With upward of two-thirds of the search market, depending on what survey you use, one would not imagine that Google would worry too much about any kind of hookup of Microsoft and Yahoo.

Think again.

While several sources at Google (GOOG), even off the record, have professed to me that they are not that worried about any search and online advertising deal the pair have finally struck, others admit that a more robust rival will force the company to compete and innovate more aggressively.

“We take nothing for granted, because anyone can make a comeback,” said one person at Google, who points to Microsoft’s laudable efforts with its Bing search service. “Especially with Microsoft’s deep pockets and Yahoo’s talent in the advertising market.”

Sources close to the situation said Google will likely try to keep a low profile at first in opposing the deal announced today, positing that regulators have the same opinion about fewer competitors in the market as they did when opposing a similar Google-Yahoo search deal last year.

“Is Google siccing the dogs on this deal?” asked one person familiar with Google’s thinking. “Or will it wait for regulators to cast scrutiny on a deal that drops the number of competitors from three to two?”

Still, having three in the market has not been enough to lift the share of Yahoo or Microsoft very much in comparison to Google over the last several years.

According to a comScore (SCOR) report for June, for example, even combined, Microsoft (MSFT) and Yahoo (YHOO) have a share that is less than half that enjoyed by Google.

Microsoft accounted for 8.4 percent of the search market in the month, with Yahoo clocking in at 20 percent. Google grabbed the lion’s share at 65 percent.

And that dominance means a financial windfall–as volume means more queries means better search ads means better relevance in an ever-virtuous and very lucrative cycle.

It is a cycle Google would like to keep intact, so much so that it made what turned out to be a very risky move to block Microsoft when it was trying to take over Yahoo last year.

Regulators ended up raising federal eyebrows about the proposed Yahoo-Google search deal, which was less sweeping than the Micosoft-Yahoo one announced today.

Google dumped Yahoo in the end–although not before the company found itself front and center on antitrust radar screens.

And there it has remained, with Christine Varney, assistant attorney general for the Antitrust Division of the United States Department of Justice, having become Google’s most pointed critic.

She should be, given the Silicon Valley-born Yahoogle idea was an appalling reach by Google, as I wrote last April:

And while it might be a long-cherished dream of Google’s to take over Yahoo search–and also get the chance to return to the scene of the crime, since Google got its first big push from doing Yahoo search, before Yahoo wised up too late–there is simply no way this will be allowed by regulators nor should it.

Still, you have to almost admire the chutzpah of the search giant in making this move, if the sheer and unadulterated arrogance of it wasn’t so distracting.

Because, while Google has almost none of the obvious menacing aggression that characterized Microsoft when it thoroughly dominated tech (although all those beach bikes on its campus inexplicably creep me out a little bit), the company still cannot be allowed to have a monopolistic share of the market.

It is bad for advertisers, it is bad for consumers, it is bad for innovation, no matter how well-intentioned Google is.

And no matter how many flashy moves Google and Yahoo make, it is flat-out wrong for one player to so dominate such an important sector.

Anti-competitiveness would likely be Google’s first arrow in what will surely be an attempt to slow down, if not block, the deal.

And while advertisers are more disposed to have a stronger No. 2 player to counter Google’s growing power, the company might use the opportunity to shave the sharp edges of its ever-scarier reputation.

In a conference call early this morning about their deal, Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer tried to paint a picture of Google as a scary and dominating search giant.

But, as Google will surely offer up, if Microsoft and Yahoo combined is the underdog, it might not look like so much of a bully after all.

Please see this disclosure related to me and Google.

Early this morning, Bloomberg reported that regulators are looking into Apple’s disclosures about the health–or lack thereof–of its iconic CEO Steve Jobs.

According to the story, the Securities and Exchange Commission is conducting a review of Apple (AAPL) “to ensure investors weren’t misled, a person familiar with the matter said. The Securities and Exchange Commission’s review doesn’t mean investigators have seen evidence of wrongdoing, the person said, declining to be identified because the inquiry isn’t public.”

And while BoomTown has railed against the creepy obsession the media have had with Jobs’s health and the publishing of rumors and innuendos about it as fact without a whole lot of reporting, I hope it is true.

