Google and Yahoo have made major concessions in their proposed search advertising deal in hopes of getting the Justice Department to go along with it, according to a Wall Street Journal story. People “familiar with the matter” say the new proposal, submitted over the weekend, shortens the term of the deal from 10 years to two years and places a limit on the revenue Yahoo can generate from Google to 25% of Yahoo’s search revenue. Also, Google advertisers can opt not to have their ads shown on Yahoo.

It’s unclear how deep these concessions are. For one, Yahoo has always said it would start slowly on the deal and see how it goes before deciding whether or how much to increase the ratio of Google ads on its pages. Moreover, Yahoo’s search revenues on its own site in the third quarter alone were $438 million; 25% of that, annualized, still adds up to a fairly large number—not the $800 million revenue opportunity Yahoo has floated, but probably more than half of that. So while that would likely be a significant concession, it’s also still significant. And in the Internet age, I wonder if a 10-year deal meant much of anything.

But the bigger issue is whether Justice’s antitrust division will be mollified, or if it prefers to make a statement about Google’s growing power by either demanding even more stringent concessions or blocking the deal entirely. It doesn’t seem out of the question that the two sides can come to some agreement, though from a story in TheDeal.com reprinted here, Assistant U.S. Attorney General Thomas Barnett told the companies a final proposal must come by Tuesday. Clearly Google and Yahoo want this deal. And according to many antitrust experts, how antitrust law applies to this deal is far from clear, since it’s not a merger and Yahoo retains control over when, where, and how many Google ads to run. So those experts think Justice would have a tough time winning a lawsuit that seeks to block the deal outright.

If Justice continues to balk, at some point—probably not much further than this latest proposal—the deal will no longer be worthwhile for Google, which doesn’t want heavy regulatory oversight of its business. If the amount of revenue Yahoo gets from the deal is too limited, even Yahoo may find it unattractive, despite the fact that any deal is probably better for Yahoo than nothing. Although I would be surprised to see an agreement in Election Day, when some current Justice officials become lame-duck by definition and whatever they announce would get buried by other political news, I also suspect it won’t be long before this gets resolved.

UPDATE: After talking with other people, I suspect there’s some positioning by Google and perhaps Yahoo going on here that transcends the actual negotiations with the Justice Department. According to one person knowledgeable with the situation, it’s unlikely Google and Yahoo would leak these details if things were going swimmingly with Justice. Surely these are options that Justice attorneys have been aware of, and examined, for many weeks now. Indeed, one person close to the situation says Justice has asked potential witnesses about what they think of potential remedies. Bottom line: If talks with the antitrust regulators were fruitful, it seems likely we wouldn’t hear much until an agreement were announced.

Google and Yahoo could be hoping to put some pressure on regulators by showing they are willing to compromise. Or they could be sending a signal to worried advertisers that they’re trying to deal with their concerns.

If so, the tactic seems like a long shot—as the deal itself is looking with each passing day.

According to a just-posted story in the Journal, the likelihood that Google and Yahoo will walk away from their controversial search advertising deal has risen, as talks with the Justice Department have not produced an agreement on terms the companies and the government can both live with.

This isn’t very surprising, since the fact that talks have gone on this long—more than four months after the two companies proposed the deal for Yahoo to run Google search ads on some of its pages—has suggested in recent weeks that it might not happen after all. But according to sources at both companies I talked to late yesterday, talks were continuing. And according to Google just minutes ago, they are still going. Spokesman Adam Kovacevich issued this statement: “We are continuing to have cooperative discussions with the Department of Justice about this arrangement and agreed to a brief delay in implementing the agreement while those discussions continue. We are confident that the arrangement is beneficial to competition, but we are not going to discuss the details of the process.”

Still, it seems pretty certain the issue will come to a head quite soon. Between a new administration likely to result in changes in personnel at Justice, Google’s desire to either do the deal or go on, and struggling Yahoo’s immediate need for the revenues that would come from it, it would seem none of the parties wants to delay this much longer.

