By Scott Moritz

The planned advertising partnership between Google (GOOG) and Yahoo (YHOO), which was devised during Microsoft’s (MSFT) unsolicited bid for Yahoo, is headed for a federal antitrust challenge. And that could mean, according to one analyst, that Google could wind up walking away from the deal.

Two days after the Association of National Advertisers sent a letter to the Justice Department opposing the Google-Yahoo ad pact, antitrust regulators hired high-powered attorney Sanford Litvack to lead its legal challenge to block the deal, according to The Wall Street Journal. For a look at what veteran antitrust lawyer Stephen Axinn told CNNMoney.com about Litvack’s hiring and what it means for Google and Yahoo, click here.

Part of Google’s strategy to form a search ad partnership was to keep Yahoo out of Microsoft’s hands. After failing to strike a deal, Microsoft and Yahoo went separate ways and Yahoo continued to pursue the ad partnership with Google.

Now, it might make more sense for Google to withdraw the partnership plan rather than fight the Justice Department in court, said Stifel Nicolaus analyst Blair Levin. Even though Google and Yahoo don’t need regulatory approval for their ad arrangement, Levin wrote in a research note Tuesday that “it would be risky…to proceed if they are getting signals that the agency has serious concerns.”

In addition, another analyst suggested that Google would not suffer too much if its Yahoo search ad plans were killed.  Cowen analyst Jim Friedland wrote in a note that he thought a Yahoo deal would only boost Google’s earnings before charges by 1% to 2% in the first 12 months of the deal.

Representatives for Google and Yahoo did not immediately return calls seeking comment.

But Google has already voluntarily delayed the start of the joint advertising process until October so regulators could examine its potential impact. “We are confident that the arrangement is beneficial to competition,” Google said in statement Tuesday.

The search ad partnership was first proposed in June when Microsoft went public with its offer to acquire Yahoo. The ad arrangement called for Google to run its text ads next to Yahoo’s search results. In exchange, Google would pay Yahoo an unspecified cut of the search revenue. But from the beginning, the deal between the top two Internet search services invited antitrust scrutiny and, as it turned out, some industry opposition.

After reviewing the deal, the ANA said in its letter to the Justice Department that Google and Yahoo would control 90% of the search ad market. “The partnership will likely diminish competition, increase concentration of market power, limit choices currently available and potentially raise prices to advertisers for high quality, affordable search advertising,” the ANA wrote.

Google responded indirectly to the ANA letter saying that “While there has been a lot of speculation about this agreement’s potential impact on advertisers or ad prices, we think it would be premature for regulators to halt the agreement before we implement it and everyone can judge the actual impact.”

In somewhat related news, Google, in an attempt to ease concerns among regulators, announced on its official blog late Monday that it has decided to shorten the length of time it keeps users’ Web information to 9 months from a previous target of 18 months. Google says it compiles some user information like Internet addresses and search history to better match ads to user interests.

By Scott Moritz

In what would be a 3-2 vote split along political party lines, the Federal Communications Commission has finally gotten close to approving the merger between Sirius (SIRI) and rival XM (XMSR).

The swing vote on the deal is Commissioner Deborah Tate, a Republican appointee. Both Reuters and The Wall Street Journal say she is close to filing her vote in favor of the deal.

The two Democrats on the five member commission – Jonathan Adelstein and Michael Copps - have voted no on the combination. Copps Monday gave an unconditional no vote on the deal, and earlier today, Adelstein voted no after he made no progress getting the companies to agree to conditions like a six-year service price freeze and mandatory public access to a quarter of the combined companies’ airwaves.

The FCC approval will include a $19 million settlement related to enforcement issues. The fine involves an FCC inquiry into radio violations. XM was forced to pull some radios off the market because the signal transmission crossed over into the airwaves of conventional radio channels.

Sirius and XM filed for a merger review with regulators in February 2007.  Just over a year later, the Justice Department approved the deal, saying that conventional radio and MP3 players like Apple’s (AAPL) iPods were sufficient competition to keep Sirius from setting high prices.

