US Unemployment Rate: 1994 - 2008

The unemployment rate crept up to 6.5% in October from 6.1% in September. This is the highest it has been since 1994. So far in 2008, 1.179 million jobs have been lost.

US Unemployment Rate: 1994 - 2008

In retail sales, usually the last bastion of employment for those thrown out of other jobs, the cumulative number of jobs lost since November 2007 ( a year ago) is 325,000.

Cumulative Jobs Lost in Retail Since November 2007

Defense Spending as a Percent of GDP, 1940-2009

After reaching 38% of GDP during World War II, defense spending dropped below 5% of GDP in the years immediately following the war, rose to nearly 15% at the start of the cold war as the US rearmed and built up its stock pile of atomic weapons, declined through the late '50s and early '60s to 7%, jumped again during the Vietnam War to 10%, declined throughout the '70s and early '80s, headed up again during the Reagan era of rearmament as we spent the Russians into state failure, droped again in the late '80s and early '90s until Desert Storm, declined until the beginning of the millennium until 9/11 when it rose steadily to almost 5% of GDP in 2008.

Defense Spending as a Percentage of GDP, 1940-2009

India Gets Caught up in Whirlwind of Credit Card Debt

It looks like credit woes are pretty much the same around the world. The Indian middle-class, enjoying rising prosperity, has gotten caught up in fast-rising revolving credit card debt that they seem to little understand and have difficulty managing.

Unsecured loans and credit card receivables more than three months overdue: 7%-9% of total loans outstanding this year; expected to rise to 15% according to ratings agency Crisil Ltd. in Mumbai.

Number of credit cards in India: 30 million, up 3x in the last 5 years.

At the end of FY '08 (ended March 31) Indians charged more than $14 billion on their credit cards, over 3x the amount charged four years ago.

Indians have little experience with handling revolving credit and more people are turning up desperate for help with their credit card payments, according to V.N. Kulkami, chief counselor at Mumbai's Abhay Credit Counseling Center, which advises borrowers.

Credit Card Payments in India 2004 - 2008

Source: WSJ

What a Real Bear Market Looks Like

The nominal definition of a bear market is one in which securities prices drop 20% over a period of time. In today's Wall Street Journal Arthur B. Laffer reminds us what a real bear market is:

I saw up close and personal Presidents Gerald Ford and George H.W. Bush succumb to panicked decisions to raise taxes, as well as Jimmy Carter's emergency energy plan, which included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.

The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes!

Laffer has a new book out on the subject: "The End of Prosperity: How Higher Taxes Will Doom the Economy--If We Let It Happen"

Laffer says we are making the same mistakes as previous generations of politicians, whether Republican or Democtratic, with hasty solutions cooked up under panic conditions that will set the stage for "the end of prosperity".

Credit Derivatives and the Modern Financial System

University of Chicago Economist and Nobel Laureate Gary Becker on the state of the economy:

U.S. unemployment 1931-1941: 25 percent
U.S. unemployment September 2008: 6.1 percent

The main problem with the modern financial system based on widespread use of derivatives and securitization is that while financial specialists understand how individual assets function, even they have little understanding of how the whole incredibly complex financial system operates when exposed to various types of stress.

William Engdahl on Credit Default Swaps (CDS), (June 6, 2008):

Like many exotic financial products which are extremely complex and profitable in times of easy credit, when markets reverse, as has been the case since August 2007, in addition to spreading risk, credit derivatives, in this case, also amplify risk considerably.

Now the other shoe is about to drop in the $62 trillion CDS market due to rising junk bond defaults by US corporations as the recession deepens. That market has long been a disaster in the making. An estimated $1,2 trillion could be at risk of the nominal $62 trillion in CDOs outstanding, making it far larger than the sub-prime market.

No regulation

A chain reaction of failures in the CDS market could trigger the next global financial crisis. The market is entirely unregulated, and there are no public records showing whether sellers have the assets to pay out if a bond defaults. This so-called counterparty risk is a ticking time bomb. The US Federal Reserve under the ultra-permissive chairman, Alan Greenspan and the US Government’s financial regulators allowed the CDS market to develop entirely without any supervision. Greenspan repeatedly testified to skeptical Congressmen that banks are better risk regulators than government bureaucrats.

