Beyond the regulatory issue, this deal wouldn't be good for Yahoo in its attempts to compete broadly against Google, he said. Yahoo should have its own search ad business, Weide said.
"The question is: Is this real? Is Yahoo seriously considering replacing [its search ad system] with Google's?" Weide said. "Or is Yahoo doing this merely to annoy Microsoft and drive Microsoft away from its acquisition attempt? It's not clear."
Eric Goldman, assistant professor at the Santa Clara University School of Law, points out that the potential outsourcing deal again brings up the often-discussed issue of how to delineate the relevant online ad market that would be impacted. Should the regulatory bodies narrow their focus to the online search ad segment, expand it to the overall online ad market, or open it up widely by considering the ad market in general, including radio, TV, print and the like?
"I'm torn about this," said Goldman, who is also director of the university's High Tech Law Institute. While Google leads in search advertising, there are plenty of opportunities for competitors to come up with a system that puts Google's dominance at risk by offering ad targeting that gives advertisers a better return on investment, he said. On the other hand, scale is also key, and Google has a massive distribution network, which it can use to trump competitors that offer better ROI results, Goldman said.
The announcement was first reported by the Wall Street Journal, quoting anonymous sources. A broader agreement to outsource its search ads to Google could let Yahoo increase its cash flow, because Google ads generate more revenue per search, the Journal reported, referring to a consensus belief among financial analysts and Yahoo investors.
Since February 1, when Microsoft made its $44.6bn offer, Yahoo's CEO Jerry Yang and the members of Yahoo's board have been reportedly trying to come up with an alternative deal. In addition to this Google plan, Yahoo has also held discussions with AOL, News Corp and Disney, according to various reports in the past two months.
Should Yahoo enter into this deal with Google, it would be an acknowledgement that it has failed to attain its goals in search advertising, despite numerous efforts, including a significant upgrade of its system called Panama.
It's not clear what would happen to Yahoo's search marketing division, which runs the company's search advertising, in the event that Yahoo outsourced this business to Google. For Microsoft, it clearly wouldn't be palatable to have an agreement of this sort bundled in with its acquisition of Yahoo.
Google reiterated Yahoo's announcement, saying the deal is a limited test and doesn't necessarily mean that Yahoo will join the AdSense for Search service.