Google Answers Its Antitrust Critics, Sort Of.

With an antitrust investigation brewing over its advertising deal with Yahoo, Google is going on the offensive in trying to answer its critics and push the deal through. CEO Eric Schmidt told reporters yesterday that all the scrutiny is being orchestrated by Microsoft and that Google plans on going ahead with the deal anyway.

Last week, Google’s chief economist Hal Varian gutted a study that claimed a Yahoo-Google advertising alliance will result in a 22 percent increase in advertising rates. And today, Google’s advertising chief Tim Armstrong reiterated some of Varian’s points in an attempt to dispel the notion that the advertising deal with Yahoo will raise prices. From Armstrong’s post on the Google Public Policy Blog:

Question: Will the Google-Yahoo! agreement raise ad prices?
Answer: Neither Google nor Yahoo! set ad prices. Ads are priced by an auction where an advertiser only bids what an ad is worth to them.

Question: Can Yahoo! pick whose ads to show based on who has the highest price?
Answer: No. Under the terms of our agreement Yahoo! won’t be able to see the current auction prices for Google ads, and Google won’t be able to see Yahoo!’s prices.

Obviously, if Yahoo thinks it can make an additional $800 million in advertising revenues from the deal, that extra money is coming from somewhere. Probably in the form of increased prices. Google is trying to deflect that by saying that it doesn’t set prices, advertisers do. The end result will be the same. Whether it will be 22 percent or something else, prices on that Yahoo inventory will go up.

The second point is also a bit disingenuous. Although Yahoo won’t be able to see Google’s auction prices before deciding which ad spots to hand over, it already knows which ads are performing poorly on its own network. And it no doubt will be doing bucket testing of ads to be able to compare how much they fetch on Google and how much they fetch on Yahoo’s ad system. So while the difference in pricing won’t be completely transparent to Yahoo at the instant when the ads are served, Yahoo will be able to glean this information over time on its own.

Armstrong promises another post tomorrow that promises to deal with some of the anti-competitive concerns being raised. Google already addressed some of these during a Congressional hearing in July. But Google cannot let up now if it wants this deal to go through. Even if it is willing to put up with an antitrust investigation, Yahoo might not be, and can kill the deal on those grounds.