How Washington Got the Google-Yahoo Deal Wrong

(MoneyWatch)  Yahoo CEO Jerry Yang made an interesting comment during his appearance at the Web 2.0 Summit this week. When asked what caused the pending ad deal with Google to go south, Yang said - among other things - that Washington doesn't understand our industry.

Amen, brother!

Having spent a couple of years working insider the Beltway, I know what it is to have people stare at you with a blank look in their eyes when you talk about anything from 3G networks to Twitter to Blu-Ray. The folks in Washington are smart - don't get me wrong - but there seems to be an unwillingness to gain an understanding about technology. It's so much easier to say, "I don't get tech" and for that to be OK. Maybe no one wants to subject themselves to the ridicule the way Sen. Ted Stevens did when he talked about the Internet being "a series of tubes." For that I can't blame them - but the importance of the tech industry in this country cannot be understated. Consider this excerpt from the Department of Justice's press release about Yahoo and Google ending their proposed deal:

Google and Yahoo! are search engine companies. A search engine allows people to search for information on the Internet. In response to a search request (or query), a search engine presents a Web page listing links to other Web pages that are relevant to the query. Those listings consist of so-called "natural"or "algorithmic" results of the search engine's canvas of the Web, as well as paid or sponsored search advertisements that are relevant to the query. Google and Yahoo! both display search advertising results above the natural search results, in the so-called "north block," and to the right of the natural search results, in the so-called "east block." Informative, relevant search advertisements provide a uniquely efficient and increasingly important means for advertisers to reach potential consumers. When a person clicks on a search ad, he or she is sent to a Web page designated by the advertiser. An advertiser typically pays the search engine when its advertisement is "clicked on" by a user, and the advertiser hopes the user will perform some action (called a "conversion") when the user reaches the destination page, such as to purchase the advertised product.

That's a nice, thorough, simplistic explanation of how search advertising works. The statement goes on to talk about third-party syndicated advertising and where Google and Yahoo are positioned in the market. Is this excerpt wrong? No, it's just that-- well, I would have hoped that, by now, that the majority of folks out there would know - more or less - how search advertising works. I'm no Madison Avenue advertising executive, but I understand - more or less - how that industry works. I don't fully understand everything about Wall Street or the automotive industry or energy issues - but I'm educated enough to know the basic business practices that make or break those industries.

As we head into 2009, the online advertising business has grown far more complex than just clickable text ads on the results page of a search query. Let's not forget that advertising is still trying to figure out how it will play out on mobile, streaming video, social networks and so on. And yet, Washington is still trying to figure out search advertising. The Google-Yahoo ad deal is a good example of how the fast-moving innovative pace of Silicon Valley can be dragged down by the slow-moving, procedural bureaucratic process that is Washington. When this deal was first announced, Google and Yahoo said they didn't feel they needed regulatory approval. After all, it was a non-exclusive deal. But they wanted to give the government a chance to chime in.

Tick-tock. Tick-tock. In an industry where time is money, Google started to lose patience when Washington took no action on the pending deal, prompting Google CEO Eric Schmdit to make his bold "We're moving forward with or without Washington" statement. But alas, Washington still maintained the upper hand and started throwing red flags, ending with a call to the lawyers to start drafting a suit to block the deal. Again, time is money and Google apparently wasn't willing to waste either.

There's change coming to Washington and, with tech executives named to President Obama's transition team just a day after the election, there's hope that Silicon Valley will finally gain some respect and understanding from the folks in D.C.

On a side note, it appears that Washington has also discovered the Google pretty much dominates the search advertising business. That means Google has become the new Microsoft - the big monopolistic empire that Washington will likely be watching closely from here on out.

Sam Diaz is a senior editor at ZDNet. See his full profile and disclosure of his industry affiliations.

Credit: ZDNet