WASHINGTON — Facing a legal battle that would have illuminated its widening market power, Google Inc. turned its back on struggling rival Yahoo Inc. and pulled the plug on an Internet advertising partnership that had been conceived to keep Yahoo out of Microsoft Corp.'s clutches.
The retreat announced Wednesday represented another setback for Yahoo, which had been counting on the Google deal to boost its finances and placate shareholders still incensed by management's decision to reject a $47.5 billion takeover bid from Microsoft six months ago.
To Yahoo's dismay, Google backed off to avoid a challenge from the U.S. Justice Department, which said it would sue to block the Yahoo deal to preserve competition in Internet advertising. Attorneys general from 15 states and Canada's antitrust regulators also could be adversaries.
"The arrangement likely would have denied consumers the benefits of competition — lower prices, better service and greater innovation," said Thomas Barnett, an assistant attorney general who oversees the Justice Department's antitrust division.
The capitulation marks a rare comedown for Google, which runs the Internet's largest and most prosperous advertising network and which had been insisting for more than four months that the Internet would be a better place to do business if it were allowed to work with Yahoo.
Google's management took a risk by agreeing to the Yahoo partnership in June, knowing the move would increase the government's scrutiny of Google's power.
Even though it is now walking away empty-handed, Google figures to remain in regulators' sights as it tries to expand.
"For the first time, Google has run into real opposition to its marketplace goals," said Jeff Chester, executive director of the Center
for Digital Democracy, a consumer advocacy group.
"Google is aware that its aggressive moves in the online advertising business are potentially contributing to damaging its brand.
"The perception of Google has changed."
The Mountain View, Calif.-based company's main incentive for entering the deal was to thwart Microsoft, which had
been stalking Yahoo to mount a more serious
challenge to Google on the Web.
Google founders Larry Page and Sergey Brin also wanted to help Yahoo founders Jerry Yang and David Filo, who had encouraged them to turn their search engine into a business more than a decade ago.
Without Google's help, Yahoo now might feel
more pressure to renew talks with Microsoft and ultimately sell itself for much less than the $33 per share that Microsoft offered in May.
Yahoo closed Wednesday afternoon at $13.92, gaining more than 4 percent in a move reflecting investors' hopes that Microsoft might renew its pursuit.
"We're of course disappointed that this deal won't be moving ahead," David Drummond, Google's chief legal officer, wrote on a company blog.
"But we're not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on."
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