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Google remains its own worst enemy.

After dodging a certain DOJ antitrust suit from the most lenient antitrust enforcer in the modern era by withdrawing from the Yahoo ad agreement, Google’s CEO essentially spit at DOJ/State AG prosecutors by publicly and gratuitously saying: Google would have beaten the DOJ in court, nothing has changed, and that they were happy they reached out to Yahoo.

Google’s unrepentant stance was captured well in the New York Times article by Miguel Helft: “Google and Yahoo Say Deal Would Have Survived a Suit.”

Yahoo's earnings provide another excellent window into why the DOJ has serious antitrust concerns with the proposed ad partnership between Google and Yahoo.

• Yahoo's discussion of its 4Q08 earnings provides the DOJ with substantial fresh evidence that Yahoo continues to lose revenue and profit share to Google.
• Moreover, Yahoo's earnings report showed Yahoo was clearly caught off guard that the Google-Yahoo ad agreement did not get cleared by DOJ, as evidenced by the big whipsaw in Yahoo's headcount plans.

I.  Evidence Yahoo is losing revenue/profit share to Google:

While Yahoo tried to put the best face on Yahoo's search business growth, in the comparisons that matter to the DOJ, Yahoo slid much further behind Google.

From 3Q07 to 3Q08, Yahoo grew overall revenues by $.018b or 1%, and search revenues $.063b or 17%, while Google grew search revenues $1.310b or 31%.

Yahoo's reported job cuts of over 1,000 of their 14,300 employees is a helpful window into the real prospects for the pending Google-Yahoo ad partnership that is under serious investigation by the DOJ.  

First, the job cuts signal Yahoo is pessimistic about getting the proposed ad agreement with Google approved by the DOJ.

• If Yahoo was confident the deal was near approval, Yahoo would be more patient in awaiting the beginning of an ~$800m annual revenue infusion to begin in 4Q08, not obviously hunkering down to go it alone.
  • To put this ~$800m in perspective, 1,000 job cuts would save Yahoo about $100m annually, or the equivalent of a couple of months of the Google ad deal.
• In other words, if the ad deal was likely to get approved, Yahoo would be doing what it told the DOJ it would do -- investing not disinvesting.

Second, the job cuts underscore how dependent Yahoo would be on the Google ad partnership. 

Google's CEO Eric Schmidt had the temerity to suggest that journalism consider becoming a not-for-profit enterprise -- at a recent Google program for magazine executives.

• See Ad Age's article: "Google's Schmidt says Internet 'cesspool' needs brands -- Says the solution is quality content; tells publishers and editors to 'increase your relevance'. 
  • From the article: "...when asked where the industry ends up if there aren't outlets willing to pay journalists to create quality content, Mr. Schmidt was a bit Palin-esque, saying that he didn't have an answer but one thing to look at is whether journalism should be a for-profit enterprise."

Google's CEO must think journalism-business people are stupid.

Don't miss the excellent Op Ed in the Wall Street Journal European Edition strongly criticizing net neutrality -- "Stuck in Neutral."

• It's helpful to hear the voice of reason from thoughtful europeans who oppose the typical EU reflex for Government intervention.     

With the 3Q08 earnings releases by Google, Yahoo and Microsoft in the last few days, DOJ antitrust investigators of the Google-Yahoo partnership now get their first fresh look at the most recent revenue and profit market shares for this market.

Growth: 39% YoY revenue growth on a ~$20b base, in a slowing global economy is impressive. Hats off to Google. Lots of network effects at work as Google sites revenue grew 42% YoY.

Tone: I did note the slightest whif of humility this quarter that external factors had some effect on Google's business, in stark contrast to last quarter's more bold statement that Google saw no effect of the external market or economy on Google's business.  

DoubleClick: As I suspected, CEO Schmidt said in an answer to a question, that Doubleclick was going well but that he would not break out any information -- in Google's well-established sorry-Charlie-style... no insight or guidance for you... The only thing interesting that was said about DoubleClick was indirect, in that Sergey Brin said that the big problem in display is that it is highly-fragmented." Couple that with CEO Schmidt indicating that Google was only months away fom offering a one-stop advertising solution, one can surmise that Doubleclick will indeed prove to be a material growth kicker to help Google fight off some of the natural drag of the law of large numbers.  

Kudos to Jim Harper of Tech Liberation Front for eliciting a comment from Google's Vint Cerf on Mr. Cerf's public ruminations in favor of 'nationalizing the Internet'  which was reported first on TechCrunch and which prompted me to post why nationalizing the Internet was such a horrible idea. 

While claiming his comment:  "Should the Internet be owned and maintained by the government, just like the highways?" -- was taken out of context -- Google's Mr. Cerf essentially repeats in his comment to Jim Harper's post -- the thrust of the thinking that has created the bruhaha:

The reality of market pricing for Internet usage is naturally gaining more attention.  

• The New York Time's had an informative Sunday page one story: "Charging by the Byte to curb Internet traffic." 
• Today the Wall Street Journal highlighted why market pricing for Internet usage is evolving with dramatic changes in the Internet marketplace in its story today: "Cisco projects growth to swell for online video."  

The big economic takeaway here is that in a free market Internet, where users have very different demand: i.e. needs, wants and means for speed, usage, mobility, latency, immediacy, reliablity, flexibility and other attributes -- suppliers (ISPs, application providers and content providers) must have the freedom to innovate, experiment and provide a diversity of choices, at a diversity of prices in order to meet the diversity of demand from users.

I wanted to follow up and build upon my post of last week: "The logic of Internet Pricing Diversity and the Fantasy of free limitless bandwidth."

•  I keep hearing this backward-looking refrain from net neutrality proponents that because some people characterize dial-up and early broadband bandwidth as unlimited or as an all-you-can-eat usage model -- that that model should never evolve or change.
  • Balderdash! This is some people's wishes being presented as analysis.

I believe U.S. Internet access consumers have come to understand at least two truths: