in the search engine industry, a primary source of web traffic.  According to ratings company Hitwise, Google now has 80 percent of the search engine market for use with its advertising.

Of course Google's dominance is not quite as complete as those numbers indicate.  Its real percentage is probably somewhere between 60-70 percent, as in the initial test only 3 percent of U.S. Yahoo searches carried Google ads.  Yahoo is not disclosing the results of the test, which might provide intriguing details into how lucrative the new deal is for Google.  Yahoo President Susan Decker on Tuesday said that speculation on its long term plans with Google was "premature".

Google is still looking to negotiate a more permanent relationship with Yahoo, which will likely be influenced by regulatory feedback.  One major critic of such a relationship is Microsoft, for obvious reasons.  Microsoft blasted such a deal saying it would make the web search market far less competitive.

Aaron Edlin, who teaches antitrust law at the University of California at Berkeley, says the deal is troublesome, but may slip by regulators.  He states, "The general rule would be that if the arrangement substantially limits competition in some aspect of their business, that would be problematic.  Collaboration that comes short of merger is much more apt to pass muster before antitrust authorities."

"If they're going to pirate somebody, we want it to be us rather than somebody else." -- Microsoft Business Group President Jeff Raikes
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