It is also entirely appropriate that the government agency charged with keeping an eye on public companies does investigate–at the very least, to get the story right.

Because if the press and blogosphere and Apple aren’t going to do it, I vote for the one with subpoena power to sort it all out and make some levelheaded determinations about the rules of the road.

(And, frankly, it is good to see the SEC more vigorous after its stunningly moribund record of late–Hello, Bernie Madoff!)

Apple’s COO and acting CEO Tim Cook, by the way, will likely be questioned about the SEC look-see, Steve Jobs’s health and more at its first-quarter conference call at 2 p.m. PST today.

Of course, the health of its business is the most important thing–sales of iPods and iPhones, new products and what Apple will do with its $25 billion cash horde.

But the focus will surely be on Jobs and now, this government inquiry.

What will be most interesting is exactly how much companies do have to reveal about the health of their leadership and whether the relative fame and brand-critical nature of that exec matters more.

For example, do leaders like Jobs or, say, Martha Stewart, have more need to discuss their health than some lesser known CEO who might have a similar problem?

And since it has been well known that Jobs suffered from a bout with pancreatic cancer and recovered, does he have to disclose it all, given that even his curable version of the illness has complications that are well documented?

And, most of all, how specific do Apple and Jobs have to be, and how frequently do they have to update, especially since a diagnosis is always a moving target?

More to the point, given that the bordering-on-crazed attention given to Jobs–who engenders so much passionate emotion–has also been off-putting and, worse, all over the map in terms of accurate information, what clarity can regulators provide?

Apple has been under increasing pressure, since Jobs revealed he had a “hormonal imbalance,” soon after which he announced that he was taking a five-month medical leave from his duties because his health problems were “more complex.”

I am less strident than others on this turn of events since having accurate health information about yourself is not quite the same as, say, details of a merger and who knew what when.

Plus it has been clear for a long time that all has not been well with Jobs, something any investor had to be aware of.

I have no inside information; nor have I talked to anyone who has treated him, but anyone who has not been on Mars for the past year could see that Jobs was not looking great, especially from his woefully haggard appearance.

As I have written:

Apple investors who have not figured Jobs’s precarious health–after a round with any kind of cancer–into their investment strategies about Apple going forward need some serious reality medication themselves.

Guess what? Jobs has been really sick and it means he is going to have a harder time with any kind of infection or complication for the rest of his life, and he will likely be more delicate than someone who has not had cancer.”

Who knows if the government will find out more, but it would be good if some of the smoke could be cleared away to see if there is some actual fire or not.

And if not, Jobs can get the peace he is seeking to try to recover his health.

As he said to Bloomberg last week: “Why don’t you guys leave me alone–why is this important?”

It would be nice to be get that answer and then, hopefully, let Jobs get on with getting well.

Finally, someone who might actually understand the Internet will be taking charge of the thus-far lackadaisical government body that plays the largest role in spurring its growth.

The Washington Post is reporting that Julius Genachowski (pictured here) will be tapped to take on the always controversial job of chairman of the Federal Communications Commission.

Sources with knowledge of the situation also confirmed the appointment, which will be announced in the next few days, to BoomTown.

Genachowski has previously worked for the FCC as its chief counsel under former FCC Chairman Reed Hundt. But he is better known to Silicon Valley as a longtime Internet exec at Barry Diller’s IAC/InterActiveCorp (IACI).

He is now a founder of a Washington, D.C.-based venture firm called LaunchBox Digital, which has invested in a plethora of unusually trendy Web 2.0 companies.

One of its investments, the social news aggregation service Socialmedian, was recently acquired by the German-based business networking site Xing for $7.5 million.

And Genachowski is also a co-founder and managing director of Rock Creek Ventures, another venture firm, and a special adviser at General Atlantic.

Perhaps most notably, he went to law school with President-Elect Barack Obama.

Thus, Genachowski worked the tech sector tirelessly for Obama’s election, along with organizing the campaign’s successful social-networking and online fund-raising campaign.

He was also clearly on the short list to be America’s first chief technology officer, which might be too light on policy-making and too heavy on pontificating for Genachowski’s tastes.

