Google Could Use Yahoo User Base for Google+

Google could buy Yahoo to grab the most valuable online social graph that isn't being leveraged to its full potential. The Yahoo user base would do well in Google+.

It's tempting to sour on the idea of that Google (NASDAQ:GOOG) would buy struggling Internet legacy Yahoo (NASDAQ:YHOO), which is facing takeover rumors and other strategies in the wake of the company's dismissal of Carol Bartz from the helm.

Let's back up a few years. Recall that when Google bid to work with Yahoo in June 2008, it wasn't to buy the company warts and all-that was Microsoft's $45 billion bid that could have been a sour poison pill.

What Google wanted to do was shoehorn into Yahoo's search and contextually targeted advertising channel, negating any chance Microsoft ever had of making a meaningful dent, let alone meaningful dollars, in the search market.

The Justice Department said no and blocked the deal, citing monopoly concerns. Microsoft got the spoils the following summer: a 10-year pact to propel Yahoo's search and ads, an effort to bolster its own search share.

Yet Yahoo's struggles continued. It has shaved off employees and technology assets and squandered acquisitions that would have buoyed any other larger, fully functional Internet company. With Bartz jettisoned after an ineffectual 30 months on the job, talk has turned to the idea that Google or Microsoft could buy Yahoo.

Just two weeks ago, Microsoft CEO Steve Ballmer candidly said he was lucky the software giant didn't succeed in its bid, but of course the asking price was a lot higher then. Yahoo's floundering brand, valuable mostly to older Internet users with Yahoo Mail accounts that stretch back 15 years, has suffered in the wake of Google, Facebook, Twitter and a phalanx of hot Web startups.

Microsoft could buy the 15 or 16 percent search share from Yahoo and leverage its display advertising for profit. Google could do the same, but it would highlight the Monopoly sign that company wears in a grotesque neon hue.

It would be anathema to think that U.S. and European regulators who are already scrutinizing Google for antitrust practices in search could actually allow the company to buy Yahoo outright. But let's say for the sake of Dr. Seussian wonderment that it did. What would Google get?

IDC analyst Hadley Reynolds told eWEEK Google could frustrate Microsoft's search alliance with Yahoo, taking away that beachhead that Yahoo display search ads offer. Yahoo had been the world's largest display ad provider until Google supplanted it in the last couple quarters.

Google could cement its display ad supremacy once and for all getting Yahoo and its ad clientele, which former investor Eric Jackson of Ironfire Capital noted is worth $2 billion a year.

Moreover, Reynolds said that "if Google were able to land Yahoo, it could give Google an interesting leap forward in its troubled Pacific Rim strategy, particularly in China. "This begs the question: Why would Google have pulled out of China itself if it now intends to potentially acquire 40 percent of Alibaba?" Reynolds wondered.

Altimeter Group analyst Charlene Li noted that apart from giving Google valuable access to Japan, Yahoo's massive user base of over 500 million users could provide a built-in network for Google+, the company's fledgling social network.

"Those people [Yahoo users] are not socially network connected," Li said. "Google+ needs a boost. Google doesn't have that user base. Google has much more of a utility relationship with people, whereas Yahoo has a content relationship with people."

This makes sense. Google+ has somewhere between 40 and 50 million users, compared with over 800 million for Facebook. If Google got Yahoo, it could port those users over to Google+ accounts. It would be a Herculean undertaking and not just from a technical point of view.

How does a company being investigated by two world power governments justify to loyal users that it is taking custody of their Webmail, search and other Web service data? It might not be practical.

But the possibility of grabbing Yahoo's built-in social graph is clearly too tempting for Google to ignore. Unless, of course, Google is just playing its usual game of brinksmanship with Microsoft to drive up the bidding price for Yahoo.

It happened before in 2008. It could happen again heading into 2012.