SAN FRANCISCO--John Battelle won't have any shortage of things to discuss with Yahoo CEO Jerry Yang at the Web 2.0 Summit here today.

Google announced today, Nov. 5, that it is ending its proposed search ad deal with Yahoo, which would have included Yahoo running Google's keyword search terms alongside its results.

Google Chief Legal Officer David Drummond wrote:

After four months of review, including discussions of various possible changes to the agreement, it's clear that government regulators and some advertisers continue to have concerns about the agreement. Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners. That wouldn't have been in the long-term interests of Google or our users, so we have decided to end the agreement.

Apparently, even a 25 percent revenue cap on what Yahoo could make from Google keywords and a paring of the deal terms from 10 to two years didn't satisfy the Department of Justice, which considered suing Google and Yahoo over the agreement. The DOJ noted:

The Department concluded that Google and Yahoo! would have become collaborators rather than competitors for a significant portion of their search advertising businesses, materially reducing important competitive rivalry between the two companies. Although the companies proposed various modifications to their original agreement in an effort to address the Department's antitrust concerns, the Department determined that such modifications would not eliminate the competition concerns raised by the agreement.

Incredibly, Yahoo acted surprised that Google didn't want to go to war in court: "Yahoo continues to believe in the benefits of the agreement and is disappointed that Google has elected to withdraw from the agreement rather than defend it in court."

Why would Google waste time and money doing this? Google was only keen on this as a strategic parry to Microsoft's bid for Yahoo. Google isn't the one with cash flow, brand, employee turnover and bleeding stock price issues. Once the DOJ reared its mighty head, Google fled, basically citing better things to do.

Consumer advocates in Washington cheered the decision. Center for Digital Democracy Executive Director Jeffrey Chester noted:

By agreeing to operate a significant part of its leading competitor's search ad business, Google would ultimately further diminish Yahoo's ability to provide some choice in the marketplace. Frankly, Google's attempt to largely deny that this--or any other deal it makes--raises public interest concerns illustrates how it must be closely watched by regulators to protect the interests of both consumers and competitors.

Chester is, as many would argue, something of a conspiracy theorist. But there is meat to his chest-puffing. If the DOJ was prepared to sue Google over this deal, perhaps it signals that Google is getting too big for its britches, that is, too close to being like Microsoft for the DOJ's comfort. That serves as a warning sign to antitrust watchers.

Google's choice to walk away from this deal shows that it knew it was going to be severely tested and decided to cut and run. To me, it's like putting a tiki torch to the guilty sign around its thick neck.

What does this mean for me as a journalist today? It means 4:50 PDT can't get here soon enough. That's when Yahoo's Yang is slated to take the stage to chat with Battelle.

What do you think will be the first question Battelle will ask? Of course, it will be about Googlehoo, and if it isn't, shame on him. The only question is, How he will phrase it? Will he be casual, or ask Yang straight out if this failure means Yahoo is totally screwed? TechCrunch discusses the Yahoo scenarios here.

What do you think?