Alan Greenspan, former Chairman of the Federal Reserve, on the use of credit derivatives (e.g., CDOs) to transfer risk outside the banking system (May 5, 2005):

Use of Credit Derivatives to Transfer Risk outside the Banking System
Perhaps the most significant development in financial markets over the past ten years has been the rapid development of credit derivatives. Although the first credit derivatives transactions occurred in the early 1990s, a liquid market did not emerge until the International Swaps and Derivatives Association succeeded in standardizing documentation of these transactions in 1999. According to the BIS, the notional value of credit derivatives outstanding increased sixfold between 2001 and 2004, reaching $4.5 trillion in June of last year. Moreover, this growth has been accompanied by significant product innovation, notably the development of synthetic collateralized debt obligations (CDOs), which allow the credit risk of a portfolio of underlying exposures to be divided or "tranched" into different segments, each with different risk and return characteristics. Recent growth of credit derivatives has been concentrated in these more-complex structured products.

As is generally acknowledged, the development of credit derivatives has contributed to the stability of the banking system by allowing banks, especially the largest, systemically important banks, to measure and manage their credit risks more effectively. In particular, the largest banks have found single-name credit default swaps a highly attractive mechanism for reducing exposure concentrations in their loan books while allowing them to meet the needs of their largest corporate customers. But some observers argue that what is good for the banking system may not be good for the financial system as a whole. They are concerned that banks' efforts to lay off risk using credit derivatives may be creating concentrations of risk outside the banking system that could prove a threat to financial stability. A particular concern has been that, as credit spreads widen appreciably at some point from the extraordinarily low levels that have prevailed in recent years, losses to nonbank risk-takers could force them to liquidate their positions in credit markets and thereby magnify and accelerate the widening of credit spreads.²

A definitive evaluation of these concerns about nonbank risk-takers would require information on the extent of credit risk transfer outside the banking system and on the identities and risk-management capabilities of the entities to which the risk has been transferred. Unfortunately, available data do not provide this information.

Credit Default Swaps (CDS) Growth 2001-2007
Notional Amount in Trillions of Dollars

Economic Realities Knock Advertising for a Loop

ZenithOptimedia today lowered its forecast for advertising growth both in the US and worldwide.

Zenith, whose forecasts are closely followed by the industry, said it expects ad spending in the U.S. to grow just 1.6% this year and by less than 1% in 2009. In June, the ad-buying firm, a unit of Publicis Groupe, predicted growth of 3.4% and 2.6%, respectively, for this year and next.

World-wide, Zenith says it now expects ad spending to grow 4.3% to $506.3 billion this year and 4% in 2009. In June it predicted 6.6% growth for 2008 and 6% growth for 2009.

Number of Ambulances in New Dehli, India

According to the government, there are 35 working public ambulances with life-saving equipment to serve the needs of a population of over 14 million in New Dehli, India. This greatly contributes to the loss of life during terrorist attacks when the "golden hour" turns into the "golden four hours".

By way of contrast, there were 1,363,893 ambulance runs in New York City in 2007 (population est. 8,274,527), over 3300 per day, with an average response time of 8 minutes and 13 seconds throughout all five boroughs.

Ambulance Runs and Incidents New York City 2007

Source: FDNY

China Drives Growth of Global Commodities Demand

I was amazed to discover to what extent demand for commodities world-wide is driven by growth in China. In 2009 Deutsche Bank forecasts that almost 100 per cent of the growth in demand for aluminum, around 80 per cent of the growth in demand for iron ore, oil, and steel, and 60+ per cent of the growth in demand for copper will come from China.

Forecast of China's Share of the Growth in Demand for Commodities Worldwide in 2009

Although growth of the Asian manufacturing economies of India and China has slowed in response to slowing global markets and the recent credit crash, commodity prices remain high. Economist Jeffrey Frankel believes that that low real interest rates have been the cause as the continued strength of commodity prices:

One wouldn’t want to try to reduce commodity markets to a single factor, nor to claim proof of any theory by a single data point. Nevertheless, the developments of the last six months provided added support for a theory I have long favoured: real interest rates are an important determinant of real commodity prices.

• High interest rates reduce the demand for storable commodities, or increase the supply, through a variety of channels:
• by increasing the incentive for extraction today rather than tomorrow (think of the rates at which oil is pumped, gold mined, forests logged, or livestock herds culled)
• by decreasing firms’ desire to carry inventories (think of oil inventories held in tanks), by encouraging speculators to shift out of spot commodity contracts, and into treasury bills.