As top telecom and, really, Internet regulator, Genachowski will have a lot more power and even more on his plate, including the rocky shift from analog to digital television, now set to take place next month, as well as dealing with net neutrality and a range of other key Web issues.

But top of the agenda will likely be how to make real Obama’s promise to drastically improve broadband access across this nation and lowering prices.

The slow speeds and high costs are an appalling legacy of Washington regulators and politicians, who have lived too long and too deep in the pockets of big telecom companies.

That has made the U.S. exactly what Softbank founder Masa Son once called in an interview I did with him at a D: All Things Digital conference: the “Third World of broadband.”

Hey, Julius, you’ll fix that, right?

When reports came out last week that Google and Yahoo were downsizing their controversial search advertising deal, I told a Yahoo exec I happened to be having dinner with that that it was the surest sign that the search giant was about to dump the long-suffering Internet portal.

The exec, who made the case that the deal was always tactical, and not strategic, laughed. For all its problems, Yahoo (YHOO) has always been a straight-up player and such sneaky machinations are not its strong suit.

Google, not so much.

After all, Google (GOOG) had already tried using The Wall Street Journal the week before to try out an our-way-or-the-highway tactic to play chicken with the Justice Department, to no avail.

As I wrote:

And, while it might be testing the Justice Department in hopes of salvaging the deal, I suspect Google–as much as its founders want to help out Yahoo CEO Jerry Yang and block Microsoft at the same time–is just now figuring out that walking might actually be the best move.”

Then in a sudden switcheroo just days later, Google was doing the docile-dog play, using the Journal again to signal that it was willing to compromise drastically to do a deal and trying more to look cooperative with the Justice Department.

Now, Google is not some Internet Sybil–way out of the deal one week and in another. Instead, it was creating what one might call “plausible deniability,” a Washington, D.C. term that essentially means covering your own petard.

Despite Google’s last-minute theatrics of cooperation, I am sure the decision had long been made at its California Googleplex lair that it would bow out.

After all, many top execs at the company were dead set against it from the start, mostly due to the undue scrutiny it would bring to Google. Those execs now had plenty of ammo to mercilessly strafe the deal from behind.

Early on, that was also a big worry of Google’s own operatives in D.C., who expressed concern–largely ignored at HQ, where execs really do see themselves as not even slightly evil–about its growing image as a scary behemoth.

Well, that picture is now most definitely solidified in the minds of regulators, helped along by the dangerous pontificating by CEO Eric Schmidt a little while back, who haughtily declared that Google would move forward with or without government approval.

“Time is money in our business,” said Schmidt, in a quote that I am sure he would like to take back now.

It was just the arrogant kind of attitude that Microsoft (MSFT) lobbyists, who have been hitting this deal hard like an old bass drum, needed in order to paint an ugly picture of Google in D.C.

And–more troublesome for Google–it gave advertisers and publishers, many of whom have long harbored fear of the company’s growing power, the courage to speak out, which they did in droves, along with many public interest groups.

But, as has been clear for a while, the Justice Department–after making its own big and noisy deal in its veiled public leaks of outside litigators and such–had to move forward with a lawsuit, and before the election was over.

And, indeed, as I have long maintained, stopping the deal was the right move all along, because a partnership between the No. 1 and No. 2 players just never should be allowed, however slight in its configuration.

As I wrote in April:

So, any further hook-up between the two seems sure to become the Justice Department Lawyer Employment Act of 2008, the likes of which we have not seen since Microsoft got its turn at being deservedly whacked for being a monopolist back in the last century.

Let’s face it, outside of those who cannot seem to shake the annoying Kumbaya mentality over at Google, a Yahoo-Google partnership is simply fantastical, like some out-of-control Dr. Seuss ditty.

They could not, would not with a goat. They would not, could not on a boat. They will not share an algorithm, they will not, will not, Jerry-I-Am.”

Because, although Google has almost none of the obvious menacing aggression that characterized Microsoft when it thoroughly dominated tech, the government was never going to allow such a clearly dominant company in search to strike such a deal, given the obvious antitrust implications.