The deal has become a political hot potato, pitting Microsoft and its extensive and experienced lobbying force in Washington against smaller teams at Google and Yahoo. By many accounts of antitrust experts I’ve talked to, Justice would have a hard case to win outright. But neither Yahoo nor Google likely wants this to come to a lawsuit at all. For Google, especially, already under increasing regulatory scrutiny, such a battle could have much worse consequences than the loss of what is for it a fairly small amount of revenues compared with its overall sales.

For Yahoo, however, the deal was not only a significant profit boost—up to $450 million annually in operating cash flow—but it was a bargaining chip vs. Microsoft potentially coming back with an acquisition offer for far less than the $33 a share, or $47 billion, it offered earlier this year to buy Yahoo. Sources indicate there are no talks between the two companies currently. Yahoo has a bigger stake in making this happen, even with restrictions the government might demand.

So the longer this stalemate goes on, indeed, the less likely the deal will happen. I suspect we’ll know very soon.

Dolly Parton

Besides the Presidential election, there's another big political battle brewing in Washington on Nov. 4. This one is over the airwaves that are used to deliver communications signals to consumers across the country, and like the race for the White House, this contest has created a big divide.

The same day that the country is picking its next President, the Federal Communication Commission will decide whether to make available a large swath of airwaves for wireless high-speed Internet access. It would be the largest-ever contiguous chunk of frequencies, also known as spectrum, doled out by the U.S. government for free public use. Combatants on both sides are out swinging.

Proponents include FCC Chairman Kevin Martin and an odd conglomeration of tech heavyweights that includes Google (GOOG), Microsoft (MSFT), Dell (DELL), Motorola (MOT), and Philips Electronics North America. The companies hope the freed-up spectrum will spur demand for wireless access and the equipment and advertising that would support it.

Martin has already lined up the support he needs from two additional commissioners, according to a person familiar with the matter. Still, opposition has gathered steam in recent days, leaving some to speculate the vote on the issue may be delayed, if not ultimately defeated.

Broadcast Disruption?

The opposing faction comprises even stranger bedfellows—from the National Association of Broadcasters, an industry group that represents radio and TV stations, to electronics companies such as Qualcomm (QCOM) and LG Electronics. Even Saddleback Church pastor Rick Warren and performers Guns N' Roses and Dolly Parton have weighed in. "I don't know all the legalese concerning this issue, so I've had some very smart people inform me about the legalities here," Parton writes in an Oct. 24 letter that begins on a folksy note. "This industry relies on wireless technology and is in jeopardy of being irreversibly devastated by the Commission's pending decision."

Parton's concern, and that of other opponents, is that new technology would disrupt broadcasts and use of wireless microphones. Their first goal is to get the FCC to delay its Nov. 4 vote. Even former Presidential candidate Senator Hillary Clinton urged Martin in an Oct. 28 letter to give "all due consideration" to concerns raised by opponents of the move.

The FCC appears intent on holding to its Nov. 4 time frame. On Oct. 29 the commission issued a meeting agenda that includes plans to rule on the airwaves, also known as white spaces, that are located in between channels used for broadcasting TV signals. "The proposal on TV white spaces is scheduled for a vote Nov. 4," says an FCC spokesman. "We moved cautiously with this proposal, we've taken into consideration public comments that have been provided over the past several years." The FCC has received more than 33,600 comments and will continue to accept input through Oct. 31.

Given the imminent change in Presidential administrations and the likelihood of new leadership at the FCC, a lengthy delay could doom an initiative that's been in the works for more than four years, analysts say.

Google Settles with Authors

The search giant will pay $125 million to settle lawsuits stating it violated copyright law by scanning millions of books

Getty Images

By Hardy Green

After more than two years of negotiation, Google (GOOG) has settled lawsuits filed by the Authors Guild and five publisher members of the Association of American Publishers against a Google program that has scanned millions of library books.

