Microsoft to Gouge Google with Yahoo Search Deal?

By Clint Boulton  |  Posted 2008-05-19 Print this article Print

As we opined earlier, Microsoft has circled back to Yahoo for round two of the Let's Make a Deal for Search and Internet Ad sweepstakes. But in a saga fraught with twists and turns, it's not what we expected.

Some of us (myself included) at eWEEK discussed in this podcast the possibility that Microsoft would come back relatively soon to try to buy Yahoo.

I said—and I still believe it—that Microsoft cannot afford to walk away empty-handed because it will not only fail to gain any ground versus Google, but waste time and resources trying to get something done to boost its Internet presence while Google's cash cow keeps ka-chinging.

Instead, the company, which remained quiet while Icahn threatened to storm Yahoo's gates with a proxy fight, yesterday admitted to trying to work out some sort of deal with the company.

My Microsoft Watch colleague Joe Wilcox noted, "Microsoft is considering and has raised with Yahoo an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo." Details from the company were skimpy.

Today, the Wall Street Journal is reporting that Microsoft has proposed a deal in which Yahoo would display advertisements sold by Microsoft alongside its Web search results.

Sound familiar? Of course it does. It sounds exactly like what Google and Yahoo have already tested, with Yahoo running Google's paid search links on its search engine.

If Yahoo is weighing whether to take a deal with Google or Microsoft, we have to wonder what a deal depends on. Is Microsoft offering better returns, perhaps a greater split of the take than Google?

I would hope so, because there is no way Microsoft search terms pull in more ad dollars than Google's, whose AdSense system is an extremely efficient cash cow. Microsoft can't possibly be promising Yahoo a better deal in a head-to-head match up, so I have to wonder if Microsoft is coming to the table with something sweeter.

Citi's Mark Mahaney wrote in a note today that if Yahoo outsourced 50 percent of its search to Google, Yahoo could get more than $500 million in incremental cash flow in 2008, and nearly $1.2 billion if Google provided 100 percent of paid links on Yahoo search. That's a lot of extra cash for Yahoo to play with on a yearly basis.

Can Microsoft trump that? If so, Yahoo might get increasingly cozy with the folks in Redmond. At the least, this would block Google's intention and would certainly pass DOJ antitrust tests much easier.

But at the end of the day, it's a defensive by Microsoft—one that will help it minimally as it seeks to compete with the Google ad juggernaut.


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