All three mechanisms work to reduce the market price of commodities, as happened when real interest rates were high in the early 1980s. A decrease in real interest rates has the opposite effect, lowering the cost of carrying inventories, and raising commodity prices, as happened in the 1970s, and again during 2001-2004. It’s the original “carry trade.” (http://www.voxeu.org/index.php?q=node/1002)

Hybrid Vehicle Market Share in the US through August 2008

Toyota: Prius, starting price $22,000; Lexus; Highlander
Honda: Insight, starting price below $20,000, to launch at the Paris Auto Show this month (Oct. 2008); Civic
GM: Volt, launch in 2010
Chrysler: Launch in 2010
Ford: Escape

Toyota plans to sell 160,000 Priuses in the US this year.
Honda plans to sell 100,000 Insights in its first year in the US.

Hybrid Vehicle Market Share in the US
2008 Total Hybrid Vehicles Sold in the US through August

Source: Autodata

U.S. Auto Sales and Automobile Manufacturer Market Share

U.S. auto sales reached a 15-year low with a double digit decline in September as sales of cars and light trucks fell 27% to 964,873 units in September (2008), down from 1.31 million a year earlier, according to Autodata Corp. Tightening credit, a financial system in shambles, and consumer fear all contributed to a seasonally adjusted annualized rate of 12.5 million units, down from 16.19 million units in September 2007.

US Auto Sales and Market Share

Piracy in Somalia Threatens Global Trade - Feeds Local Wars

A report by Chatham House.

Summary:

• Piracy off the coast of Somalia has more than doubled in 2008; so far over 60 ships have been attacked. Pirates are regularly demanding and receiving million-dollar ransom payments and are becoming more aggressive and assertive.
• The international community must be aware of the danger that Somali pirates could become agents of international terrorist networks. Already money from ransoms is helping to pay for the war in Somalia, including funds to the US terror-listed Al-Shabaab.
• The high level of piracy is making aid deliveries to drought-stricken Somalia ever more difficult and costly. The World Food Programme has already been forced to temporarily suspend food deliveries. Canada is now escorting WFP deliveries but there are no plans in place to replace their escort when it finishes later this year.
• The danger and cost of piracy (insurance premiums for the Gulf of Aden have increased tenfold) mean that shipping could be forced to avoid the Gulf of Aden/Suez Canal and divert around the Cape of Good Hope. This would add considerably to the costs of manufactured goods and oil from Asia and the Middle East. At a time of high inflationary pressures, this should be of grave concern.
• Piracy could cause a major environmental disaster in the Gulf of Aden if a tanker is sunk or run aground or set on fire. The use of ever more powerful weaponry makes this increasingly likely.
• There are a number of options for the international community but ignoring the problem is not one of them. It must ensure that WFP deliveries are protected and that gaps in supply do not occur.

Number of Piracy Attacks and Attempts in the Gulf of Aden

• 

Source: Chatham House

Links:

Pirates off Somalia Get $18 - $30 million in Ransoms

On November 10, the European Union (EU) launched a secunity operation to combat Somalian pirates

Update, November 18, 2008: Somali pirates have hijacked a Saudi supertanker carrying a cargo of $100 million in oil. The capture of Sirius Star 450 nautical miles southeast of Kenya's Mombasa port, and way beyond the Gulf of Aden where most attacks have taken place this year, is their boldest attack and the culmination of several years' increasing activity.

Circumcision Rates of Newborns Drop Dramatically Worldwide, Except in the US

Circumcision rates of newborns worldwide has dropped dramatically since World War II, except in the US where the rate has dropped from 64 percent of newborn males to 57 percent of newborn males. Doctors fear this is a serious public health issue since circumcision defends against many forms of sexually transmitted diseases, including HIV/AIDS. Arguments against the procedure include fear of desensitization of the penis, which doctors claim has never been demonstrated clinically.

Rates of Newborn Circumcision Have Dropped Dramatically Since WWII, Except in the US

Source: NewScientist, "Cut!", July 19-25, 2008

Female genital circumcision (mutilation) showed a drop from 35% to 20% in Ghana at the War Memorial Hospital from 1995 to 2003.

Prevalence of FGM among mothers delivering at the WMH (1996–2003)

Ghana Med J. 2006 September; 40(3): 87–92.

The WHO says that 3 million girls a year undergo female genital mutilation (FGM) in Africa.

"Prevalence of female genital cutting in Upper Egypt: 6 years after enforcement of prohibition law."

