Yahoo-Google Search Deal Moving Forward, Yahoo Playing This Brilliantly

Henry Blodget | April 17, 2008 6:40 AM

Another small Yahoo (YHOO) leak in the Journal should start some conversations at Microsoft (MSFT) today: The Yahoo-Google search test has been judged a success, and the companies are now moving toward a full outsourcing deal.

As we've said, we believe the search partnership is a brilliant 11th-hour counter move by Yahoo will force Microsoft to pay more for Yahoo than it otherwise would have:

First, by allowing Yahoo to boost its cash-flow projections by $500 million or more a year, and,
Second, by forcing Microsoft to buy Yahoo to break up the partnership. If Google and Yahoo work together and Microsoft doesn't buy Yahoo, Microsoft's own search platform will be rendered almost entirely irrelevant. (It's headed there anyway, which is why Microsoft wants to buy Yahoo).

Upon the announcement of the test, Microsoft quickly argued that a Google-Yahoo search partnership would be illegal. After looking into this, we believe Microsoft would have a credible argument to support this, but we also believe that Yahoo would have a reasonable counter-argument, so we don't think any litigation would be resolved quickly. The WSJ also notes that the two companies are aware of the regulatory hurdle and are designing the terms of the deal to minimize regulatory risk (by eliminating certain regions or categories).

Yahoo is supposed to have a meeting with Microsoft week. Given that we haven't heard about it yet, it's likely happening today or tomorrow. The Google-Yahoo partnership will be an elephant in the room.

Brilliant Yahoo-Google Test Should Lead to Higher Takeout Price

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31 Comments

Mischief said:

Apr. 17, 7:16 AM

So...when is Yahoo taking over AOL?! But seriously, this outsourcing of search to Google may play directly into a Yahoo-AOL takeover/merger. Why should Yahoo and AOL continue to spend $$$ on search when Google does it better and can provide results as a partner.

Yahoo and AOL combined have some of the most popular websites and best advertising technologies. Of course, it may be hard to explain to Yahoo shareholders that a Yahoo-AOL (with Google search) company is a better deal than taking Microsoft stock. But where is Microsoft heading in the future given... Vista (ack!), OpenOffice, etc.

joeblow said:

Apr. 17, 8:43 AM

Boat floats!

http://online.wsj.com/article/SB120839839184321833.html?mod=yahoo_hs&ru=yahoo

(Quoting from the story):

“Yahoo Inc. moved closer to outsourcing its search advertising to Google Inc. after an initial test of the system yielded what the two firms deemed positive results, people familiar with the matter said.”(end)
--
All I can say is - that test is like my hometown... The "Welcome to OurTown" sign and the "Thanks for Visiting OurTown" sign are on the s-a-m-e signpost.

But then, systems like the ones employed by these two Internet giants are most likely very capable of assembling a great amount of meaningful data in a very short while. Yahoo’s press release about the test claimed it might last for “up to” two weeks, and I would estimate that they wouldn’t learn anything different in the second week or third week of such a test that conflicted much with the first week’s results. Too, they may have finished two weeks of testing and just weren’t exact in the press release about when it began.

Were I to consider buying, say, a car… I might search in a particular manner in which the discovery of some trend from my repeated searches could take longer even than two weeks, but my guess is that most of the trends in efficiency of paid search can be discovered in shorter impulse periods from hours to a few days. If I need something special for my dog or I'm shopping for a cameral, any trends from searching for those items is probably discoverable in shorter periods.

...If Microsoft lets this one slip away, the U.S. Navy couldn't float a boat for them in paid search. They’d be left to the task of expending way more resources and time than what would’ve been represented in just a higher bid.
--
Old business:

MM, sounds like you don’t like opera, but just to close the mystery for any that do.

The duet at the end of Act 1 of La Boheme is the only scene in opera in which leading performers are singing (not just a chorus) but nobody is seen on the stage anywhere, if performed the way Puccini intended it:

http://www.youtube.com/watch?v=AI2mkUj5-As&feature=related

Messa,

Of course correct on "Bookkeeper" – but now we’ve finally got game again for the Pundinistas, and we have to watch that bunch with all our attention.

