Google Deal Casts Doubt on Yahoo's Search Viability

Letting Google run ads on its networks could impair Yahoo's strategy to grow search.

Google CEO Eric Schmidt said on a conference call that Yahoo users, advertisers and publishers alike will benefit from seeing relevant, targeted Google ads on Yahoo in the wake of the companies deal in that vein June 12.
This is a favorable spin for Yahoo but is it sincere? Analysts believe Yahoo is playing with fire because the deal could enable Google to poach Yahoo's advertisers and publishers.
Here's the gist of the June 12 Googlehoo deal: Yahoo will decide which queries on its properties will show Yahoo ads or Google ads, and control whether Yahoo or Google ads show up on Yahoo's affiliate network.
Advertisers will pay Google directly. Google will pay Yahoo based on the negotiated TAC (traffic acquisition cost) rate, which has not been disclosed. Citi Investment Research analyst Mark Mahaney wrote in a note June 13 that Google will give Yahoo 85 percent of the TAC, helping the company earn $250 million to $450 million in cash in a year after the deal.
So Yahoo will make some money. Yet this deal may also dilute Yahoo's market and mind share in search, helping Google make even more money and expand the sphere of its highly successful text ad business, analysts believe.
Forrester Research analyst Shar VanBoskirk said Google has a much better deal here than Yahoo does, simply because Google just made an opportunity to make money off of its chief rival's inventory.
"Yahoo is saying they'll make revenue off this and they probably will. It will open them up to a set of advertisers that they hadn't been able to access before, but I don't think this is the way they will grow their core search business," VanBoskirk told eWEEK.
"I see this as relinquishing control to a competitor. How does that help? It almost threatens their ability to execute on their core competency. Are they, or are they not good at search?"
Citi's Mahaney said while Yahoo and its publishers stand to make money from Google's long tail of advertisers, there is the possibility that some of Yahoo's search advertisers and publishers could abandon Yahoo and work with Google if they are seeing a substantial improvement in monetization.
While this extra cash is clearly welcome at the rebuilding Yahoo, what is less clear is how the deal will help Yahoo wend its way on the comeback trail in the search market.
Once a beacon in the Internet space, the company last year was stymied by inertia before being set upon by Microsoft to buy the company for $44.6 billion Feb. 1.
Google stepped in to object and test this search outsourcing deal with Yahoo in April. Microsoft courted Yahoo warily, then returned to the table only to leave again empty-handed.

Somewhere, investor Carl Icahn, would-be conqueror of Yahoo via proxy fight, is screaming because it doesn't look like there will be a change in control at Yahoo at the August shareholders' meeting.
However, this deal is by no means a sure shot. By delaying the commencement of the deal by three-and-a-half months to let the Department of Justice pore over it, Schmidt said the deal has been structured in such a way to pass regulatory review.
Microsoft and smaller competitors and lobbyists will challenge this, but VanBoskirk believes the deal will go through simply because there is no antitrust issue. Microsoft, after all, along with AOL and, remain viable competitors.
But not really. Those companies make a little bit of money compared to Google and Yahoo in search, but not enough to make a difference.
"It will go through to the disagreement of the fiercest competitors such as Microsoft," VanBoskirk said. "Regulators can't infer long-term effects of the relationship, which would assume Google and Yahoo were trying to take over the world. They have to let it go through as any sort of partnership."