The objective of this study was to evaluate the prevalence of female genital cutting (FGC) in Upper Egypt, after 6 years of putting prohibition law into action. A total number of 3730 girls between the ages of 10-14 years were recruited to participate in this study. They were mainly preparatory school students (three urban and three rural areas). Social workers interviewed them as to whether they had undergone circumcision within the last 6 years or not. Subsequently, a questionnaire was sent to parents of girls who were positive for circumcision as to the circumstances surrounding the procedure. The prohibition law of FGC seems not to have altered the prevalence of this procedure. The majority of girls (84.9%) had had circumcision within the last 6 years with high prevalence in rural areas (92.5%). Circumcision was done for a combination of reasons, according to parents, with high rates of non-medical personnel participation (64.15%). This study's results indicate that the practice of FGC in Upper Egypt remains high despite enforcement of law. Extensive efforts are needed both to revise public awareness and to change attitudes regarding FGC.

PMID: 18348787 [PubMed - indexed for MEDLINE]

Employer Health Care Insurance Costs Trend - up 5% in 2008

Employer health care insurance cost trends continued their upward march in 2008, rising an average of 5% from 2007. This is a far cry from the 13% to 14% increases of five years ago, but it still makes employer paid health care one of the greatest benefits to employees in the US. The costs for family coverage in 1999 were an average of $5,900. In 2008 family health care insurance coverage averaged $13,000, an increase of 54% in nine years. But employers and employees are paying more for less, because today's insurance packages come with much higher deductibles, in some cases as much as $1,000 or more per year.

Estimated Average Annual Premiums of Employer Sponsored Health Benefits

Source: WSJ

Interest Rates & Consumer Price Infaltion - US & EU

Interest rates in the US remain 2 1/4 points lower than those in the EU, despite greater consumer price inflation in the US. The Federal Reserve in the US is charged with both keeping inflation under control and stimulating the economy, while the EU central bank's mandate is only to keep inflation in check.

Interest Rate and Consumer Price Inflation Trends - US & EU

Source: WSJ

Bank Failures - Then and Now

Over 3000 banks failed during the savings and loan crises, and the run up to it, in the '80s and '90s. By comparison, bank failures post the S&L crisis of the '80s have been minuscule by comparison. But the ones of late have been gigantic in size.

Bank Failures during the S&L Crises of the '80s and Now

Source: WSJ

Housing Woes Grows

At the core of the Wall Street crisis lies unresolved issues with the housing market in the US. This is the rot at the core of investment banks' holdings. Unfortunately, the data still does not paint a pretty picture about the housing market. The inventory of unsold, previously owned homes stands at a high approaching 12 months. This means there is a pipeline of 12 month's worth of sales in currnt back inventory of unsold homes. Since large numbers of people are probably postponing their home sales if they can, due to the lousy housing market, this backlog is probably a dam behind which lie many more months of unsold inventory just waiting for a sign of improvement before it gets dumped onto the market, depressing housing prices once again.

There was a brief uptick in the median price of homes in the first quarter of '08, but the trend resumed its downward course in the second quarter of '08. Meanwhile, the delinquency rate shot up in the second quarter of '08, now above 5 percent on first mortgages, and the default rate on first mortgages approached 2% in the second quarter of '08.

None of this reflects added woes that may come from the loss of jobs on a related to the Wall Street melt down. For example, economist James Hughes, dean of Rutgers' Edward J. Bloustein School of of Planning and Public Policy, said that he expects New Jersey to suffer economic difficulties and job losses well in excess of the 16,000 that the state has already lost since the beginning of the year. In a worst case scenario, 100,000 jobs could be lost, he fears.

Inventory of Unsold Homes; Median Home Sales Price Trend; Delinquencies & Defaults Trend

Source: WSJ

Links: Mortgage Foreclosures in the US

A Brief History of Investment Banking Firms in the US

Goldman Sachs and Morgan Stanley - End of the Line


Source: WSJ

"It Was Leverage Killed the Beast"

Police Lieutenant: Well, Denham, the airplanes got him.
Carl Denham: Oh no, it wasn't the airplanes. It was beauty killed the beast.

--- Last lines, King Kong (1933) ---

Morgan Stanley and Goldman Sachs Group, the remaining independent Wall Street brokerages, threw in the towel today and converted to traditional bank holding companies, placing themselves under the regulatory supervision of numerous federal regulatory agencies. Instead of being overseen just by the Securities and Exchange Commission, Goldman Sachs and Morgan Stanley will now face much stricter oversight from numerous federal agencies. The Federal Reserve will regulate the parent companies, the Comptroller of the Currency will oversee the national bank charters, and the Federal Deposit Insurance Corp. will likely play a bigger role because the companies are expected to seek much higher volumes of federally backed deposits, and the entities may seek to take customer deposits, instead of depending on short-term borrowing to finance their investments.