As I also said then: “It is bad for advertisers, it is bad for consumers, it is bad for innovation, no matter how well-intentioned Google is.”

Thus, the die was cast for the inevitable dumping of Yahoo, in a hasta-la-vista-baby letter this morning terminating the partnership, which Yahoo should have seen coming many miles away.

Sources close to the company, which has been justifiably irked about how Google has handled itself with the Justice Department, said execs at Yahoo might have expected the move, but were deeply disappointed too.

(Here is Yahoo President Sue Decker’s memo on the collapse of the partnership.)

At least the very least, Yahoo did use the deal to escape the clutches of Microsoft in the midst of an ugly takeover battle, which investors now wish it had not, given its stock price is now half of what it was then.

And, indeed, it was perfectly tactical in that regard, using the software giant’s archrival, Google, to poke Microsoft relentlessly.

But Google would only prod so much, until it adversely impacted its own main goal of quiet but inevitable domination over search and, in fact, all online advertising.

When it did just that, dragging Google into a thorny briar patch, the company inevitably resorted to one of its internal mantras, “Feed the winners, starve the losers.”

Time will tell just how much a loser Yahoo will be from this latest bump in its current pothole-filled journey.

As to the candy-colored Google image? Well, it’s definitely not as sweet as it used to be.

Please see this disclosure related to me and Google.

Are Google and Yahoo thinking of walking of away from their controversial search advertising deal, as reported in an amusingly hedged report in The Wall Street Journal last night?

How’s this for covering your bases in a story: “Following a meeting Thursday with the Justice Department, the companies could announce a decision to back away from the partnership–or a last-minute resolution, if one is reached–by the middle of next week, according to these sources.”

So they will back away unless, of course, they don’t and soon?

I would bet my Barry Manilow record collection, based on rumblings on Wednesday among those close to the case, that Google (GOOG) is a key whispery source here, sending a very public signal to the Justice Department that it would walk if pushed too far and leave regulators with egg on their faces for not letting the search giant help the struggling Yahoo.

But, let me be even more concrete, since The Journal report is dead wrong on at least one count. I can tell you for sure, based on many sources close to Yahoo (YHOO) that walking away is its last option, outside of a lawsuit, and it still hopes to make the partnership work.

That was underlined last night in a statement by Washington D.C.-based Yahoo spokeswoman Tracy Schmaler:

“We have been working with the Department of Justice regarding our agreement with Google and those discussions are ongoing. As we have said, we believe strongly that this agreement will strengthen Yahoo!’s competitive position in online advertising and will help to drive a more robust, higher quality Yahoo! marketplace for our advertisers, publishers and users.”

And I do not believe she is spinning here, even though that is her job.

Indeed, Yahoo can ill afford to pull out so easily, because it needs the revenue the deal might provide and simply cannot take the hit to its stock the collapse of the partnership would entail.

Such a series of one-two punches after its already tumultuous year would be devastating. It would also put Yahoo in the direct crosshairs of Microsoft CEO Steve Ballmer as its only partnering alternative in search.

Going it alone, of course, while preferable, is no longer an easy option for Yahoo, since keeping its No. 2 position in search would be expensive and brutal, especially sandwiched by No. 1 Google and No. 3 Microsoft (MSFT).

And, even more vexing, several sources at Time Warner (TWX) told me they are waiting until the resolution of the Yahoogle situation before consummating the ongoing merger discussions with Yahoo, because of the uncertainty of the impact on the Internet giant.

“It is linked to and just overhangs everything,” said one Yahoo exec about the long-pending Google partnership. “We want and need this deal, and would not be the ones to walk away first.”

As I have written, that would be Google, which benefits a lot from the will-they-or-won’t-they speculation here and cannot mind letting its intentions get some play (along with state attorneys general, who were also present at the Thursday meeting, and for whom leaking for simple self-aggrandizement is a basic character trait).

In fact, there was already much chatter that reached me on Wednesday that Google was sprinkling crumbs here and there to the media pigeons, all centered around the fact that it might balk at any onerous Justice Department demands, such as caps on search it could serve, or a consent decree that would require monitoring.

