Yahoo's gains from the nonexclusive search advertising partnership with Google are minimal compared to what they would have been in a Microsoft deal. Yahoo will get an estimated $800 million annually in shared revenues from online ads Google helps to facilitate, while Google gets as much as $1 billion in annual incremental revenues.
The deal puts more than 90% of the search ad market in Google's hands, and raises the likely prospect that Google and Yahoo will work together on display ads. Executives from both companies have suggested as much, calling the partnership "good for competition;" when they should have said that it is "good for the competition." The deal is a Trojan horse that makes Google the monopolistic gatekeeper, sucking the democracy and free capitalistic process out of advertising and e-commerce. The nonexclusive clause in the deal seems meaningless. Who else would Yahoo do business with? Microsoft?
By outsourcing its search advertising business to Google, Yahoo runs the long-term risk of permanently losing some of its clients to a rival. Doing business directly with Google would give Yahoo's current customers added advantages. Deutsche Bank, CitiGroup and Merrill Lynch are among investment banks reducing their estimates on Yahoo in anticipation of its advertisers shifting their business to Google. "This effectively signals the end of Yahoo's competitive entry in the paid search business and signals to advertisers /agency customers to simply work with Google to purchase ad impressions from Yahoo longer term," said Deutsche Bank analyst Jeetil Patel.
There is nothing in the Google arrangement that assures Yang can better achieve the lofty three-year goal he has set. Staying out of the clutches of one rival and jumping into the arms of another rival is not a growth strategy when the difference was a $47 billion takeout by Microsoft and $800 million in annual sales revenues from Google, with up to $450 million in operating cash flow the first year. Yahoo can't necessarily become more cost-efficient as a result; it still shoulders the expenses for its elaborate Panama advertising search engine program. Clearly, staying independent isn't the same as knowing how to use that autonomy to grow revenues, profits, businesses.
But there is more to come on this Silicon Valley soap opera, thanks to regulators and Carl Icahn. The U.S. Justice Department, U.S. Senate Antitrust Subcommittee and the European Union have vowed to scrutinize the deals, which opponents insist would set a bad precedent. The concentration of power represented by Google controlling the sale and management of advertising across its own platforms as well as those of its nearest competitor, Yahoo, in addition AOL and Ask.com, should not go unchecked.
The strategic partnerships that will continue to permeate the media landscape, in place of mergers and acquisitions, should be scrutinized. That requires regulators and legislators to grasp the emerging digital economy, not just what advertising and content relationships are generating, but the potential for generating revenues and blocking competition over the course of the contracted partnerships. The Google-Yahoo agreement is for 10 years, with an initial four-year term and two three-year extensions.
Activist investor Carl Icahn will make the case that Yang and his board have squandered a $47 billion opportunity with Microsoft and have destroyed shareholder value. Yahoo shares plummeted Friday, reflecting Wall Street dissatisfaction with the Google deal which will surely set off more shareholder lawsuits.
Stepping back from the fray offers an interesting perspective. The unwieldy experience demonstrates that new media companies aren't much better than so-called old media companies at doing deals, leveraging their assets and negotiating to win. Vanity plays occur everywhere in public companies. Patel called it one of the "worst strategic maneuvers" ever seen in the Internet industry. The three dominant players in the Internet space are engaged in a vanity dance in which Google, the passive and cunning third party, walks away the clear winner.
Microsoft is only $47 billion richer for abandoning the Yahoo acquisition, but it is not better off long-term. Microsoft still has the distant third-place online search advertising business and no sure plan to boost its fortunes. The smaller acquisitions or alliances Microsoft can make -- such Facebook or Ask.com -- will not collectively accomplish what it could with Yahoo under wing to be a stiff competitor to Google.
If Microsoft is as smart as it insists, it will acquire or buy into Yahoo for at least at one-third the $35 a share it more recently offered. That may have been Microsoft's endgame, which is the only rational way to explain the on-again, off-again antics with Yahoo. It will take at least three months and well past Yahoo's scheduled annual shareholders' meeting in August, to review and approve this deal. Icahn and Microsoft will reek lots of havoc in that time. Increasing numbers of dissident Yahoo shareholders are expected to support Icahn's proxy fight to replace Yang and his board and force them to accept a lower Microsoft buyout offer.
Microsoft issued yet another statement Friday saying it is still open to talks with Yahoo about a strategic alliance, which is not precluded by the Google deal. There is talk that Microsoft could lead the legal charge against a Yahoo-Google partnership on anticompetitive grounds. It will be interesting to see what post-Yahoo plan Microsoft CEO Steve Ballmer offers to analysts at the July 24 meeting.
The wild card is Icahn, who is not leaving this party without the return on investment he expects. He could sell his 10 million Yahoo shares and options to buy 49 million more by May 15, to Microsoft or to Google, which would make them a new activist shareholder for Yang. The $250 million Yahoo would be required to pay Google to break their new ad deal, due to a change in its corporate control is small potatoes. Maybe, Google knows deep down that a Microsoft play on Yahoo is inevitable, and that it will take the remainder of the year to work out. Google figures it will make some money and gain some of the competition's customers till then, which may be the smartest short-term strategy of all.