Wednesday, July 2, 2008; D01

The Justice Department has opened a formal antitrust investigation into a deal struck last month that would allow Internet titan Google to provide some search advertising for Yahoo, according to sources familiar with the inquiry.

Investigators are planning to demand documents not only from Google and Yahoo, but also from other large companies in the Internet and media industries, said the sources, who spoke on condition of anonymity because the investigation is ongoing.

Google and Yahoo officials have said since the deal's announcement that they would delay its implementation for a voluntary Justice Department review. But a formal investigation signals that the department may have found some cause for concern.

"There is nothing unexpected in the review of this arrangement as structured by the parties and Department of Justice officials," Yahoo said in a statement, expressing confidence that the deal would be good for competition. Officials with Google and the Justice Department declined to comment.

But lawyers familiar with similar investigations said that the kind of legal requests being issued by the Justice Department in this case -- "civil investigative demands" -- are not used for routine matters.

"They don't do it without having identified significant issues," said M.J. Moltenbrey, a Freshfields Bruckhaus Deringer lawyer who was director of civil non-merger enforcement in the Justice Department's antitrust division in the 1990s. "It involves approval at higher levels within the antitrust division."

"It doesn't mean they have drawn any conclusions," said Peter Guryan, a partner with Fried Frank and formerly an antitrust lawyer in the Justice Department. But "it is a significant step beyond a request for voluntary information," he said. "It demonstrates that the DOJ clearly has questions."

The investigation arises as a high-stakes fight is underway to control Internet advertising, and, by extension, the content it supports.

Google, according to its competitors and critics, could gain a monopoly in Internet advertising if the deal with Yahoo is permitted.

One of the largest chunks of Internet advertising today is "search advertising," or the ads that run alongside Internet search results delivered by the major search engines: Google, Yahoo and Microsoft.

Google's is the dominant search engine, while Yahoo's and Microsoft's efforts run a distant second and third.

Under the Google-Yahoo deal, announced June 12, Google would provide search advertising to Yahoo for some, but not all, Yahoo searches in the United States and Canada.

The two would share the advertising revenue, with Yahoo estimated to receive as much as $800 million annually from the agreement.

By proposing to unite the two biggest players in search advertising, however, the agreement quickly aroused critics who said the move would allow Google to become a monopoly for advertising in the new medium.

Shortly after the announcement, the heads of key subcommittees in the House and the Senate reiterated their intentions to look into the Google-Yahoo arrangement.

Even so, attorneys for Google have appeared confident that they could convince Justice Department reviewers, as well as congressional committees, that the deal would be good for consumers.

"We do feel that it is a pro-competitive deal," said Google's general counsel, Kent Walker.

In Google's view, consumers and advertisers would benefit from the deal because Google's method of determining what ads to place beside a search query is the best in the industry.

If Google is allowed to provide the ads for a Yahoo search, consumers will see more relevant ads and advertisers will realize a better return for their ad spending, Google officials have said.

Moreover, they said, competitors in other industries have reached agreements that have passed muster with regulators.

"Toyota sells its hybrid technology to General Motors, even though they are the number one and number two car manufacturers globally," Omid Kordestani, a Google senior vice president, noted in a blog post. "Canon provides laser printer engines for HP, despite also competing in the broader laser printer market. Google and Yahoo will continue to be vigorous competitors, and that competition will help fuel innovation that is good for users."

But critics and competitors of Google -- chief among them Microsoft -- have argued that the deal will limit choices for advertisers and render Yahoo less likely to compete against Google.

Asked whether Microsoft has been issued a demand for information in the investigation, a company spokesman declined to comment.

"This is a complicated situation, but one of the key questions is very simple," said David Balto, an antitrust lawyer who was competition policy director at the Federal Trade Commission during the Clinton administration. "What is Yahoo's incentive to continue to compete?"

www.washingtonpost.com/wp-dyn/content/article/2008/07/01/AR2008070102622_pf.html