I’ve already offered my debate that there are no serious anti-trust issues with Yahoo-Google in any form (between only the two of them) merely because Google's search algorithm is developing a monopoly. The monopoly is deserved and has not resulted from predatory monopolistic behavior. Anti-trust restriction applied to Google would be like denying people television because radio complained. Google's competitors are just effectively sandbaggers to efficiency, and anti-trust oversight isn't designed to suppress efficiency.

I suspect my arguments would hold, but I’ll still take on any challengers that can make a case otherwise.

Microsoft’s answer is the checkbook, not the anti-trust merry-go-round.

joeblow said:

Apr. 17, 9:08 AM

Well, Henry... I think it's pretty clear in the pre-market that any supposed AOL/Google/Yahoo cake would have to be baked with lots of cash.

We'll see after the regular session gets rolling.

selfmademadman said:

Apr. 17, 9:16 AM

According to this blog and other self-proclaimed M&A experts in the press Jerry Yang was too 'emotional' and was destroying shareholder value, blah, blah, blah. Well it looks like the emotional Yang has outwitted the 'rational' MBAs who, for the record, were probably the same guys who thought CDOs were an excellent financial instrument two years ago.

Henry Blodget said:

Apr. 17, 9:27 AM

Agreed, Jerry's playing this very well now. Still think the bid caught him flat-footed, and think the best strategy is to persuade Microsoft to spin its net division into Yahoo (instead of other way around), but he's doing the best he can while holding few cards.

eden said:

Apr. 17, 9:47 AM

so much for Yahoo's "independence." isn't that what this fight was about? the whole situation shows you exactly how seriously google takes yahoo as a "competitor."

Steve (URL) said:

Apr. 17, 9:59 AM

I don't see how Jerry is playing this well right now. Seems to me anyone truly "in the biz" will see right through this trumped-up YHOO-GOOG search deal.

First of all, the Feds would pummel GOOG if they took out YHOO search. Second, even if lightning struck and the feds didn't nix it, such a deal would destroy YHOO over time. This is just a thin negotiating tactic, that GOOG is playing along with. Simple. Ballmer isn't going to be fooled that easily.

The YHOO-GOOG search deal YHOO is touting boils down to YHOO holding a gun to it's corporate head and threatening to use it if MSFT doesn't go away or raise it's offer dramatically. The latter, isn't very likely to happen now that YHOO has stunk the joint up so bad.

I see the situation as worse than where it started for YHOO (with them in a corner), due to YHOO's bizarre reaction to MSFT's offer.

frusrated said:

Apr. 17, 10:02 AM

I am speechless, nice move Jerry. But the game is still far from being over.

Messa said:

Apr. 17, 10:33 AM

Henry,

How do you think this newest development will affect Ballmer's 3 week ultimatum? Do you think that is still on or will Microsoft need more time to digest this latest coup de grace? I'm watching my fingernails grow waiting for this thing to be settled.

joeblow said:

Apr. 17, 12:23 PM

Under 4 million shares by noon?... Ho Hum.

joeblow2 said:

Apr. 17, 3:02 PM

It'll never get through AntiTrust regs.

It's also simply a slow suicide for Yahoo over the long term.

Look at what happened to AOL's search after they outsourced. People just stopped using it altogether. Yahoo still has their Portal & various services, but outsourcing their cash cow is simply a stalling maneuver for now -- and flat out hari-kari in the long run.

joeblow said:

Apr. 17, 3:42 PM

#2,

The 2 doesn't change the facts. It just reminds me of the Yahoo message boards.

joeblow said:

Apr. 17, 4:17 PM

Google's results just make it even more laughable that MSFT would want to walk. Ballmer had better be walkin' over to the phone *** is where he needs to be walkin' and callin' up Jer to close this deal before they sign something with Google, if they haven't already.

http://www.fool.com/investing/value/2008/04/17/death-to-microhoo.aspx

You're dreaming Rick if you think MSFT shares any of the sentiment of your piece.

Marah Marie (URL) said:

Apr. 17, 8:25 PM

"MM, sounds like you don’t like opera, but just to close the mystery for any that do.

The duet at the end of Act 1 of La Boheme is the only scene in opera in which leading performers are singing (not just a chorus) but nobody is seen on the stage anywhere, if performed the way Puccini intended it."

Oh, I like opera just fine, especially when someone gets killed and someone else starts singing about it. So much drama. I just don't understand Italian (or French - as revealed in our last discussion). Thanks for the cool bit of trivia, anyway.

joeblow said:

Apr. 18, 12:37 AM

MM, I'd hoped you'd help me play the analogy to our mutual readers of my challenge and example.