The firms will reduce their leverage ratios -- a measure of a firm's risk in relation to the equity on its balance sheet -- over the next two years from current levels to something more in line with that at commercial banks. Investment bank ratios now stand above 20, with commercial banks closer to 10. The combination of easy money, interest rates kept lower than the real inflation rate by the Fed after the dot com bust, Fannie Mae and Freddie Mac incentives to make housing affordable to more Americans, and finally the housing bubble burst, at the core of the problems, that all contributed to the rapid deleveraging of investment banks as their underlying assets crashed in value.

Quarterly Leverage Ratios Trend for Morgan Stanley, Goldman Sachs, Lehman Brothers

Morgan Stanley and Lehman Brothers had leverage ratios above 30 in Q1 2008, while Goldman Sachs had a leverage ratio of 27. For comparison purposes, Bank of America has a leverage ratio of 11, giving it far more assets to back up any troubled investments it makes. Having more assets on their balance sheets allowed the commercial banks to ride out the storm, since they had more resources to fall back on, without having to raise more capital, as their investments declined in value. Much of the investments banks out-sized profits came from this leverage - investing borrowed money in the hopes of getting a great return before having to pay it back. This fueled the out-sized returns of the investment banks during their salad day, and fuled their death pyres during the housing crash. They will be safer in the future, but also have smaller returns, as their ability to bet large amounts of someone else's money has now come a'cropper.

Newspaper Readership Continues Decline; More Newspapers on the Ropes

The Newark Star-Ledger, New Jersey's largest newspaper, expects to loose $30 million to $40 million this year, while its sister newspaper, the Trenton Times expects to loose $5 million. Both papers are properties of Advance Publications, owned by the Newhouse family. The Star-Ledger is attempting to negotiate voluntary buy-outs of 225 non-union workers, which would leave its workforce with 500 employees. The Trenton Times is attempting to achieve 25 voluntary buy-outs. The Star-Ledger's circulation has shrunk to fewer than 300,000 subscribers.

The Pew Research Center for the People and the Press has released its Biennial News Consumption Survey. The survey shows that all old media news viewership and readership has been steadily loosing ground since 1993.

News Readership Trends: Newspaper, Radio, Cable TV, Nightly Network News, Morning Network News, Online/Internet News

Source: Pew Research

Only network morning news has held fairly steady at around 20%, while Internet news readership and viewership has grown smartly from 2 percent in 1996 to 37 percent in 2008.

Newspaper Readership Declines
Internet News Increases

Source: Pew Research

This morning (Sept. 22, 2008) Internet entrepreneur Mark Cuban told newspaper executives to give up and declare bankruptcy. It's not that people won't continue reading newspapers, its that they won't continue reading them in the numbers they have. The handwriting is on the wall and newspapers need to start over again. Some, such as the Wall Street Journal, have made yeoman efforts to reinvent themselves on line. A few, with such herculean efforts, will probably survive. But for the most part, newspaper online sites are disappointing at best, hard to use, and merely repurpose their print editions with an online edition.

The Google-Yahoo Search Advertising Partnership: Good? Bad? For Whom?

Google has delayed its search advertising partnership with Yahoo for three months to give government regulators a chance to examine their deal on the fear that it might lead to anti-competitive developments in search engine marketing. Google and Yahoo together control over 80% of the lucrative and fast growing search engine advertising market (SEM).

Percent Spend on Search Engine Advertising
Google, Yahoo Microsoft

Source: SearchIgnite Whitepaper

But now Google CEO Eric Schmidt says the companies cannot wait any longer and will move forward with their partnership. Search marketing company SearchIgnite has published a whitepaper, Potential Impact of Google-Yahoo! Partnership & Cost to Marketers, which purports to show that Google's keyword prices are as much as 22% higher on average than Yahoo's. This could result, SearchIgnite says, in advertisers paying more for keywords on Yahoo than they otherwise would, if Yahoo chooses a revenue maximization strategy for its Google partnership. Google claims that its search keyword prices are set by auction, as are Yahoo's, and that no collusion between the companies on setting prices can result. Google also claims that there are methodological errors in the SearchIgnite research that make its results questionable.

