Eric Goldman, one of the few active cyberlibertarians in legal academe, has a thoughtful post about the search partnership announced today. Eric notes blogger Danny Sullivan’s observation about the decline in Yahoo’s assets and his comment that:

Microsoft is getting a huge bargain courtesy of the US Department Of Justice. Without Google being able to compete for Yahoo’s business, the billions that were floating around in 2008 become millions in 2009.

Danny and Eric certainly have a strong point: One of the costs of the Justice Department’s decision to block Google from partnering with Yahoo! is that Yahoo! wound up fetching much less in its deal with Microsoft. But the intervening slump in the economy and online advertising has also contributed in the drop in Yahoo!’s share price and overall valuation, so it’s difficult to make an apples-to-apples comparison. Eric is probably right that in assessment that:

Yahoo was unbelievably crazy for passing on Microsoft’s acquisition proposal from a year-and-a-half ago. It looked like a foolish mistake at the time, and hindsight has definitely not improved that assessment!

It would seem that both Yahoo! and Microsoft under-estimated the likelihood that antitrust regulators would block a Yahoo!/Google deal a year ago: Microsoft probably wouldn’t have offered as much as it did to acquire Yahoo!’s search business ($31/share) and Yahoo! (currently $15.14/share) certainly wouldn’t have held out for a better deal from Google. While the end result ended up being a Yahoo!/Microsoft deal anyway, the delay of over a year in reaching a deal is itself a significant cost of what economists would call the “regime uncertainty” created antitrust: Without clear rules, it’s difficult for economic actors to predict the decisions by regulators. A delay of a year could well prove to make a big difference in the ability of the two companies to mount a successful response to Google in search and advertising—just as Microsoft’s 18 month delay back in 2003-2004 in developing a search ad auction system to respond to Google’s AdWords system (which now produces 2/3 of its revenue) probably did much to thwart Microsoft’s initial efforts to compete in search.

Sadly, no one can undo the mistakes of the past—either by regulators or businessmen. But as Adam and I conclude in our Forbes.com op-ed about the deal, to avoid doing further damage:

policymakers should recognize that the business, user and technological paradigms of the Web are constantly being re-invented and replaced. They shouldn’t delay approving this deal, especially as any delay would lengthen an awkward period of uncertainty for the corporate couple at the antitrust altar. Moreover, they should avoid micro-managing the transaction through regulatory blackmail: demanding “voluntary concessions” before giving their blessing.

The NYT reports that Google has recently disclosed in an SEC filing that it had 1 million advertisers as of 2007.  Some analysts suggest that Google’s growing scale will lead to higher ad prices:

Ben Schachter, an analyst with UBS, said he expects the current number is likely to be between 1.3 million and 1.5 million. Google declined to comment on the current size of its advertising base. “It is a number that people have wanted to know for a long time,” Mr. Schachter said. More advertisers means more revenue — and more revenue, on average, for every search query — for a couple of reasons: a larger number of queries will have ads matched against them; and on popular queries, competition for placement will be more intense, and as a result, ad prices, which are set by auction, will be higher.

But is Google’s success really driving up ad prices?  The same piece also notes that:

Interestingly, each advertiser, on average, spent a little more than $16,000 a year on Google. That figure changed little between 2003 and 2007.

As one of the commenters on the piece noted:

If average advertiser expenses hasn’t really changed in the last 5 years, maybe Google’s argument that it’s not a monopoly because prices are determined by ad auctions, not Google’s search share, holds some weight.

Meanwhile, Google Watch notes Microsoft’s recent success in signing up Verizon, Dell, Sun and Hewlett-Packard as partners for Microsoft’s Live Search engine and asks whether Google’s success is driving potential partners into Microsoft’s arms, as Microsoft appears to be working harder to gain market share for its own search and advertising products.  So can Microsoft—and Yahoo!—regain momentum?