The FCC was a more difficult hurdle, in part because the agency wrote the original satellite radio charter, which specified that the two radio wave licenses should be in separate hands to foster competition.

In an effort to ease the concerns that the satellite duo would use its monopoly status to gouge consumers, the companies proposed new price plans like 50-channel and 100-channel a la carteofferings that would cost $13 and $15 a month, prices that would stay static for three years. XM and Sirius currently charge $12.95 a month.

The companies also promised to set aside 4%, or 12 channels, for outside access like public service and minority programming.

But as the merger approval process dragged on for nearly a year and a half, the two companies saw growth cool and losses mount. And as new car sales fell, the satellite radio sector suffered as well. Investors worried about the perpetual need for new financing and the prospects of recapitalization pushed the stocks down. XM shares are down 23% from the pre-merger announcement level and Sirius has dropped 37% in the same period.

Looking ahead, if the companies manage to bring their operations together and find new sources of cash, the new entity will likely take aim at lowering high-priced programming deals like the five-year $500 million contract with Howard Stern, which expires in 2010.

By Yi-Wyn Yen

MOUNTAIN VIEW, Calif. — Look who’s calling the kettle black.

Last year Google denied Microsoft’s claim that the search giant’s proposed acquisition of online ad company DoubleClick would cripple competition for Internet advertising. Now Google co-founder Sergey Brin is suggesting that Microsoft’s (MSFT) proposed $44.6 billion takeover of Yahoo (YHOO) would monopolize the Internet.

“The Internet’s evolved from open standards,” said Brin when an Associated Press reporter asked him about Yahoo Thursday at a press conference at the Googleplex. “When you start to have companies that control operating systems and browsers, they tie up top websites. I think that’s unnerving.”

Earlier this month, David Drummond, Google’s (GOOG) senior vice president for corporate development and chief legal officer, argued in an official Google blog post that Microsoft-Yahoo merger could quash innovation on the Internet.

Brin, who did not mention Microsoft by name, made his comments as Google unveiled the finalists competing for the Google Lunar X Prize, a $30 million competition to put the first commercial rover on the Moon.

“When you think about the budgets to make movies or race sailboats…it occurred to me that if we should be sponsoring things, it should be for new discovery in ambitious ways,” Brin said. “When I found out what it would take to get a rover on the Moon, I was shocked at how this incredible space for human discovery was relatively low-cost.”

Southern California Selene Group, one of ten finalists for the Lunar X Prize, estimates that it can send a private rover to the Moon for about $20 million, or about a tenth of NASA’s budget. It says it has the resources to complete the mission within two years. Teams have six years to land a rover on the Moon, let it roam for 500 meters, and send video images and data back to Earth.

Other finalists include Frednet, which will use open-source technology to build a rover, and a Romanian aeronautics team.

By Michal Lev-Ram

Hours after Microsoft made its $44.6 billion bid for Yahoo last Friday, Google CEO Eric Schmidt reportedly called Yahoo chief Jerry Yang and offered his help in fending off the software giant’s unwelcome advance. But how far can Google go in rescuing its rival before running into its own antitrust problems?

There are two ways Google could try to help the struggling search engine:

• Out-bid Microsoft and acquire Yahoo.
• Form a partnership with Yahoo.

The first option, of course, is a non-starter. Google (GOOG) may be able to get its DoubleClick acquisition past the competitiveness cops but it’s doubtful it could convince them that buying Yahoo is legit given its already dominant market share in online search and text ads. Plus, it’s not clear Yahoo wants to become a wholly owned subsidiary of what some techies see as the Evil Empire, Silicon Valley version. (Though answering to Mountain View is no doubt preferable to genuflecting before Redmond.)

Analysts say the second option, entering a commercial agreement with Yahoo (YHOO), is much more plausible, though even this could pose antitrust hurdles for Google. Here’s how a partnership between the two would probably work: Yahoo would outsource its search and advertising systems to Google (much like AOL does) in the hopes that cutting costs and bringing in more revenue per search query would raise its valuation and get investors excited about a Yahoo comeback, not a Microsoft (MSFT) acquisition.

