Should Yahoo outsource search to Google?

As Yahoo CEO Jerry Yang cooks up the company's strategic plan one piece of speculation increasingly pops up as an option: Yahoo outsourcing search to Google.Strategically, it's tough to picture Yahoo (all recent posts) following through on this idea.
Written by Larry Dignan, Contributor

As Yahoo CEO Jerry Yang cooks up the company's strategic plan one piece of speculation increasingly pops up as an option: Yahoo outsourcing search to Google.

Strategically, it's tough to picture Yahoo (all recent posts) following through on this idea. Financially, it may work. What ultimately happens remains to be seen. Should Yahoo become a partner of Google?

Bear Stearns analyst Robert Peck outlines a few scenarios today worth discussion. Peck called Yahoo one of Bear Stearns' top picks. According to Peck Yahoo has a bevy of positives: It's a takeover target, sits on top of a financial gain from an Alibaba IPO, Panama and is likely to see relief from ad sales.

But outsourcing search to Google is the most interesting point in Peck's research. It's an idea that has popped up from time to time. Maybe Yang should consider Google in his 100-day plan.

Let's examine whether a Yahoo-Google pairing makes sense.


The strategic importance of search.

The tough question Yang must ask is this: Just how important is search Yahoo? If Yahoo comes down on the side of media company much like AOL.com then it may make sense to go with Google.

"We believe that the strategic impact of becoming a Google partner, rather than the financial, is weighing more heavily on the minds of management. We think it is strategically important for Yahoo to continue to be a principal in search, particularly in the domestic market," says Peck.

It's hard to argue with that point. For starters, Yahoo needs to give Panama some time to work. Going with Yahoo would toss years of developing Panama down the drain. More importantly, however, is the fact that advertisers want to bundle search and display ads in campaigns. If Yahoo went with Google for search it's unclear how these bundles would work. Yahoo has a hard enough time coordinating its own businesses. Imagine bringing Google into that loop somehow. In addition, Yahoo has combined its search and display sales teams to sell bundles.

There's another cynical reason for Yahoo to refrain from partnering with Google: A partnership would diminish Yahoo's takeover price. Think about it. If Microsoft buys Yahoo today (something Peck floated) it would grab more search market share and make catching Google more of a reality. Right now, Microsoft catching Google in search is a pipe dream. If Yahoo sells out to Google one excuse to buy Yahoo disappears.

Shacking up with Google could also make it more difficult for Yahoo to forge partnerships. And Yahoo could fall behind Google and MSN in developing new ad formats and technology.

Strategically, Yahoo going with Google may not add up.

The financial payoff with the Google solution.

Financially, a partnership with Google may be a little difficult to resist. Peck estimates that Google would give Yahoo a revenue share of 90 percent to 99 percent just for the privilege of putting its biggest competitor to rest.

Yang's analysis will weigh short-term payoff against long-term financial well being. Short-term Yahoo wouldn't lose much by going with Google on search. In fact it could gain revenue. In the long run, Yahoo would likely lose integrated ad deals, traffic as users figure out Google is driving search and diminish its takeover premium.

Meeting Google half way.

Another idea floated by Peck goes like this: Yahoo could partner with Google in its weakest areas. Under this scenario Yahoo could farm out search to Google where it has no hope of competing.

Enter Europe. Peck estimates that if Yahoo outsourced search to Google in Europe it could double down on its U.S. efforts and rid itself of a situation that looks hopeless. In Asia, Yahoo would stay in the search market since it is in a much better position competitively.

Outsourcing Europe search to Google would leave a lot of avenues open to Yahoo. If Yahoo were to close the monetization gap with Google it could always take back its Europe search.

As for the figures, Peck reckons that outsourcing Europe to Google adds up for Yahoo.

Based on those figures above, Yahoo has a nice hedge built in. Outsource Europe to Google for some short-term gain and then load up for the future in the U.S. and Asia.

Will Yahoo make such a move? If Yang is putting everything on the table Google may be part of the mix.

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