If Yahoo
fails to pull off a deal with Microsoft to share search, advertising and other technology resources, it would mean the company would have to go through a turnaround alone. The partnership could put
both Microsoft and Yahoo in a better position to compete against Google, analysts said Monday.
While the agreement gives Yahoo the technology, Microsoft gains the search inventory
and a stronger revenue model, according to Ross Sandler, senior Internet analyst at RBC Capital Markets, New York. Ten years from now, when consumers can pick up software from the clouds nearly for
free, the Redmond, Wash. company will need another revenue-generating model to fall back on, he said.
This puts Yahoo in a much stronger position to negotiate a stellar deal, Sandler said. But
sealing the deal will require Microsoft to offer Yahoo a more favorable agreement than the one Google offered. A failed deal with Microsoft's Steve Ballmer would force Yahoo's Carol Bartz to turn
around the Sunnyvale, Calif. company on its own. "Yahoo still needs to remain aware that there is only one potential partner for this deal," he said, referring to the no-longer-possible deal with
Google, which the Federal Trade Commission shot down.
Surviving in ad and search means that Microsoft needs to more closely match Google's revenue stream. Sandler said history suggests Microsoft
isn't able to do it alone. Microsoft will need to guarantee Yahoo improved revenue and reduced operational costs, he said. A reported deal on the table last year suggested an upfront payment and
guaranteed $2.3 billion annual revenue for five years.
A Microsoft and Yahoo deal could also get a push due to the economy. J.P. Morgan published research Monday that lowers Google's
first-quarter U.S. revenue estimates, suggesting a 2% year-over-year decline -- down 13% sequentially, versus the prior forecast of 5% growth. The firm expects Google to report for the first quarter
in 2009, pro forma EPS of $4.76 versus our prior estimate of $5.04 and first-quarter net revenue to decline 4% sequentially versus the 2% declining prior estimate.
Portland, Ore. Pacific Crest
Securities Senior Research Analyst Brendan Barnicle said the deal between Microsoft and Yahoo would give Google real competition. Enabling Microsoft to become more relevant online would benefit
shareholders over the long term, he said.
Trip Chowdhry, Global Equities Research analyst, suggests the deal could mean the two companies could share technologies, from email to search and
display ads. This means Yahoo could tap into Microsoft's Silverlight to improve display ads. Or, it might suggest that Microsoft fold hotmail. Sources tell Chowdhry that Microsoft either would shut
down hotmail or white box Yahoo email.
Chowdhry said Microsoft offers several Web mail services, resulting in confusion among consumers. He estimates Hotmail use is down 15% year-over-year, and
active users have dropped 60%. Typing "hotmail" into a browser's URL now takes users to Windows Live, where a notice suggests that one Windows Live ID gets users into Hotmail, Messenger, and Xbox
Live.