The agreement, subject to approval by the U.S. District Court for the Southern District of New York, provides for the establishment of a book-rights registry, through which scanned books can be viewed in part or in whole and payment made to copyright holders. As part of the deal, Google will pay $125 million to rights-holding plaintiffs and to cover legal fees. Of that amount, $30 million will go to set up the registry.

Google ran afoul of book publishers and authors when some of the libraries participating in its book-scanning program opted to scan full texts of copyrighted books (BusinessWeek.com, 10/20/05). Publishers argued that scanning an entire book without permission, and storing it on a Google server, violates copyrights. Google argued that because it's creating what amounts to a massive card catalog and would let users view only brief excerpts of books, it shouldn't have to get express permission to scan the books.

"A 21st-Century Solution"

All parties to the agreement expressed enthusiasm about the settlement during a conference call with reporters. "This could be the biggest book deal in U.S. publishing history," Authors Guild Director Paul Aiken said. "Millions upon millions of books will find a new home among readers online."

"This is an innovative, 21st-century solution," added Association of American Publishers Chairman and Bertelsmann Co-Chairman Richard Sarnoff. "The registry will function as an authoritative rights-holder database, distribute money, and mediate disputes."

David Drummond, Google's chief legal officer, noted that "7 million books are now searchable through Google Book Search, and we're looking forward to many times that number."

Payments Split Three Ways

The registry will manage two types of online book searches. Individuals will continue to view samples of in-copyright books much as they can today, and purchase the work online. Institutions such as colleges and universities can pay for subscriptions to the registry and have complete digital access to millions of scanned books. Participants in the conference call noted that the program will make it possible for small colleges and universities to have access to the trove of books in major research libraries at such institutions as the universities of California, Michigan, and Wisconsin, and Stanford University.

In all cases, payments will be split three ways, with Google getting 37% of the revenue and, after the subtraction of an administrative fee by the registry, the publisher and author splitting the remaining monies. Certain advertising revenues will also be shared with the rights holders, Drummond said, according to the same proportional split. But no ads will appear in the actual pages of books, he noted.

The registry is several months away from being a reality. Overall, the development seems likely to encourage the sale of books in bits and pieces, or "chunking," as the practice is coming to be known among book publishers, along with "transforming," or delivery of books in a variety of formats, including downloads to e-book readers or for print-on-demand. "The real victors are the readers," Google co-founder Sergey Brin said in a prepared statement. "The tremendous wealth of knowledge that lies within the books of the world will now be at their fingertips."

Lawsuits Date to 2005

The publisher plaintiffs, who filed suit against Google in October 2005, included Pearson Education, Penguin Group, John Wiley & Sons (JWA), Simon & Schuster, and the McGraw-Hill Companies (MHP), publisher of BusinessWeek. The Authors Guild class action was filed in September of that year.

Executives from Silicon Valley to Madison Avenue are keeping a wary eye on the Justice Department this week as it nears a decision on whether to try to block an Internet advertising partnership between Google Inc. and Yahoo Inc.

After months of studying the arrangement, government antitrust attorneys could move any day now to sue to stop it from taking effect -- or they could abandon a potential court challenge and allow the partnership to proceed.

Under the terms of the deal, Google will sell some of the online advertisements displayed alongside search results on Yahoo's site. Yahoo entered the partnership in June after rebuffing a $47.5 billion takeover offer from Microsoft Corp. -- sparking a shareholder backlash.

With the Justice Department investigation shrouded in secrecy, it is unclear when a decision could come. But after Google and Yahoo agreed this month to a "brief delay" in launching their deal to allow the government to complete its probe -- and perhaps to try to reach a settlement -- many observers expect an announcement by midweek.

The stakes are high. The Justice Department investigation has pitted Google and Yahoo against not only their archrival Microsoft but also many of the advertisers that are their primary sources of revenue.