While no one outside the companies has seen the agreement, Yahoo has described it as providing supplemental results to its own search advertising. As Cnet describes Hilary Schneider, Executive Vice President of Yahoo, saying:

She [Schneider] showed a specific example to bolster her case. A search for "red roses in Birmingham Alabama" yields no advertisements on Yahoo's search engine and 11 on Google's. Under the deal, Yahoo can show Google's ads when it chooses, sharing the resulting revenue.

This is a long-time and established relationship in the search and online advertising industry referred to as "backfill". It is quite common for a search site A to have an arrangement with a partner B to display B's results, either search results or search ads or both, as a supplement to A's. This provides A with more paying inventory and better results to display, B with greater distribution of its results, B's advertisers with broader reach, and visitors to the site with better results. It is generally held to be an all-around win for all parties.

In this case "A" is Yahoo and "B" is Google. It would seem that this arrangement benefits all parties concerned. Users of Yahoo's search engine will get more and better ads. Advertisers on Google will get broader reach to another audience of highly qualified searchers (Yahoo's search engine users). Google will derive additional revenue from displaying its ads to a broader audience (Yahoo's search engine users), and Google advertisers will have broader reach to another audience without the trouble of running multiple search advertising campaigns on multiple search engines.

Yahoo has said that it expects $800 million in revenue and $250 million to $450 million in incremental cash flow from the first year of the deal. Google offered the deal to Yahoo to keep the company and its search engine out of the hands of Microsoft, who had made a bid to buy Yahoo for as much as $47.5 billion, or $33 per share. Yahoo shares fell 44 cents to $18.82 on Wednesday, September 17, 2008.

The fear by advertisers, who have been the most vocal opponents of the deal, is that this arrangement will somehow boost their advertising costs. But Google and Yahoo will not be commingling their keyword auctions in this arrangement, nor will either company be able to see the price of the other's keywords, although Yahoo will know it after thte fact, that is after a user clicks on one of Google's keyword ads. Yahoo could use this after-the-fact knowledge to cherry pick higher-paying Google ads that perform better than their own lower-paying ads.

With respect to SearchIgnite's claim that keyword prices could rise as much as 22% as a result of this deal, this seems unlikely. Assume that it is true that Google's keywords are, on average, 22% more expensive than Yahoo's. Even if Yahoo could see the Google price on each keyword (which it can after the fact), and even if it decided to pursue a profit maximization strategy by replacing each of its cheaper keywords with a more expensive keyword (which it says isn't the nature of the agreement), Yahoo would still have to pay the affiliate fee for each Google PPC ad so used. This could range from a Yahoo/Google revenue split of 70%/30% to 90%/10%. While Yahoo has alot of clout due to the size and quality of its search traffic, 70/30 seems on the low end while 90/10 seems on the high end.

Based on the agreements I have been privy to I would speculate that the revenue split between Yahoo and Google is on the order of 80%/20%. With just a hypothetical 22% premium on Google search ads, Yahoo essentially breaks even on this profit maximization strategy. The only way Yahoo makes money from this deal is if it uses Google PPC ads to supplement its own, not replace its own.

There is one other area of concern that none of the above addresses, and that is the fear of the concentration of power in the hands of just two players of over 80% of the search advertising on the Internet. This advertising is extremely desirable and likely to continue growing strongly in the future. The idea of just two players controlling so much of this market has to be unsettling, despite any demurrals by the principals and admonishments to "do no evil" from Google. This is an issue that cannot be addressed by the facts of the deal. Internet advertising technology is likely to continue to change rapidly and the partnership between Google and Yahoo may grow tighter. If it is any consolation, historically such deals have usually ended with the partners at odds with each other, rather than closer to each other. The interests of the two parties eventually diverge so that they cannot sustain the relationship. The Internet is the most dynamic environment, technologically and business-wise, we have ever created. What seems like a good idea and a threat today can just as quickly go sour tomorrow.

Google now provides its advertisers control of which of its affiliate networks, even down to the particular web site, they want their ads to appear on. I would hope that Google extends this control to its advertisers for this Yahoo partnership. If an advertiser is afraid that it will be charged too much when its ads appear as backfill on Yahoo, or if they don't like the resulting ROI in such an arrangement, they should be able to opt out of having their ads appear on Yahoo. It is something that advertisers now can do on Google anyway, and it should ease concerns over rising advertising prices for those who are worried, even theoretically, about such things.

Link: Google Public Policy Blog: The SearchIgnite study on ad prices and the Yahoo-Google deal
Link: ANA Recommends Against Google-Yahoo Search Advertising Partnership in Letter to Department of Justice
Link: Facts about the Yahoo-Google Deal