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Google announced today that it has decided to walk away from its ad partnership with Yahoo, citing that legal battles with federal antitrust regulators won’t make it worthwhile to pursue.

The deal would have placed Google text ads throughout Yahoo’s network and search results. The last concession made by the two companies was to cap the amount of Yahoo’s revenues generated by Google ads at 25 percent. But this wasn’t enough to satisfy regulators, so Google essentially decided there wouldn’t be a satisfactory middle ground.

This is telling of Google’s dominance in search, which has increasingly made it a target for antitrust scrutiny. It’s gained this designation among regulators (a win for Microsoft), and has also drawn a certain amount of disdain from some consumers who generally have a knee-jerk reaction to dominant companies. It still, however, tops consumer satisfaction rankings in the University of Michigan’s quarterly index. This has also been shown in its dominance in search volume, search marketing revenues and local search.

Most of all, this is a loss for Yahoo, which forecast an $800 million annual revenue opportunity. It also entered the deal as a preferred alternative to a Microsoft takeover. Here, again, Microsoft is the winner — in both the dashed prospect of competing against a stronger Yahoo/Google tie-up and the potential for picking up efforts to buy Yahoo.

For the latter it could be done at a reduced price — and with greater probability, given less artillery for Yahoo to resist takeover (enter AOL?). Yahoo stock is up 5 percent today, trading at about $14 (Microsoft’s May offer for the company was $33 per share). Google shares are meanwhile down about 15 points today, hovering around $350 at the time of this post.

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