In a letter to Justice Department officials last month, the Association of National Advertisers warned that the Google/Yahoo partnership would leave advertisers with fewer options for placing online ads, raise the cost of online advertising and further cement Google's control over the search advertising market. The Association of National Advertisers represents such large companies as Kellogg Co., Johnson & Johnson, American Express Co., Walt Disney Co., Kraft Foods Inc. and McDonald's Corp.

For their part, Google and Yahoo argue that the deal will benefit both advertisers and consumers by delivering more targeted, more relevant ads.

They also maintain that because Google's system for identifying and displaying ads is more lucrative than Yahoo's approach, the deal will generate additional revenue for Yahoo that will it make it a more formidable competitor to both Google and Microsoft. When it first announced the deal, Yahoo projected the agreement would increase its operating cash flow by $250 million to $450 million in the first year.

The Justice Department review could play out in one of several ways for Google and Yahoo.

If the department does not make its intentions clear soon, the two companies could simply move ahead with their partnership and wait to see whether the government acts. While a court case would be unpleasant and cumbersome, there is no guarantee that a lawsuit would succeed -- leading some to speculate that the Justice Department may just be bluffing in threatening to sue.

If the department does bring a court challenge, Google and Yahoo could fight, or they could simply walk away from the deal.

Or, to play it safe, the companies could offer up voluntary conditions -- limiting the volume of ads subject to the agreement, for instance -- in order to head off a possible lawsuit.

Still, that approach risks exposing Google to accusations that the partnership would have in fact crossed the line into anticompetitive behavior. Many people in the industry are doubtful that the two sides can agree on concessions that would enable the deal to pass antitrust muster, still make the partnership worthwhile for Google and Yahoo and not taint the companies.

Melissa Maxman, head of the antitrust practice group at Baker & Hostetler LLP, said Justice Department attorneys must answer a series of critical questions in determining whether to intervene in a deal such as the Google/Yahoo partnership. Those include: How much market share does each party have? Would the agreement further concentrate the market? How would the deal affect consumers, competitors and other players, such as advertisers in this case?

The challenge, Maxman noted, is applying standard antitrust measures to a deal like this. For example, the department will often measure market share geographically, but Internet companies have a global reach. And precisely delineating "product" market share is hard to do in online advertising.

Microsoft, for one, argues that the deal should be blocked because Google already controls more than 70 percent of the market for search-related advertising. If it teams with Yahoo, which controls as much as 20 percent of the market, the two companies could together have a 90 percent share, Microsoft has warned.

The nature of the Internet advertising business also complicates things. Both Google and Yahoo use auctions to sell the ads that run alongside search results on their sites. The companies maintain that even if they partner, the marketplace will still determine online advertising prices through separate auctions.

The Association of National Advertisers is unconvinced. In its letter to the Justice Department, the group warned that the agreement will effectively drive up prices for ads sold through Yahoo's auctions since Yahoo will have access to ads sold by Google at a higher price.

Ultimately the battle over the Google/Yahoo partnership is about more than just the online advertising business. It's about the survival of Yahoo as an independent company, and whether Microsoft or Google has more of a say in the future of the Internet and computing.

That war extends far beyond Washington and the tug-of-war over Yahoo. But for now, the Justice Department could help shape the outcome.

Google (nasdaq: GOOG - news - people )’s shares soared 8.8%, or $30.98, to $384.00 in after-hours trading. It had risen 4.1% in regular trading, though it remains well below the $740-plus at which it traded hands last year.

“We had a good third quarter with strong traffic and revenue growth across all of our major geographies thanks to the underlying strength of our core search and ads business,” said Chief Executive Eric Schmidt.

Nonetheless Schmidt said he is realistic about the turmoil in the global economy, and the company will continue to invest for the long term.

The Mountain View, Calif.-based search engine reported earnings jumped 26.0%, to $1.4 billion, or $4.24 per share, up from $1.1 billion, or $3.38 per share, in the prior year.

