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Google and Yahoo have announced that their planned search advertising deal has been put on hold while the US Department of Justice (DoJ) completes its investigation of the deal.

Previously, despite indications that the DoJ might be preparing to file an antitrust lawsuit against Google to block the deal, Google's CEO Eric Schmidt insisted that his company planned to move ahead with the arrangement come hell or high water.

Google and Yahoo have both increasingly been on the offense recently, arguing that their proposed deal will not harm advertisers and other stakeholders in the online ad market.

Google, of course, is the 400-pound gorilla in the search advertising market and its brand has become synonymous with "online advertising." Some, including advertisers, fear that the company's deal with Yahoo will give it far too much control of the market.

The US government's skepticism, coupled with scrutiny from regulators outside of the US, has clearly surprised Google management. This turn of events has been unfortunate for Google shareholders who have seen the company's shares hammered in the ongoing global sell-off.

Of course, it's still very possible that Google and Yahoo will be permitted to proceed with a deal in some form or another.

But the implication of the scrutiny it has received is clear - Google's dominant position in the online advertising market has it on the radar of regulators.

The problem for Google is that, as I have pointed out numerous times before, it has failed to establish a strong foothold (revenue-wise) in markets outside of search advertising.

In other words, from a financial standpoint, it's still a one hit wonder.

As shareholders demand continued growth and the economic downturn impacts Google's stock price, the company's reliance on its one dominant revenue stream looks increasingly problematic.

While there are certainly other business areas the company can move into (and is trying to), the mere fact that the company is on the radar of regulators is worrisome.

Let me explain why, using Microsoft as a simple example.

By the time Microsoft was forced by antitrust regulators to pay for its "sins" and "change its ways," it had already benefitted significantly from its anticompetitive behavior, having leveraged its position to enter new markets and to build a dominant, diversified company.

While Microsoft has paid considerable reparations for its past behavior, at the end of the day the honest truth is that Microsoft had already accomplished everything it could have ever hoped to by the time it was forced to rehabilitate.

Google, on the other hand, is already on the radar of regulators and there is a widespread perception that it has become far too powerful in its core market.

While this does not preclude it from successfully leveraging its position to increase marketshare in search and to expand into new markets, I suspect that this may eventually make the company's quest for growth far more difficult as navigating around regulatory hurdles becomes increasingly necessary.

If this need to deal with regulatory hurdles forces Google to change its strategies, it's worth considering that the impact on Google's future could be quite significant.

All of this said, it's worth pointing out that adversity presents the opportunity for great companies to demonstrate their greatness and this is true for Google.

How effectively it handles government scrutiny of its planned deal with Yahoo and how shrewdly it addresses future antitrust pitfalls will tell us a lot about Google's character.

Drama 2.0

Published 7 October, 2008 by Drama 2.0

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