Yahoo's Google ad deal: Savior or mistake?

Yahoo's Google ad deal: Savior or mistake?

Summary: Yahoo has made it official: It is teaming up with Google on search advertising, but the ripple effects--both short-term and long-term--are just beginning.The two companies have announced a broad agreement where Yahoo uses Google's text advertising, but stops short of completely outsourcing search.

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Yahoo has made it official: It is teaming up with Google on search advertising, but the ripple effects--both short-term and long-term--are just beginning.

The two companies have announced a broad agreement where Yahoo uses Google's text advertising, but stops short of completely outsourcing search. Among the key parts of the deal:

  • The Yahoo-Google partnership is non-exclusive and Yahoo controls the user experience and where the ads run.
  • Yahoo will still use its own Panama marketplace when the monetization is comparable to what Google could provide.
  • Google and Yahoo will make their instant messaging services interoperable.
  • The agreement has a term of up to ten years: a four-year initial term and two, three-year renewals at Yahoo!'s option.
  • Either party can terminate the deal in the event of a change in control. The catch: Yahoo has to pay a termination fee if the agreement is terminated as a result of a change in control that occurs within 24 months. The termination fee is $250 million, subject to reduction by 50 percent of revenues earned by Google under the agreement. That's basically an anti-Microsoft takeover clause.
  • And most importantly, Google will provide $250 million to $450 million in incremental cash flow. After 12 months of implementation, Yahoo expects "an $800 million annual revenue opportunity."

It's clear that the Google deal has thwarted Microsoft's bid. Yahoo and Microsoft both confirmed that talks between the two companies are over. What remains to be seen is whether activist investor Carl Icahn will react. After all, Icahn's entire plan for Yahoo rested on Microsoft's willingness to buy the company.

icahn1.pngYahoo CEO Jerry Yang said the $800 million in revenue is relevant to only the areas where Google monetization is better than what Yahoo can deliver. President Sue Decker said more details on revenue will emerge as Yahoo implements the partnership with Google.

Also see: Why Internet companies are attractive takeover targets: They can’t manage

On a conference call, Decker said that the Google deal provides "flexibility" that allows Yahoo to use Google as a monetization lever while allowing the company to focus on its starting point strategy--the portal, media and display businesses.

"We're excited by potential and how it accelerates our long term strategy," said Decker. "The flexibility allows Yahoo to focus and use paid search results where comparable value. Yahoo has full and unfettered control over the user experience and we decide how much of search inventory (is allocated to Google)."

She added that Google will pay Yahoo on a TAC basis. Yang said the Google deal "is a good long-term opportunity for Yahoo."

For its part, Google said on its official blog that its pact "is good for users, advertisers and publishers. By offering Google's industry-leading technology to Yahoo, the whole system becomes more efficient, and everyone benefit."

Execs tout open strategy

Yang and Decker noted that the Google deal is about bolstering the company's open strategy--an argument that analysts on the conference call didn't seem to buy.

Nevertheless, Yang played along. Here's Yang's official line:

"We believe that the convergence of search and display is the next major development in the evolution of the rapidly changing online advertising industry. Our strategies are specifically designed to capitalize on this convergence -- and this agreement helps us move them forward in a significant way. It also represents an important next step in our open strategy, building on the progress we have already made in advancing a more open marketplace."

Under this vision, Yahoo would use its AMP marketplace, Panama or Google depending on what was necessary for monetization. In other words, Yahoo is eyeballing monetization levers. There are also a few nuggets that give Yahoo an out in the event of a change in control of either Google or Yahoo. Meanwhile, the Google deal only impacts Yahoo's U.S. and Canada operations, which leaves the company's extensive Asia operations in tact.

The elephant in the room: Why not just buy Google ads?

For Yahoo, the Google deal satisfies a few pressing needs:

  • Google gets rid of Microsoft;
  • It bolsters short-term results;
  • And allows Yahoo enough options to make its AMP strategy viable.

But the big question is why wouldn't an advertiser just buy Google and hope for the chance of being on Yahoo?

Analysts came back to that question a few times and Yahoo's answers were less than satisfying. Yahoo's point is that for display it is still a must buy. The text advertising business is a different animal.

However, that argument doesn't completely work. If all I'm buying is text ads I know can deliver ROI I'm already inclined to go with Google. The Yahoo deal just re-emphasized that point.

Is that perception entirely true? Maybe not. But in the ad business perception is reality and Yahoo looks like it just got a bail out from Google. Did Yahoo just hurt its long-term prospects in the name of fending off Microsoft?

What now Carl?

Icahn can't be happy about the Google deal--essentially a nuclear bomb on his big shareholder value plan. Here's Icahn's Thursday afternoon: Yahoo confirms talks with Microsoft are off. Microsoft confirms it's not interested. Carl's holding falls.