Citigroup (C) analyst Mark Mahaney says there is a 25% chance that Google and Yahoo will partner (versus just a 5% probability that a white knight bidder will emerge, and a 60% likelihood that Microsoft will end up acquiring Yahoo). “We believe that the possibility of this outcome is likely greater than the financial markets believe,” Mahaney wrote in a report issued Wednesday. Mahaney also suggested that negotiations to outsource Yahoo’s European search operations to Google were already in the works before Microsoft made its $44.5 billion bid last Friday.

The upside of such a GoogHoo deal would be that, at least temporarily, Yahoo would remain free to compete in display ads, e-mail and instant messaging. But it’s not clear what the long-term implications of giving up its own search and ad platform and outsourcing to Google would be. It’s also unclear whether such a move would be sufficient to thwart Microsoft.

Most legal experts (including, of course, Microsoft’s general counsel Brad Smith) agree that the leading search engine couldn’t make an outright acquisition of Yahoo because of its already dominant market share in online search and text ads. but a growing number of antitrust specialists are now saying that even a commercial partnership between Google and Yahoo could pose legal problems.

An antitrust source close the the deal who did not want to be identified said a commercial agreement between Google and Yahoo would “really amount to agreements not to compete with each other” which is “generally said to be per se unlawful.”

“The question to answer is whether the arrangement would eliminate to a significant degree an independent competitor, in a situation where there is already a high level of concentration,” wrote Albert Foer, president of the American Antitrust Institute, a Washington, D.C.-based advocacy group, in an email.

However, a source close to Google who did not want to be identified says that the antitrust issues raised by a commercial deal between Google and Yahoo would “pale in comparison” to the anti-competition problems raised by the complete integration of Microsoft and Yahoo. Google’s chief legal officer last week questioned whether Microsoft would hurt innovation on the Internet if it acquired Yahoo and thus ended up controlling a large share of the e-mail and instant messaging market.

Of course, Google has monopoly over online search — the Mountain View, Calif.-based company has a 58.4% share of the U.S. market.

One thing is clear: Yahoo is running out of time, and will need to decide whether it will accept Microsoft’s bid or try to partner with Google soon. Yahoo’s annual shareholders meeting is in May, and Dinosaur Group analyst David Garrity says shareholders will want to see a decision made well before then.

Should Yahoo end up trying to enter into some kind of a partnership with Google, Garrity says you can bet Microsoft will “raise holy hell.”

By Michal Lev-Ram

Looks like the U.S. House of Representatives may have jumped the gun on Microsoft’s bid for Yahoo — a House committee spokesperson just confirmed its antitrust hearing on the proposed deal, originally slated for Friday morning, has been canceled.

Just hours after Microsoft (MSFT) revealed its $44.6 billion bid for Yahoo (YHOO) last Friday, the House Judiciary Committee, led by John Conyers, Jr. (D-MI), announced its task force on antitrust and competition policy would hold a hearing to discuss MicroHoo.

Now, the hearing is postponed indefinitely and sources close to the deal say the reason for the cancellation is that the House acted too quickly last Friday, thinking that Microsoft’s bid for Yahoo was close to a done deal. One source, who did not want to be identified, said the House and Senate are “vying to take the lead” on any antitrust hearings.

A spokeswoman for the House Committee on the Judiciary confirmed that the hearing was postponed but would not comment on why that decision was made.

Meanwhile, Lynn Becker, a spokesperson for Senator Herb Kohl (D-WI), chairman of the Senate’s Antitrust Subcommittee, said it would hold its own hearings should the proposed Microhoo deal go through.

“As in our recent examination of the Google/DoubleClick deal, we will need to investigate how this combination affects consumers, advertisers and businesses who increasingly use the internet for their news, commerce and entertainment,” the Senate’s antitrust subcommittee said in a written statement. “Should Yahoo accept Microsoft’s offer, the subcommittee expects to hold hearings to explore the competitive and privacy implications of the deal.”