"...only scene in opera in which leading performers [MSFT/Yahoo] are singing [leaking] but nobody [except the "sources close" leaksters] is seen on the stage anywhere."

Oh, well... you don't speak French or Italian or joeblow. Maybe I was too esoteric.
--
New subject:

http://www.forbes.com/2008/04/17/microsoft-yahoo-google-tech-ebiz-cx_ag_0417yhoo.html?partner=yahootix

Quoting from the story by Andy Greenberg:

"'I hate to admit it, but Microsoft is right,' asserts Robert Lande, a member of the American Antitrust Institute. 'The closer Google and Yahoo! get to a deal, the closer they get to some very serious antitrust problems.'"(end)
--
Andy,

I'm not willing to take that on face value.

Why didn’t you ask Mr. Lande what he meant by saying he “hate[d] to admit it” when referring to his apparent agreement with Microsoft’s claim that a Google-Yahoo deal would violate anti-trust laws. I can only assume (because you didn’t ask him) that there could be but one reason for him to hate agreeing with Microsoft… likely because he already views them as a violator of anti-trust rules and doesn’t particularly enjoy the association. If I'm wrong, I wish to be corrected.

I’m not suggesting that Mr. Lande isn’t a dedicated professional who is very serious about his institute’s initiatives for preventing the abuses of monopolistic behavior. That’s a worthy objective and a necessary one in an otherwise risky environment of unrestrained free-market capitalism. However, a Google-Yahoo deal that would concentrate near total paid search market share in Google’s control wouldn’t necessarily violate anti-trust laws any more than Microsoft’s 90% plus dominance in op systems/desktop does now. It doesn’t, or the Department of Justice would’ve already succeeded in forcing Microsoft to divest the offending components of its business.

Thus, Mr Lande's hating to admit his agreement with Microsoft likely transfers to his hating to accept that nothing has been done about Microsoft's monopoly... and he might later have the opportunity to transfer that hate as well to a Google-Yahoo partnership or total merger if they aren't blocked. In other words, Mr. Lande countered his own opinion when one understands the subtext of his comments to you.

Were customer choice or Microsoft’s sheer bigness the issues, Justice would’ve already intervened. But those weren’t the issues that Microsoft was ultimately penalized for, because they still exist… simply in the same fashion that an assumed lack of customer choice and the bigness of Google-Yahoo would both preexist and per-sist during and after a deal or merger between the two, even in the face of Mr. Lande’s jaded suspicions about their potential to abuse the relationship.

I’m afraid we’re continuously being bombarded with punditry about this issue that is centered on bigness for its own sake as being the evil reason for anti-trust actions, even though pundits at the same time, incredulously, i-g-n-o-r-e Microsoft’s same bigness… and the pundits are overlooking a key element countermanding a need for anti-trust oversight, and that’s the efficiency often provided to consumers by monopolists. That’s exactly the reason Microsoft has been permitted to maintain its current monopoly.

Let’s look at another situation you refer to, the actions in 2005 taken against Visa’s joint venture with MasterCard by their competitors. There you had an entirely different circumstance than applies either to Microsoft’s current op/desktop monopoly or to one resulting from any potential deal or merger between Yahoo and Google. How?

Because Visa and MasterCard had little in the way, if anything, to contribute to the efficiency for consumers that might have mitigated for allowing their joint venture. Had Microsoft’s monopoly not provided greatly to standardization and efficiency (that also pass along directly and indirectly to the benefit of consumers), its de-facto dominance of the systems that control IBM PC-successor motherboards might’ve led to successful anti-trust actions even in the 80s or early 90s and broken up Microsoft's corporate structure long before Windows 95 rocketed them to the 95% stratosphere.

Visa-MC wouldn’t have provided a lower cost of capital in their operations (and thus lower costs for consumers) and it wouldn’t have contributed efficiencies that vendors could pass along to their customers. It would only have taken choice away from customers and given the partnership the potential to use terms of service as a weapon against its primary competitors (their fellow oligopolists) who offer substantially similar services but would’ve had a diminished capacity for countering the partnership's terms of service.

Oligopolists compete on terms rather than price. In other words, Visa and MC wouldn’t have been able to contribute anything to their mutual customers that each of them didn’t already provide the customers independently. They could only have upset the balance of the terms of service in their industry for the purpose of excluding competitors from market access, and thus consumers from reasonable choice.

