Yahoo might well be able to have its Google cake and eat Microsoft’s market share, too.
Faced with the prospect that Yahoo might give some of its search advertising business to Google, Microsoft recovered from its “we’ve moved on” tantrum and proposed combining its search ad business with that of Yahoo.
On the face of it, Yahoo now has a real choice between two options that might well help it increase search revenue and still keep its independence.
The most attractive option for Yahoo, however, might be to do both. That’s right: it should merge its search advertising unit with that of Microsoft. And for the year or two (at best) it will take to combine those two systems, it can let Google sell ads on some of its search terms, bringing in many hundreds of millions of dollars in much-needed cash.
This is a wacky structure, but it is essentially the same deal Yahoo is discussing with Google now. Yahoo doesn’t want to give up on search ads, presumably on the theory that there is room in the market for a No. 2 player and because search ads are tied at least a bit to display ads, which are essentially its core business. So it wants to take money from Google, in effect, to build its own rival to Google.
Google had a few reasons for talking about a deal that would help its closest rival. Money, for one: each search it can put an ad on is more money in the bank. Moreover, I suspect that Google is so cocky, with at least some reason, that it figures Yahoo won’t be able to catch up, even with a cash boost.
Google also has legal reasons to keep any deal with Yahoo flexible. It has so much market share in search ads that antitrust regulators would look askance at a long-term restrictive contract with Yahoo. (The deal they are discussing would allow others, including Microsoft, to bid for Yahoo’s search ad business. But Google makes so much more money on each search that it presumably would wind up selling most of the ads.)
There are some soft motives for Google as well. Love: Yahoo gave Google its first big break, allowing it to power Yahoo’s search engine. And hate: Google sees Microsoft as its mortal enemy, so it wants to help keep Yahoo out of Microsoft’s hands.
So why would Google agree to a deal even if Yahoo merges its search business with Microsoft? I’m not saying it is likely. But most of Google’s reasons for doing it still apply. It will still make money and at least temporarily increase its share of the search market. It also doesn’t have that much to fear from even a combined Yahoo and Microsoft. And since it is partway down the road toward offering Yahoo this sort of arrangement, why back out now?
Microsoft may find this concept more than a little disturbing. It doesn’t seem to buy the open nature of the proposed arrangement between Yahoo and Google, and it suggested that the proposed deal was one reason it walked away from its acquisition negotiations.
But if Microsoft wants Yahoo to consider its alternative arrangement, it needs to give it all of what it wants: independence, cash now to assuage shareholders, and the ability to have at least a piece of a search advertising business that could rival Google in the future.
Microsoft could do that, without involving Google, with its checkbook. It could offer to pay Yahoo enough cash to cover the gap between what Yahoo would earn on its own search ads and what Google would pay for them.
That is probably the most likely scenario here. (That is on the assumption that Yahoo doesn’t just sell its search ad business to Microsoft.) But it would be very amusing if Yahoo and Microsoft found a way to get Google to put up some of the money they need to build the Google killer they both dream of.
