Microsoft to Circle Back for Yahoo?

When Google and Yahoo struck their pact for search advertising last week, press and media opined on what that deal would do for the companies.

There is no mystery here; both sides will earn money as Yahoo runs select Google ads alongside its search results.

But the real mystery is what will Microsoft do? I speculated on Google Watch that Microsoft could target a number of companies, including Facebook and AOL. Kara Swisher of All Things Digital postulated the same theories, but added that Microsoft could circle back to score Yahoo.

The notion never occurred to me because Google's presence seems to taint Yahoo's blood. Why would Microsoft want to buy Yahoo with Google in the mix as the proverbial poison pill? Wouldn't buying Yahoo help bring money to Google by dint of the Googlehoo deal?

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IDC's Karsten Weide added some clarity to my musings, noting that Microsoft could circle back for Yahoo.

"The Microsoft-Yahoo story is not necessarily over," Weide told me. "Microsoft said that it did not want to acquire Yahoo as a whole, but we believe that it could still happen."

I asked Weide if Microsoft would have the power to break the Googlehoo agreement. He said it really wasn't breaking an agreement because the deal is not exclusive and Yahoo gets to choose how much or how little ads they want to run on Yahoo. The deal, in effect, has the strength of an egg shell.

So if Microsoft and Yahoo strike a deal, Weide said Microsoft would likely tell Yahoo to stop selling Google ads, forcing Yahoo to pay Google $250 million, according to the Securities and Exchange Commission filing on the deal.

Technically, Microsoft need only buy 35 percent of Yahoo's stock to trigger this provision. But if Microsoft buys only between 15 percent and 35 percent of Yahoo, Google can terminate the deal but not collect the $250 million fee. Clearly, the deal puts Yahoo in a precarious position.

"What all of this does is disappoint stockholders even more than they were before, which means they will put even more pressure on Yahoo to sell to Microsoft," Weide told me. "The question now--does Microsoft really still want to acquire them? We don't know."
 
Yahoo is holding its annual shareholders meeting Aug. 1, at which time shareholders can oust the board and install new members, possibly the hand-picked slate of Carl Icahn.

OK, so let's pretend Weide doesn't believe Microsoft will circle back to Yahoo. What would it do, or more poignantly, buy? Not Facebook, AOL or Ask.com, he said.  

Weide said AOL is an unlikely target because Microsoft is heavily focused on search as a major advertising format and AOL only cradles roughly three percent of that market. Moreover, AOL is still trying to right it's ship.

"Search will lose some market share to online video but it's still going to be the No. 1 format five years from now," Weide told me. "If you want to make it in online advertising, you need to make it in search. Acquiring AOL is not going to help them."

Weide said IAC's Barry Diller wouldn't sell Ask.com to Microsoft because it's his only cash cow. As for Facebook, he has more dire thoughts. He said that while social tools will be the rule, not the exception, social networks in the future won't be destinations where users live and where they're likely to see and click on ads.

"They're already losing traction in terms of popularity and in terms of how much time users spend on them," Weide told me. "There's already user fatigue, so short of Facebook reinventing itself, becoming more like a portal essentially I don't see how that could help Microsoft decisively."   

Well, there you have it. I still like to think that Microsoft will leave Yahoo alone. The story is old and tired. The deed with Google has been done. It's time for Microsoft to move on to greener pastures and buy an up and coming vendor, such as Facebook.

Microsoft may already be on that path. The company last night bought Navic Networks, which makes software to deliver television ads. Navic's software features campaign management tools that use data to boost the delivery and placement of targeted interactive TV media.

Google, of course, already has TV ads, albeit only as of May. Perhaps Microsoft really has moved on from Yahoo and Navic is the start of a long, fruitful acquisition binge.