Excluding costs for employee stock compensation, Google said it would have earned $4.92 per share, beating analysts’ forecasts of $4.75 per share.

Revenue soared 31.0%, to $5.5 billion. After subtracting advertising commissions, however, Google's revenue totaled $4.0 billion, slightly below analysts’ estimates.

Google generates nearly all its money from consumers clicking on the ads on its sites and partner sites. (See “ Economy Weighs On eBay, Google.”)

But the weak economy has dampened spending, and the holiday shopping season is shaping up to be a poor one.

Global Equities Research analyst Trip Chowdhry said he is concerned that Google missed Wall Street’s revenue estimates since it has historically beat forecasts “hand over fist.” “For the first time in history Google missed on the top line,” Chowdhry said. “Google’s growth rates are declining.”

Chowdhry said that Google’s website growth rate, which makes up 67.0% of its revenue, was 49.0% in the first quarter, before tumbling to 34.0% in the third quarter, a trend he said is “bothersome.”

“The company’s probably reaching a maturity stage,” he said. “It’s not a secular growth story anymore.”

Google is famous for not providing financial guidance, a policy Chowdhry said it might be forced to reconsider as investors demand increased information from companies.

The effort, dubbed RE<C (shorthand for "renewable energy less than coal"), calls for Google to invest in companies developing clean-energy technologies and for Google itself to next year invest tens of millions in research and development in renewable energy.

Technologies created by Google will likely be used by Google, whose data centers are voracious consumers of electricity. The company envisions either selling electricity from renewable sources or licensing technology on terms that would promote broad adoption, according to company founders Larry Page and Sergey Brin.

Its overarching goal is to produce 1 gigawatt of electricity from renewable sources--enough to power the city of San Francisco--faster than the current pace of green-technology development.

"The main crux of this is that we believe that you can do it cheaper than coal...and we want to make it happen now," said Page, Google's president of products. "Most people who are doing this now are trying to do it less expensive than people before, but they are not trying for that goal which will have a significant effect on the world."

Investments in other companies will be funded by Google's philanthropic arm, Google.org, which has about $2 billion worth of Google stock available to it.

In particular, Google will be investing in solar-thermal technology, wind power, and geothermal systems. Its target is to fall below the price of coal power generation, which can be as low as 2.5 cents per kilowatt-hour, said Bill Weihl, Google's green-energy czar.

Google said it's already working with eSolar, a solar-thermal company building systems for utilities to generate electricity from heat. It has invested in Makani Power, which is pursuing electricity generation by harnessing wind at high altitudes.

As part of the effort, Google will be hiring experts in the energy field. It expects to hire 20 to 30 people into its clean-energy division in the next year. More substantial investments will come as energy projects come online, Weihl said.

Although an ambitious plan, Google's impact on the clean-tech market segment in the near term is likely to be more psychological than financial, said Paul Clegg, a senior equity analyst who follows clean tech at Jefferies.

"Tens of millions of dollars is not a small number, obviously, but you're spreading that over things that a lot of other companies are attacking on an individual basis with more money going at it," Clegg said. "I think they'd have to invest a lot more money to get the next Manhattan Project going."

However, Google's initiative is significant in that it could indicate how corporations will start addressing their energy needs and climate change going forward, he said.

A strategic move
The push to mitigate the effects of climate change through clean energy falls squarely into Google.org's missions to improve human health and alleviate poverty, said Larry Brilliant, the executive director of Google.org.

Its foray into the energy business is part of Google's corporate charter to expand into new business areas that are "strategic," according to Brin.

As a large consumer, Google can benefit from cheaper sources of electricity and technologies it successfully develops could generate revenue, he said. In addition, those technologies could potentially bring cheaper sources of electricity to areas of the world that don't have it.

"For economic development to be possible in these areas and for new industries to be spurred along, we want to develop cheap alternatives that are widely available," Brin said. "This isn't just about solving a problem. It also creates a gigantic opportunity."