UPDATE:  as of November 6, the proposed deal between Google and Yahoo! is officially dead.

Perhaps in a last ditch effort to appease the Department of Justice, Google and Yahoo! have submitted a revised agreement that limits the scope of their proposed partnership.  Under the new terms of the deal, the length of the agreement is only two years, instead of as many as ten.  Additionally, Yahoo! would only be able to receive 25 percent of its total web search sales from the deal with Google.

Although there is no guarantee that this revised proposal will be enough to alleviate the concerns of the DOJ, it does represent somewhat of setback for both companies.  Yahoo!’s additional operating cash flow would be more limited and Google would not be able to exert as much power as it would like.  Even so, after release of the news, the stock price of both companies saw an increase.

The proposed advertising partnership between Google and Yahoo! is not dead, but the possibility of one or both sides walking away seems increasingly likely.  Just how that might play out, however, is not that simple.

Some have suggested that Google is simply playing a game of chicken with the Department of Justice.  At this point, Yahoo! may be reluctant to back out of the agreement unless it has to, as its core business continues to suffer.  The deal contract between the companies specifies that either party may end the agreement to avoid an antitrust lawsuit if defending that lawsuit is not commercially reasonable.  In other words, both companies may have to wait for the DOJ to officially challenge their proposed deal before they can back out of the deal without being liable to the other company for breach of contract.

One of the sticking points is apparently the DOJ’s desire to have both companies sign a consent degree stating the terms of the partnership.  The problem with that, especially from the perspective of Google, is that continued compliance would be subject to judicial oversight.  More than one expert has suggested that Google might be better off not drawing any more attention to its dominant hold on the market than it already has.