Yahoo commits suicide

Chris Forrester

Microsoft and Yahoo sealed their long-awaited relationship, one that sees Microsoft gain access to Yahoo’s search-engine functionality. Or put another way, Yahoo handed over control of its search technology to Microsoft, and for “jam tomorrow” in terms of any reward.

This time last year Microsoft was bidding a credible $48bn to absorb Yahoo. Yahoo’s newly-appointed CEO Carol Bartz recently promised that “boatloads of money” for Yahoo shareholders would flow from the deal. Yesterday investors ran screaming from their Yahoo positions as its stock fell 12% on Wall Street as it was realised there’s zero cash upfront, and yet Microsoft can now control just about every step of Yahoo’s search business.

So what’s in the deal for Yahoo? It will receive 88% of the revenue from traffic through its own sites, which seems fine except when you remember that three days ago it was getting 100% of that revenue. Yahoo says it will save $200m a year, and see a boost to operating cashflow of about $275m.

Industry analysts Ovum summed up the deal by saying the vision will be “challenging and that risks will need to be carefully managed.”

An Ovum analysis continues: “While the deal will allow a stronger competitor to Google to emerge, there are two caveats that need to considered. Firstly, when they are combined, the Microhoo proposition is complete and has been launched Google will still be the dominant market force, with a 70-80% share of the search market. The second facet that few will consider, is that the deal and most of the commentary focus heavily on the US and European markets. In the Asian market there are very strong local competitors that continue to be more popular than Google, Microsoft or Yahoo. In China, for example, Baidu is a very strong player while in South Korea it is Naver that is the most popular search provider. Given that the Internet population is growing fastest in Asia, both Google and the combined Yahoo-Microsoft proposition will need to work very hard to make inroads into this highly lucrative market.”

“The implementation of this deal will not be without its challenges,” says Ovum. “There are significant engineering challenges that both companies will need to work through and a substantial change management task to accomplish in implementing the agreement and the vision that it encapsulates. It is to be hoped that the management attention needed to shepherd through this change, does not distract either companies and their management from the day-to-day competition. It would be too easy to let this significant deal draw attention away from the task of developing and selling great products, thereby risking short-term revenues.”