Yahoo is Screwed

So Yahoo officially announced that its talks with Microsoft have concluded they have once again failed to reach any kind of deal. There are reports that Yahoo may soon announce a search deal with Google. They’ll basically be outsourcing search to Google. Throwing away a core competency key to its long-term success for short-term gain. In my eyes I feel like Yahoo really botched this whole thing.

Microsoft Chased But Yahoo Wanted Independence

Unofficial sources have indicated Microsoft offered close to $40 a share privately last year and it was rejected by Yahoo. Later on, Microsoft very publicly offered $31 a share which Yahoo rejected. It basically did everything it could to avoid the deal, including invoking a poison pill. It demanded $37 a share but the most Microsoft offered was $33. After that debacle, Microsoft walked away leaving Yahoo the subject of shareholder lawsuits and criticized by institutional investors that hold large amounts of Yahoo stock. Not to mention Icahn’s current attempt to replace the Yahoo’s board and top management.

Still No Deal

Getting all that flak, they resumed talks with Microsoft, but MS no longer wanted to buy all of Yahoo. It now only wanted to acquire Yahoo’s search assets in the US and Asia. This is basically what they wanted in the first place. Everything else is just gravy. Of course Yahoo’s not going to let MS strip its crown jewels and we arrive at today’s news that their talks have ended with no deal. Again.

Deal With Google?

Well they wouldn’t sell search to Microsoft but they’re willing to outsource it to Google (who dominates search). This can only strengthen Google. Sure, Yahoo gets short term cash gains from the agreement but like I said, search is Yahoo’s crown jewel. It’s where the money is as Google has clearly shown.

Regardless of everything else it’s doing, Google’s primary money-maker is search. Google doesn’t release all these other services like Gmail, Analytics, Reader, Docs & Spreadsheets, Maps, etc. for the heck of it. These services make NO money but rather require a lot of engineering and infrastructure to provide such services on a large scale. It’s because the more people use these services, the more likely they are to use Google Search, and vice-versa. You build a critical mass of users and then you have network effects. That’s the whole point. It was the same deal with desktop OS’es. That’s why MS is concerned with Google. It’s the same evenw with Google Apps and its message security services offered through the Postini acquisition. It’s all about getting consumers and businesses under the Google umbrella, so they’ll use Google Search, Adwords, Adsense, etc. At the same time, it jabs Microsoft.

Doesn’t Look Good for Yahoo

By outsourcing search, Yahoo will eventually be reduced to a bit player with services like Flickr and its primary portal. Those things really don’t generate a lot of revenue or profit. Google’s eventually going to demand a bigger and bigger piece of the search revenue sharing and Yahoo will have no leverage. Because by outsourcing search to Google, Yahoo’s going to eliminate a lot of internal resources (that includes employees) that’s dedicated to search. Yahoo may do well in the short-term but it’ll eventually resume its decline. Shareholders aren’t happy with the news either, since Yahoo’s stock has gone down significantly this afternoon.

Well the deal will definitely attract regulatory attention since it would consolidate a HUGE share of the search market into Google’s hands. So it might not even go through. We’ll see. Hindsight is 20/20 but Yahoo should’ve taken the $33 offer. They had no way of knowing what would happen later on after they rejected the private offers last year so that’s understandable. Without buying Yahoo, Microsoft still has $40 billion to figure out how to fight Google in search. That’s not a small chunk of change.

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