But that’s not the case with Yahoo and Google. By all accounts Yahoo’s search algorithm is not nearly so efficient or productive for its own search consumers or paid search advertising vendors as is Google’s, and neither is Microsoft's, making Mr. Lande's agreement with them in this particular matter even less understandable coming from an individual dedicated to the promotion of efficiency for consumers.

A partnership or even a complete merger between Google and Yahoo would add greatly to the efficiency and cost savings of both classes of their mutual customers and this fact would mitigate against claims of anti-competitive behavior.

Denying that efficiency and the reduction of the costs of any industrial processes that pass along directly and indirectly to consumers is not the kind of thing that anti-trust regulation is all about. Bigness is not bad by default… sometimes it’s a good thing.

monk (URL) said:

Apr. 18, 1:06 AM

http://tech.groups.yahoo.com/group/anti-ms-takeover-yahu

Marah Marie (URL) said:

Apr. 18, 8:30 PM

Should have known with you there is often some sort of subtext. Very fitting, BTW.

Darwin C said:

Apr. 22, 10:24 AM

So, Jerry would cripple his company to keep it from being acquired by Microsoft?

James said:

Apr. 26, 11:13 PM

Although we all like to speculate, I raise the following:

1. So did anyone expect Yahoo to come out and say "Nah, the test sucked"? Come on ... Really!

2. So, a 2 week test mind you of interfacing two search ad platforms (passing say 2% of Yahoo's ad orders), that were developed independently with no provision designed and implemented to handle the interfacing with the other, by two passionate competitors not sharing any previous design detaiils, was performed in 2 weeks (i.e. 14 days) WITHOUT ANY glitches, issues, shortcomings, bugs, processing or other problems, and in spite of it all, was a complete success. If this were true, that would most definitely be A FIRST IN THE ANNALS OF SOFTWARE DEVELOPMENT.

3. As for antitrust, riddle me this one; The number 1 search ad guy (Google), enters into an outsourcing agreement with the distant number 2 search ad guy (Yahoo), to "Spoil" (as clearly expressed in the press through leaks by Yahoo operatives) the ability of the even more distant search ad number 3 guy (Microsoft/MSN) from ever being successful or competitive, while at the same time locking up and controlling close to 80% of the CURRENT search ad transactions in the world. Google seems to claim that because its outsourced, it does not count. Hasn't the worlds PC vendors "outsourced" the development and maintenance of the PC operating system (around 90% of the market) to Microsoft? And wasn't that the idea that prompted most of the antitrust activity in the world over the last ten years (and still continues)? So, someone needs to tell me why this WOULD NOT excite those in the antitrust regulatory and law community?

James said:

Apr. 26, 11:27 PM

to joeblow:

Microsoft provides the operating system to 90% of the worlds PCs. The average cost of the Windows OS is, say $200. So why did IBM bag OS/2? Why doesn't Dell develop the Dell OS for its PC's? If Linux owned even 50% of the desktop OS market, do you think that it would attrack dev's from the day jobs "for free"?

So, all the anti-Microsoft guys took MS to court and convinced the judge(s) that even though Microsoft is the most economically efficient producer of the PC operating system, and could not prove that anyone could produce and support an equivilant OS for less money (that people could use, sorry Unix people) they still are a monopolist, and are regulated as such.

As for Yahoo being "Brilliant", only a turnip that just fell off the back of a truck would beleive that this scenario would ever be allowed to move forward, much less to the purported economic benefit to Yahoo and its shareholders.

Remember, second only to religion is the love of one's technology choices.

James said:

Apr. 26, 11:44 PM

To Henry Himself:

Henry, Henry, HENRY ... although your rooting for the underdog here (Yahoo), do you really think that Jerry will be viewed as a brilliant business strategist down the road, even if (a BIG IF) he gets 2 bucks more per share from MS? The only person currently garnering press attention that is demonstratablly more LAME that Jerry is Jimmy Carter!

List of guys 10 years ago that were deemed "Brilliant"

Studs:

Larry Ellison

Gimps:

Scott McNealy
James Barksdale
Jim Clark
Rob Glaser
Steve Case

Weenies Only:

Marc Andreessen
Edward Felton

lily (URL) said:

Aug. 15, 5:33 AM