A few hours after we hit send on last week's Confidential and around the same time Media Breakaway announced the results of their arbitration with MySpace, a new chapter of another ongoing drama began, one that has the potential to alter the landscape permanently. Last Thursday news broke that Yahoo and Microsoft had officially wrapped up their talks with no deal - either in part or whole being reached. Those shorting Yahoo stock had a great afternoon, but the rest of the shareholders did not as they watched billions of dollars in value disappear in a matter of minutes, or as TechCrunch put it, "Massive Destruction Of Shareholder Value, Employee Morale and Internet Balance Of Power." The first two points seem pretty self explanatory. Watching one's company get absolutely pummeled financially and roasted in the press has to shake the confidence in even the biggest die-hard. Proving their thoughtfulness, Yahoo decided to share the burden of their loss across more than just their employees and shareholders. They decided to screw over the entire Internet ecosystem by becoming a syndication partner for Google AdWords. Perhaps they merely wanted to turn back the clock to 2000 when they had a chance to purchase Google for a mere billion dollars. Perhaps they realized that not continuing that relationship hurt them so they decided to connect with their lost love. Alas, in this case, you can't go back in time and a second chance at a new beginning really means a quicker journey to the end.
As stated in the press release, the agreement "enables Yahoo! to run ads supplied by Google alongside Yahoo!'s search results and on some of its web properties in the United States and Canada. The agreement is non-exclusive, giving Yahoo! the ability to display paid search results from Google, other third parties, and Yahoo!'s own Panama marketplace." The agreement has a term of up to ten years: a four-year initial term and two, three-year renewals at Yahoo!'s option. Economically, "In the first 12 months following implementation, Yahoo! expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow." Interestingly, Google and Yahoo! do not need regulatory approval of the deal before implementing it, but the companies have "voluntarily" agreed to delay implementation for up to three and a half months while the U.S. Department of Justice reviews the arrangement. Henry Blodget calls the Yahoo-Google deal a good one. Others think the company simply wanted to spite Microsoft so badly that they would knowingly destroy their own business to do so. The path of least resistance says people will want to use just one platform for their spends, and it won't be Yahoo's.
The ending conversations between Microsoft and Yahoo focused on Microsoft purchasing Yahoo's search business, which at roughly 20% share comes to somewhere between one-third and one-fourth of what Google has. What would you pay for it were you Microsoft or perhaps the European Union which seems interested in investing in unseating Google's dominance? Google has a value hovering around $175 billion, whereas Yahoo pre-breakup could claim a market capitalization north of $35 billion, let alone the more than $47 billion ultimately offered by Microsoft for the entire company. Microsoft offered $8 billion, about a fourth of the company's value and less than five percent of Google's total value. Yahoo thought it too low despite their products under performance and constantly slipping share of search. If people weren't such creatures of habit, they probably would have an even lesser share. They seem to have captured a dying demographic - the non-power user but not any new users. The Yahoo user started using Yahoo first and has stuck to it just because, with those surrounding them - the more advanced and the newer users, even those with grudges against them, using Google. As John Battelle and many others have pointed out, no amount of monetization can stop the core problem of a fading audience.
Most people would admit that search in five years will look quite different from the search of today. Google knows this. They know they came at the right time with better technology and most importantly, a ruthless desire to conquer with the will to execute. Having grown, their role has changed. They are empire builders now, focused on expanding their reign. Despite their frequent and unilateral judgments they offer enough, once paid, services for free to show that like Xerxes, they are a compassionate ruler. Instead of an army of people to increase their rule, they have millions of higher paying keywords, the morphine drip for the patient in pain (Yahoo), the steady supply of alcohol for those who have never had it before. For Google, such deals are merely a continuation of their history of land grabbing, whether AOL, Ask, or MySpace. Yahoo represents their most audacious, the one where the world cries outrage but doesn't see far enough in the future to oppose it now. This deal is about anything but advancing search. Instead, it's about making sure that Google controls the pace in which search goes. Google knows that better technologies exist in helping users find what they seek through search, but like Apple computer against Microsoft, better can't flourish if like a crop it has less fertile land and worse weather. By controlling the money, they suffocate the others and make it hard for them to grab a foothold.
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DM Confidential
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