The Journal story mentioned the consent decree, which would be welcomed at Googleplex in Mountain view, Calif., like nonorganic mango nectar and bleached flour. The idea of regulators ferreting around its servers is simply not an option for the secretive company.

As I wrote early yesterday about the possibility of Google walking, in a predictive laundry list of options for Yahoogle earlier yesterday:

It seems far more likely that Google would do this than Yahoo, given its corporate culture is impatient with moving forward illogically (think Spock and you have the right picture of Google’s mindset).

I would imagine Google execs do not want to accept any caps or changes to the deal at all, and might conclude such restrictions make it not as worthwhile…

Plus, the joy of government regulators breathing down your neck 24/7 is, well, priceless, especially after Google CEO Eric Schmidt told regulators he would move forward with or without them.

While Google has now perhaps permanently put the government on notice that is must be more scrutinized than ever going forward with that unfortunate statement, I would be surprised if Google accepted any substantial changes to the deal.”

And, while it might be testing the Justice Department in hopes of salvaging the deal, I suspect Google–as much as its founders want to help out Yahoo CEO Jerry Yang and block Microsoft at the same time–is just now figuring out that walking might actually be the best move.

First off, even though it moved forward with the partnership, many top execs at the company were dead set against it, mostly due to the undue scrutiny it would bring to Google.

In fact, early on, some of its own operatives in D.C. expressed worry–largely ignored at HQ, where execs really do see themselves as not evil–about Google’s growing image as a scary behemoth.

Second, while Google seldom runs from a good fight–in fact, it often runs directly towards them–tangling with the federal government might be like crossing the 38th Parallel in Korea for the company. And you know how that went for General Douglas MacArthur!

It would certainly put the full attention of regulators on every move Google might make in the future, which is not good.

Third, the Yahoogle controversy, while being stoked by Microsoft’s relentless lobbying, has also brought into the light exactly how scared of Google’s power advertisers truly are.

And that would be terrified.

The company cannot simply blame Microsoft for manufacturing this fuss–even though it has surely pulled out all the stops in its bag of tricks.

In truth, whether Google chooses to accept this stark reality or not, many advertisers, publishers and public interest groups have been raising some real concerns about its dominance, which it ignores at its peril.

Lastly and perhaps most importantly, times have changed drastically as the economy has tanked.

Thus, Google–like a lot of other tech firms–has been engaged in a very serious company-wide appraisal of its business in the downturn.

One of Google’s internal mantras, I have been told by many inside and outside the company, is a variation of this phrase: Feed the winners, starve the losers.

It would come as no surprise, given the initial internal doubt about the partnership, that the Yahoogle deal might have suddenly become perceived at the company as a loser, and access to Google’s fabulous cafeteria might be about to be cut off.

Whatever Google’s true intentions, in playing chicken, it is courting danger.

According to Wikipedia, “the principle of the game is that while each player prefers not to yield to the other, the outcome where neither player yields is the worst possible one for both players.”

As in, if everyone is trying to win, it always ends in a fatal crash.

Please see this disclosure related to me and Google.

You have to admire the sledgehammer stylings of Google CEO Eric Schmidt, who loves to accuse Microsoft (justifiably, I might add) of bullying lobbying tactics in our nation’s capital, in the latest moves in the regulatory fight over the controversial search advertising outsourcing partnership that Yahoo and Google have struck.

Today, just days before the Justice Department will decide whether to move ahead with a lawsuit to stop the Yahoogle deal from proceeding or let it move forward with some other remedy or tweaking, Schmidt announced that he would be campaigning for Democratic presidential candidate Sen. Barack Obama in the last two weeks of the election.

Schmidt said in an interview that it was a personal endorsement and not from the company, even though many of its top execs are longtime supporters of Obama.

“I’m doing this personally,” he said. “Google is officially neutral.”

Well maybe so, and Schmidt has long been politically active himself.

But I cannot help but be struck by the perfect timing of the announcement, right as government officials under the Bush administration must make a move before the election makes them unable to do so.

(Then again, if Schmidt had endorsed Obama after any move by the government, it probably would have looked worse.)

In any case, it now makes any action by Washington policymakers even more complex.

