Why Yahoo Should Have Sold Search To Microsoft

Silicon Alley Insider, Monday, September 22, 2008 1:15 PM
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If regulators don't decide to put the kibosh on the Google-Yahoo search partnership, a big "if" by many accounts, it could turn out to be a very lucrative deal for Yahoo. Henry Blodget points out that Google's superior search ads would provide Yahoo with incremental revenue and cash flow, and at the same time allow the ailing Web portal to reduce spending on the search wars, which Yahoo lost a long time ago now.

However, as nice a deal as this might turn out to be, Yahoo should have taken Microsoft's offer for its search business, particularly the second one, which Blodget describes as a "reasonable" offer. Yahoo has already lost the search wars. It has lost almost 2 full points of search share since January, and now holds onto less than 20% of the market. If that trend continues, whatever incremental revenue Yahoo makes from the Google partnership will steadily decline over time. As Blodget says, "it doesn't matter if you 'improve monetization' of queries if your share of queries continues to shrink."

This is a big reason Yahoo's stock is now trading below $20 per share: investors don't see where steady, long-term growth is coming from. As Yahoo continues to fight the losing battle in search, the display market, Yahoo's core business, is softening due to a weakened economy and greater competition for eyeballs from Web sites like Facebook and YouTube. Investors simply don't see strong growth from these businesses, and until they do, the downward spiral will continue.
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