The Lopsided Debate over Whether the Microhoo Deal Will Lead to Yahoo's Slow Suicide

By Clint Boulton  |  Posted 2009-07-30

The Lopsided Debate over Whether the Microhoo Deal Will Lead to Yahoo's Slow Suicide

Your mission, should you choose to accept it, is to find someone who doesn't believe Yahoo engaged in slow-moving suicide with the 10-year search and search ad deal it struck with Microsoft July 29.

For starters, there was no upfront payment of billions of dollars, despite early reports claiming Microsoft would pay Yahoo $3 billion upfront.

Microsoft, whose Bing search share is 8.4 percent, agreed to power Yahoo's search and search ads on the back end with Bing. Yahoo, the No. 2 player in search at 19.6 percent, will gain a respectable share of the search ad sales.

Microsoft will pay Yahoo traffic acquisition costs (TACs) at a rate of 88 percent of search revenue generated on Yahoo's sites for the first five years of the agreement. Microsoft will guarantee Yahoo's revenue per search in each country for the first 18 months following initial implementation in that country.

Just how bad was the reaction to the deal? The announcement sent shares spiraling 11 percent in morning trading.

Eric Jackson, managing member for Ironfire Capital, which sold its shares in Yahoo after the company refused to sell itself to Microsoft in the first go-around in 2008, told eWEEK that Yahoo's agreement is a head-scratcher.

"I think [Yahoo CEO] Carol Bartz is a really smart leader, and I think she's done a lot of things that three years ago I and others were calling on Yahoo to do, but to walk away from search for this kind of deal. ... They weren't No. 1, but they were still in a pretty good position in that space, so it leaves me scratching my head about why they would do that," Jackson said. "I think probably their board felt pressure to show their shareholders that, 'Hey look, we're doing something to create value for you,' but I don't know if this is the best way to do it."   

But here's the kicker: Jackson was pleased with the deal from Microsoft's standpoint. That's because Jackson and Ironfire have been investors in Microsoft since March of this year, when Microsoft's shares fell to $15 per share.

"It's a good deal for Microsoft," said Jackson. "They didn't have to pay anything upfront, and in three years they'll effectively become the No. 2 player in the space, pole-vaulting over Yahoo."

That has to burn the eyes of any Yahoo executive or board member who reads that. So does this interview on TechFlash, with Bartz and Microsoft CEO Steve Ballmer laughing like friends who just pulled the wool over the world's eyes.

During the conference call to announce the deal, Bartz was asked specifically why Yahoo elected for no cash upfront. "Having a big cash payment upfront doesn't help us from an operating standpoint," Bartz said. "What was most important to us was a significant TAC rate so that we could therefore have revenue to support an expense line, so that we could invest in the business."

Worse, Bartz's introductory speech about the deal signaled to analysts and press that Yahoo was acknowledging defeat in the search market to Google, which owns 65 percent of the market to Yahoo's roughly 20 percent.

Still Searching for a Microhoo Proponent


"We face a formidable competitor in one aspect, and that aspect is search," Bartz said. "It became obvious to us that working with another great technology company would help us share the investment expense to scale the market. This deal enables us to keep a healthy revenue stream and invest in areas critical to our future, while Microsoft invests in search technology. We want to invest in what is really important to our future success, including winning audience properties, display advertising and mobile experiences."

Search Engine Land's Danny Sullivan told eWEEK after the Microhoo call: "It effectively takes Yahoo out of the game, as far as I'm concerned. They're no longer a wildcard to distract consumers or advertisers."

Sullivan, who wrote a search eulogy for Yahoo, is among the majority. Take a look at these stories from the media and blogosphere:

How does a company like Yahoo win audience properties, and bolster its display ad share and mobile search experience without a Yahoo core search offering? This remains to be seen.  

Remember when you were challenged to find someone who doesn't believe Yahoo fell on the sword with this agreement? eWEEK believes it has found two analysts who see the deal a bit differently from others-IDC analysts Karsten Weide and Susan Feldman, who wrote a research note July 19.

They like that Yahoo will keep the majority of its search ad revenue, while saving millions of dollars on data centers, servers, storage and telecommunications costs.

They like the fact that adding Bing's search traffic market share will increase its market share to a combined share of 28 percent, making it a mildly more attractive offer to advertising clients. Finally, Weide and Feldman said the deal will allow Yahoo to focus on what it is good at: media and advertising.

"More focus on sales and a more attractive search ad offer could increase the combined revenue, thereby improving both companies' top line and making them more competitive," Weide and Feldman said. But wait, in the conclusion of the research report, the analysts said this deal is strategically unwise for Yahoo.

"Search will remain the most important online advertising segment for years to come. If that is so, why outsource search development to someone else without any control over that someone else's work? Why, in one word, put one's fate in somebody else's hands? Because there is no way back from this deal: Once search is outsourced, it will be almost impossible to bring it back in-house. Should Microsoft lose the race against Google in terms of search relevance and ad placement technology, Yahoo's ship would sink with Microsoft's."

OK, so maybe it really is impossible to find people who think this deal is good for Yahoo. Well, eWEEK's phoning paid off.

Forrester Research's Nate Elliot pointed out that search is one of the few places Yahoo hasn't been successful. So, he argues, why not let Microsoft Bing take control? Elliot explained:

"I don't think this is Yahoo giving up on search. I think it's them finding the easiest way to make money from search. They've been putting a lot of effort into this for a long time. They spent a lot of money, a lot of resources trying to challenge Google and it wasn't working for them. If they can spend a lot fewer resources and still make money from search, that's a win for them. For me, it's a very smart move, to say: 'We want to find a low impact, low resource way to monetize our search traffic and we want to spend our resources focusing on the things that we're best at."

Elliot is in the minority, but you have to admire his logic and contrarian stance. What do you think? Has Yahoo begun its suicide march?  

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