The US Department of Justice is trying to determine whether Yahoo's two-week test to deliver relevant web advertising from Google alongside its own search results violates any antitrust laws, according to a Reuters news service report.
A source told Reuters that antitrust regulators "have initiated an investigation" of the test. According to the report, the source, who spoke on condition of anonymity, said the regulators were concerned about a telephone call from Google CEO Eric Schmidt to Yahoo CEO Jerry Yang to offer help in fending off Microsoft's US$44.6 billion takeover bid .
Another source told the news agency that the DOJ was concerned about the possibility of a longer-term deal between the number one and number two search engine companies and opened up an inquiry into matter.
Yahoo and Google said they had informed the DOJ of the two-week test .
"Yahoo proactively kept the Department of Justice informed of its intention to conduct this limited test with Google and has provided information to DOJ on the nature of the test," said Yahoo spokeswoman Tracy Schmaler in an e-mail.
A Google spokesman concurred. "We informed the Justice Department before we launched this test and we have been responsive to their questions about it," said Google spokesman Adam Kovacevich, in an e-mail.
DOJ spokeswoman Gina Talamona declined to say whether the department had initiated an investigation. However, she said the department "was aware of the collaboration."
Microsoft could not be reached for comment. Earlier, company General Counsel Brad Smith roundly criticised the test, saying it raised antitrust issues.
The test, which ends this week, does not include Yahoo's network of affiliate or premium publisher partners and is limited to no more than 3% of Yahoo search queries. The companies have not said whether they are planning to extend the test.
"I assume Yahoo's interest in its deal with Google is to forestall a merger with Microsoft, largely so that its management can remain in control," said Keith Hylton, professor at the Boston University School of Law, in an e-mail.
"Google's interest is also to forestall a merger with Microsoft, so that it can avoid a competitive threat. I doubt that price-fixing is a major part of the aims of either Google or Yahoo. If Microsoft's goal in acquiring Yahoo is to make a run at competing against Google, the Yahoo-Google partnership has anticompetitive effects because it is shielding Google from having to face a tougher competitor."
Hylton said he didn't think it was fair to suggest that a Google-Yahoo partnership was the same in its competitive implications as a Microsoft-Yahoo merger.
"It's clear that Google is the dominant firm, while Yahoo and Microsoft are fringe competitors," he said. "The Google-Yahoo partnership effectively limits and minimises the fringe even more. The Microsoft-Yahoo merger would allow two fringe firms to merge into a possibly serious rival to Google."
Hylton said antitrust regulators have looked with suspicion on mergers between dominant companies and other firms, especially if it appears those mergers were designed to avoid competition.
"The merger laws have probably been a bit too strict in this area. In the past, mergers have been deemed anticompetitive when the dominant firm joins with another firm with only one percent of the market," he said.
"In comparison, Yahoo, the 'other firm' is a relatively big player among the fringe competitors in its market, and Google is clearly the dominant firm in its market. The courts could easily apply the reasoning of the merger case law to a monopolization inquiry - when, as in this case, the dominant firm seeks a partnership that appears to have a significant competition-avoiding effect."