Perhaps 2009 will bring some answers to these questions—and more hard data about ad prices.  But whatever happens, it’s a safe bet that speculation and fierce argument will abound with every new development in the search/advertising wars.

Google has begun including the “load time factor” into the quality score for ads on its AdWords program.  This means that “Keywords with landing pages that load slowly may get lower Quality Scores (and thus higher minimum bids).  Conversely, keywords with landing pages that load very quickly may get higher Quality Scores and lower minimum bids.”

Google provides two reasons for the change:  “First, users have the best experience when they don’t have to wait a long time for landing pages to load.  Interstitial pages, multiple redirects, excessively slow servers, and other things that can increase load times only keep users from getting what they want: information about your business.  Second, users are more likely to abandon landing pages that load slowly, which can hurt your conversion rate [and thus lower profits for both the advertiser].”

One could easily imagine that some might complain that Google is “discriminating” against slower-to-load pages, and even hypothesize that this would introduce a systemic bias towards sites that can afford faster server throughput.  True, this change makes the AdWords system non-“neutral” in ways that will benefit some advertisers over others.

But so what?  Google is simply engaging in smart management of their network:  Giving priority to ads that load faster introduces a strong incentive for all advertisers to speed up their pages in any manner possible.  This small change in pricing structure could have broader effects on the efficiency of Internet browsing for all users–at least in terms of building home pages that load faster–particularly if other advertising platforms follow suit.  Google explains that this change is merely an application of one of the “Ten things Google has found to be true”:

3. Fast is better than slow. Google believes in instant gratification.  You want answers and you want them right now. Who are we to argue? Google may be the only company in the world whose stated goal is to have users leave its website as quickly as possible.  By fanatically obsessing on shaving every excess bit and byte from our pages and increasing the efficiency of our serving environment, Google has broken its own speed records time and again.  Others assumed large servers were the fastest way to handle massive amounts of data.  Google found networked PCs to be faster.  Where others accepted apparent speed limits imposed by search algorithms, Google wrote new algorithms that proved there were no limits.  And Google continues to work on making it all go even faster.

Amen!  Who could possibly disagree?

But if Google’s prioritization of its AdSense network is a good thing, should we not encourage other network operators to look for analogous ways to increase the operational efficiency of their networks through prioritization?  For example, how else could Gogo ensure the functionality of soon-to-be launched in-flight wireless boadband service if it could not prioritize low-bandwidth activities like Web surfing and email over high-bandwidth activities like streaming video?   As the DOJ noted in its September 2007 filing opposing the adoption of “net neutrality” mandates by the FCC, “The prioritization of certain content and content providers (such as streaming video and other latency-sensitive content), offering of premium services and different levels of quality of service, preferential treatment of certain content, and vertical integration–in many instances actually may be procompetitive.”

Of course, one might respond that Google’s form of prioritization is “good” and that other forms of prioritization are “bad.”  But what about Gogo’s?  Indeed, by what measure should such assessments be made and who is to make them?

Ultimately, the best answer is that consumers should have the freedom to choose among networks and services at the various layers of the Internet.  The key to such competition is, of course, transparency:  making it clear to users how traffic or services are being prioritized and why.  As I’ve discussed, Google’s recent announcement that it will offer users free tools to monitor ISP traffic management is both a means of increasing that transparency and a recognition that increased transparency will allow users and watchdogs to ensure that the “right” kind of prioritization is taking place while also facilitating the enforcement of user terms of use.

In this respect, Google is leading by example:  Google has explained very clearly what they’re doing and why, starting with their initial announcement in May that landing page load time would soon be incorporated into AdWords Quality Scores and their subsequent announcement that Google’s Keyword Analysis tools would allow each advertiser to monitor Google’s calculation of its landing page load time.  The adoption of such transparency as an industry best practice for explaining prioritization combined with the availability of user monitoring tools like those being developed by Google would provide a powerful alternative to government “Net Neutrality” mandates–without depriving users of the freedom to choose prioritization.