(Adds Google comment, analyst, background, byline)
By Diane Bartz
WASHINGTON Oct 3 Google Inc (GOOG.O) and Yahoo Inc (YHOO.O) have decided to delay implementing a controversial search advertising partnership, Yahoo said on Friday.
"The companies have agreed to a brief delay in implementing this agreement to continue our ongoing discussions with the (U.S.) Department of Justice," Yahoo said in a statement. "We have had discussions with regulators and look forward to responding to their questions about this agreement."
Google issued a similar statement.
"When we announced our advertising agreement with Yahoo in June we agreed to delay its implementation until October to give regulators time to look at the details. As we are still in conversation with the Department of Justice we have agreed to a brief delay in implementing the agreement while those discussions continue," the company said.
The delay was expected to last less than a month, a source familiar with the discussions on the issue told Reuters. "We're still looking at the time frame of October," the source said.
The deal, which allows Google to sell advertising for some of Yahoo's online advertising space, is unpopular with advertisers who fear higher prices. Google's web-search market share widened to 63 percent in August, while Yahoo dropped to 19.6 percent and Microsoft Corp (MSFT.O) slipped to 8.3 percent, according to comScore Inc.
Bob Liodice, president and CEO of the Association of National Advertisers, said his organization was opposed to the pact. "We're gratified that Google and Yahoo are delaying," he said.
Google uses an algorithm that aims to match consumers with what it says are the most appropriate ads, a formula some advertisers find mysterious and bothersome.
The deal announced in June to share advertising was widely seen as an effort to help fend off Microsoft's efforts to acquire Yahoo, by bringing Yahoo an additional $800 million in annual revenues.
An antitrust lawyer, who regularly brings mergers to the Justice Department, said that the delay was probably not a good sign for Google and Yahoo.
"It means that they were not going to get a clean bill of health in time, and perhaps it's much worse than that. They don't want to go forward and be told that there's potentially a very serious problem there," said the lawyer.
There had been previously been signs that the planned partnership was running into trouble with the Justice Department, in particular reports that the agency had brought on board top litigator Sandy Litvack to work on the deal.
Litvack was the department's antitrust chief under former U.S. President Jimmy Carter and Walt Disney Co's (DIS.N) former vice chairman.
Google has argued the tie-up means Google and Yahoo could work together to improve the chances that consumers will be more likely to get ads for products they will want to buy -- thus giving advertisers more bang for their buck. It has also said that since it sells its advertisements by auction that it has little control over prices. (Reporting by Diane Bartz; Editing by Tim Dobbyn, Leslie Gevirtz)