• by Shankar Gupta , March 13, 2007

Reports suggesting that Yahoo and AT&T's broadband access partnership may be at risk should not be overstated when considering the strength of Yahoo's business, said Merrill Lynch in a research note released Monday.

Yahoo's stock also began to rebound Monday after the hit it took following the rumors of difficulties with AT&T. On Friday, Yahoo's stock tumbled more than 5% to 29.08. The stock closed at 29.99 on Monday.

Reports surfaced last week that Yahoo risked losing $250 million in revenue when its contract with AT&T comes up for renewal next year. Both companies downplayed the rumors, stating that they intended to expand their broadband promotion deal to encompass mobile Internet services.

Merrill Lynch's research note stated that even if Yahoo does lose some ground in its AT&T partnership, it's unlikely that they will lose the deal altogether.

"At the close [Friday], Yahoo/AT&T reaffirmed their goal to expand the partnership, which should help alleviate worst case concerns, and we think Yahoo is the clear frontrunner to be AT&T's long-term partner," it said. "We believe Yahoo has strong branded advertising economics to offer partners, and search revenues should get better from here."

The report stressed the importance of Panama, Yahoo's recently released upgrade to its search marketing platform, stating that the improvements to the company's infrastructure could help it close the revenue gap with Google.

"In Q4 alone, we estimate Google generated approximately $1.1 billion in U.S. search revenues, while Yahoo generated approximately $190 million. This 500% gap, versus a 65% query volume gap, is a $1.5 billion-plus estimated opportunity for Yahoo."