Well this plan certainly hasn't turned out as expected. What's next? Another Dear Roy Bostock letter? Or should Carl just walk away? Sometimes it's not easy being an activist billionaire.

Usually Carl can push boards around and get what he wants. Yahoo just goes scorched earth reportedly nearing a Google search deal that Jerry Yang & Co. knew would push Microsoft away.

Shareholder value? There isn't any. You can argue all you want about how Yang and the board should be tossed, but Icahn appears to be left holding the bag here. He's a man with a thin Yahoo plan (Microsoft) and that plan just walked away.

I can't wait for Icahn's response, which can be summed up in one word: SELL!

Topics: CXO, Google, Social Enterprise

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59 comments
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  • Irrational hatred of MS just cost lots of people billions of $$$

    I feel sorry for anyone who saw their Yahoo shares plummet because a group of people hate MS. How sad.
    NonZealot
    • Put it this way

      It saved MS stockholders $44 billion on an unnecessary buyout prompted by Steve Ballmer's irrational fear of Google. Maybe MS stockholders should send thank you cards to Jerry Yang.
      John L. Ries
      • Good point

        I agree with you 90%. I thought this deal was terrible for MS. I disagree with this though:
        [i]Steve Ballmer's irrational fear of Google[/i]

        I don't think his fear is irrational at all.
        NonZealot
        • So, you really think that Google is a threat to MS then? The Windows and

          Office monopolies won't hold up too well against the cloud? Say it ain't so!!
          DonnieBoy
          • Didn't you say yourself that

            Google would be stupid not to fear MS, why not the other way around, too?

            Nothing to do with Office monopolies (as Googles's offering remains a dismal non-issue), but in the future of online ads, yeah each companie wuld be foolish to ignore the other, agreed?
            AllKnowingAllSeeing
        • Agree

          "I don't think his fear is irrational at all."

          Even more so now with Yahoo and Google going into an
          advertising partnership. An unfortunate outcome, for MS, of
          an ill considered take-over bid. Google just got stronger and
          Yahoo is holding sway, just.
          A Grain of Salt
          • Did this really change anything?

            My question is thus: did this really tilt the field?

            If anything, all this did was give Google more leverage on Yahoo in the case of an eventual takeover. It's redundant on Google's part, because Yahoo isn't going to bring in the advertising clout that people think. It's bad on Yahoo's part because all they did was stall off the inevitable, and essentially sell themselves to Google at a discount. This hurts Microsoft because of advertising dollars, but I wonder if that's what they really wanted; I think they were after Yahoo Mail more than the advertising and search money.

            Google is a legitimate fear for Microsoft, but less because of advertising money - a category Ballmer should just write off, as he's well behind and his product in that field is poor - and more because of Google's potential to spread out into other areas; could you imagine if Google put their weight behind a Linux based OS? Still, I don't think this affects any of that as much as people make it out to be.
            superbus
        • Not the fear, but what he does about it. Link inside.

          Balmer and others at MS might well have a rational fear of Google, but the way they seem to go in 90 different directions at the same time seems somewhat irrational. Live undergoes weekly revamping, modification, rewrites. (Maybe not that bad but MJ's blog is chock full of them).

          I do agree, buying Yahoo was VERY bad for MS. They were going to finance a purchase that put them in a very distant second, with less ability to adapt/buy in the future.

          MS needs to decide what are their core products, and then focus on them, and only them to make them really world class.

          I mean, why compete with Google Earth half heartedly, only matching. If they are going to compete, do it for real, with gusto, and drop another side tangent.

          How many new languages has MS release this year? 10? 20? Pick 3 and run with em, lol. :D

          I found this blog, from a pro Windows person, and it echos what many have said, MS needs direction.
          http://msftextrememakeover.blogspot.com/2008/06/eight-years-of-wrongness.html

          TripleII
          TripleII-21189418044173169409978279405827
          • Thanks, great article!

            I actually quite enjoyed reading that. It makes me glad that I'm comfortable in the Linux and Google worlds!
            NonZealot
          • I agree with just about everything he said

            Under Steve Ballmer, MS has transformed itself from Darth Vader to Dark Helmet and it hasn't been a pretty sight. The bad part is that once MS is no longer dangerous enough to be worth a boycott, they may no longer be selling anything worth buying.
            John L. Ries
          • Spewed my coffee!!!

            It's Vista SP1, IT'S GONE PLAID!
            middle of nowhere
        • Re: Good point

          I agree. MS's fear is in no way irrational. Matter-of-fact, Google is just as fearful of MS which is why they courted Yahoo. No company should ever get complacent and feel that they have no enemies.
          NPGMBR
    • Actually, with reduced competition, it would be the opposite, it would have

      cost consumers billions of dollars and stifled innovation.