To begin, Assistant Attorney General for Antitrust Thomas Barnett (pictured here), who will be leaving that post after the November election, has not been much of a trustbuster, to say the least, taking a mostly hands-off attitude toward business regulation.

But, in taking a long look at the deal in the first place, a partnership that does not actually need Justice Department approval to move forward, and hiring an outside counsel too, Barnett has also put himself out on a limb.

Thus, he is likely not to pat Yahoo (YHOO) and Google (GOOG) on the back and wish them good luck in their exciting endeavor.

That’s especially true given that a wide range of advertisers has expressed worries about the deal, which they say will lift online search ad prices and create a dangerous duopoly, along with public interest groups that have called the deal dangerous. Plus, there are also the many other special interest groups, all jacked up by Microsoft’s lobbying.

(It still surprises me up that some reports find it shocking that Microsoft is being aggressive here–helloooooo–Google would do exactly the same if the tables were turned.)

Google and Yahoo are arguing that the deal is nonexclusive, does not violate antitrust laws and that prices will not rise since they are determined by auction.

Still, sources close to all parties–Yahoo, Google and Microsoft (MSFT)–said the decision from government regulators, expected as early as this Wednesday, could still go a number of ways.

Under one scenario, the government could file a lawsuit and ask for an injunction to stop the deal from starting at all.

This move would be the most drastic of all. And, more to the point, it is hardest to prove, because there is no actual damage yet to point to as a result of the deal, even if the pair do control upward of 80 percent of the search market.

Under a second, the Justice Department could file a lawsuit opposing the deal, but not ask that it be stopped.

That means that the Yahoo and Google deal could go forward with implementation, even with the suit hanging over its head. It is a move that would provide a lot of data to determine the true impact of the No. 1 and No. 2 search players being in business together.

Under a third scenario, regulators could give Google and Yahoo tacit approval for the deal, with certain new rules about caps or monitoring that are agreed to in advance.

This option is the most complicated, since it is hard to determine what is dangerous and what is not in the fast-moving world of search. Will the Justice Department have a monitor sitting cluelessly next to Yahoo and Google engineers as they fiddle with the algorithm?

Still some sort of new rules to the deal are expected, if Justice takes a pass on a lawsuit.

“They are not going to hold a parade for us, and it is obvious they are interested in putting appropriate guardrails in place,” said one source close to Yahoo and Google. “But they might just say, ‘Go ahead, but we are watching you very carefully.’”

Under a fourth scenario, which Google is pushing for strongly, the Justice Department could simply pass on taking any action at all.

In that case, which seems unlikely, it is not without possibility that some advertisers or even Microsoft could go to court to seek their own injunctions, although that would be extreme.

Microsoft could also ask, given that the Yahoogle deal is nonexclusive, to make a similar deal with Yahoo. If it is rejected, the software giant could use that as proof that it is not.

But what is perhaps most interesting is that Yahoo and Google have not completely agreed as to how to handle this difficult process.

Yahoo, which has only recently become more active in lobbying for the deal, has been more willing to allow the government to set parameters in order to get regulatory blessing.

The company has also been quietly telling advertisers worried about it there are moves to come–Yahoo execs are obviously referring to a possible merger deal with Time Warner over its AOL unit–that mean that advertisers should be less scared of Yahoo becoming a satellite of Google.

Google, as is typical for it, has been more aggressive in its stance, holding out for less–if any–tweaking of the original Yahoogle deal.

Even its partner Yahoo thinks the powerful Internet giant has had a tin ear in this regard so far, with Yahoo execs cringing when Schmidt was widely quoted as saying that the deal would move forward with or without Justice Department approval.

The statement by Schmidt, in which he also added, “time is money in our business,” made him seem a bit arrogant about the role policymakers have.

Obviously, Schmidt misspoke, which all neophyte politicians tend to do now and again.

Today, he was much more circumspect, although he still managed to get a dig–or was it a warning?–in.

“My sense is, the Justice Department makes judgments on these issues independent of politics,” Schmidt said, priming the pump perfectly. “It would be unfair to Justice to imply [that supporting Sen. Obama] would make a difference.”

Yes, that would be completely unfair.

Please see this disclosure related to me and Google.