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Microsoft Search Payback: Killing Yahoo, Annoying Google

ballmerfists.jpgThe Google-Yahoo search partnership is getting neutered by the Justice Department. If the current "compromises" are adopted, the deal will be worth far less to Yahoo, Yahoo shareholders, and Google, which is one reason Yahoo's stock is taking it on the chin. 

Who is responsible for the search deal getting bogged down? In all likelihood...Microsoft.  Redmond's lobbying army got the Google-DoubleClick deal delayed for damn near eternity, and we imagine that it is now putting the fear of God into the advertising industry and Justice Department. Think of this as Chinese water torture payback for the Google-Yahoo collusion during the Microsoft-Yahoo takeover dance.

What "compromises" are on the table?

  • capping the volume of Google ads Yahoo would use,
  • assurances that Yahoo would continue to compete in search ads,
  • a reporting mechanism to ensure compliance
  • measures that will ensure that prices...don't rise significantly after the deal.

The big deal here is the first two terms: capping the number of searches and forcing Yahoo to continue to compete in search.  Right now, Yahoo says it intends to maintain its Panama search platform after the Google deal launches. Within a year of launching of an unfettered Google deal, however, we would expect Yahoo to drop Panama. Why? Because, now that Google will be serving some of Yahoo's search ads, Panama is a complete waste of money.

For Yahoo, the advantages of the Google partnership are twofold:

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  • increased revenue per search (because Google has more advertisers and a better matching system)
  • reduced costs per search (through the ability to phase out Panama over time.

If Yahoo is forced to continue to maintain its own Panama system, it will sacrifice revenue and incur additional needless cost. Thus, the current compromises on the table will significantly dilute the value of the deal.

Chalk up another quiet victory for Microsoft.  If Microsoft does eventually decide to buy Yahoo, it will almost certainly be able to do so at a lower price than if the Google-Yahoo deal had been launched without conditions.  And even if it doesn't buy Yahoo, it gets the quiet pleasure of poking another stick at the carcass of a company the spurned its now extraordinarily generous buyout offer.

See Also: Google and Yahoo Getting Earful From Justice Department

 

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On February 28, Axel Springer, Business Insider's parent company, joined 31 other media groups and filed a $2.3 billion suit against Google in Dutch court, alleging losses suffered due to the company's advertising practices.

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