      The only people that lost are the short term investors in Yahoo that wanted a quick buck. The problem is, what is short term good for investors is often long term bad for companies and consumers. Selected investors that know how to play the market come out smelling like a rose, but, in general these buyouts are not good for our economy.
      DonnieBoy
    • The zealots love being wrong...

      The only reason Yahoo's shares went up was because the market loves a buyout of this proportion. It had nothing to do with whether it made good financial sense for either company. The people to feel sorry for are those who see everything as either blind love for Microsoft or blind hatred. The business world is never that black and white, and only zealots try to paint it that way.
      jasonp@...
    • Irrational Hatred?

      Most of the dislike for MSFT is justified. It has been adjudged, on
      two continents, to be a repressive abusive monopolist. (The EU has
      opened new investigations into the actions of the Bloatfarm.) It
      has been fined and forced to end its abuses.

      Most of its products since the monopolies (Win+Office) have been
      either outright failures: Vistaster, Xbox, WinMobile, Live Search
      (whose demise is, as I write, being hastened by the Yahoo deal),
      Spot, Book Search, Zune, Playsforsure (surely among the most
      ironic names in the IT industry), etc.

      One could make a very strong case that MSFT has no inherent
      competence except its now past ability illegally to abuse its
      competition. When this monopoly capability was removed, it stood
      naked, incapable of effectively competing. Thus its repeated
      recent failures.

      If one doubts this, I invite one to examine the stock price
      development over the last five years. There, MSFT management,
      the Ballmers, Turners, Bachs, etc., stand convicted of
      incompetence. They have not earned their shareholders a single
      cent. They DESTROYED shareholder value.

      This they have done by attempting to chase, unsuccessfully, every
      competitor instead of striking out on their own paths of product
      competition. Nothing illustrates this better than in search where
      MSFT is a resounding failure to google and in music where its Zune
      is seen, yet again, as a pale imitation of real innovation. Has
      anyone actually seen the "social" in the wild?

      One could cite other examples: gaming, mobile phones, etc. It is
      always the same story: a bloated heap of lazy people (starting with
      Ballmer) vastly over compensated for the results they produce.
      When development costs are computed, Vistaster is a failure; so is
      Zune, Xbox, Spot, WinMobile and all the rest.

      What is NOT to dislike if you are a shareholder?

      If you are a user, there are dozens of websites describing the
      frustration of using things from MSFT.

      MSFT fits the definition of a true business failure.
      Jeremy W
      • I would love to

        Have a business that failed as miserably as MS. I would ask the employees if they have enjoyed being part of a miserably failed company. Especially, those that made millions on their failed stock.
        High Plains
      • That's a hell of a failure!

        For a company that's such a stinking, miserable failure, Microsoft sure seems to have a lot of capitol behind it! Golly, that's a lot of money for a company SO poor at doing what it does...
        superbus
      • Your right about the stock price

        MSFT has gone nowhere the last 5 years or more, I think the S&P 500 is up around 90%.
        But they do earn tons of money every qt. I think they are so big there's nowhere for them to go, they don't seem to understand they've become a P&G type company. They should start paying a healthy dividend and stop trying to buy failing companies like Yahoo. I never bought the DOJ or EU's nonsense about Monopolies. Because they included a media player and a browser? MS got its market share because it made sence to have one dominant OS for enterprise to use for compatibility. It could have Apple if they had licensed the OS since day 1, but they didn't.
        By the way there are dozens of web-sites describing the frustrations of using Macs or Linux as well. There are dozens of sites complaining about just about everything so BFD.
        In a 2 years 500 million people will be using Vista, if you have tried it lately you will see it works great. I've used Macs, and I am using XP, Vista and Ubuntu 8.04, they all have their strengths but for me Vista is the best OS I've ever used. By the way the Zune is as good a player as any iPod it competes with, I have both (actually several) and I prefer the Zune it sound just a little better to me, and the interface is great.
        Not everything MSFT does is great they just do the things I care about better than anyone else. You can certainly do more things on the Windows platform than any other, that's not really debatable is it.
        tech_walker
    • if you had founded a company and wanted

      to maintain your independence, its not hatred that keeps you independent. If you look at a 5 year chart Yahoo has outperformed MSFT and the S&P 500. Yang thinks the company can get back into the 40's on it own. That isn't hatred it's the kind of drive any successful entrepreneur has.
      tech_walker
  • Well, it IS heart warming to know that there will be more competition now

    that the deal fell through. This is nothing but good for consumers.
    DonnieBoy