ByDAN BURROWS
EITHER MICROSOFT
Yahoo
The revelation that Microsoft and Yahoo are in some sort of talks, discussing some sort of "transaction," is the latest weird twist in this corporate saga. What that transaction could be is a matter of speculation. Microsoft's said it's not trying to marry Yahoo, but did leave open the option of maybe making a wedding proposal at some later date. Perhaps all they need to do is work out some issues in couple's counseling.
More likely is that Ballmer is scrambling to keep Yahoo from getting too cozy with Google.
As we've said before, an outright acquisition of Yahoo by Microsoft would likely end in a wreck, but some of the potential transaction scenarios being bandied about could make a lot of sense.
Microsoft's Yahoo bid, unveiled Feb. 1 and pulled two weeks ago, was an admission that the company is dangerously far behind when it comes to the online game, which is the future and represents a threat to its dominance in desktop software. Why install applications on your hard drive when you can access them through your browser?
Google's run away with the lucrative and fast-growing search advertising market. Yahoo is but a distant second to Google; Microsoft, a distant third. Even if Microsoft and Yahoo combined their respective market shares they would still have only half of what Google has. But they would represent a legitimate alternative for ad buyers and would have a far greater volume of page inventory on which to place ads.
Search is a natural monopoly. The more people who use Google search, the better the results get. Everybody wins: consumers, advertisers and publishers. But just because it's a natural monopoly doesn't mean there isn't room for another big player, one with, say, 20%, maybe even 30%, of the market.
It's against that backdrop Microsoft and Yahoo are talking. What they're working on, or whether it will come to fruition, is unknown to all but a chosen few at the negotiating table. But of the scenarios being floated in the press, some sound better than others.
Perhaps the most credible, at this point anyway, is some kind of search outsourcing deal, in which Yahoo would display ads sold by Microsoft alongside Yahoo search results. It's not clear how remunerative that would be for either party (don't forget that Yahoo's search isn't nearly as efficient as Google's), but it would presumably be good for Microsoft if it scuttled a Yahoo partnership with Google. And it seems that breaking up that nascent relationship is pretty important to Microsoft.
Other speculation includes Microsoft buying Yahoo's search business with its also-ran Panama ad platform and all. This one probably makes less sense for Microsoft. Sure, it's cheaper than buying Yahoo as a whole, but it still won't make Microsoft competitive with Google. Microsoft hasn't been able to manage and grow its own search business, so why would it fare any better with Yahoo's, troubled enough as it is?
Another possibility being bantered about is that Microsoft and Yahoo would form a joint venture. On the face of it that's a desultory idea. Joint ventures are tough to pull off, especially and historically in tech land. The idea that these two very different management teams and corporate cultures could agree on how to run the thing seems far fetched. The JV would have to reconcile the demands of two corporate masters, a situation that seems less than ideal, to say the least.
Finally, the wild card in all this is Carl Icahn. It seems unlikely that he snapped up a healthy chunk of Yahoo, lined up a slate of alternative directors and went to proxy war just to walk away with some kind of partnership on ads. Icahn wants Microsoft back in there with a bid, one that his own Yahoo board will be grateful for.
We're not sure who has the upper hand right now, but Microsoft's latest move suggests that it's probably Yahoo. And if Microsoft is so jealously intent on keeping Yahoo from going out with Google, then it seems Google must be winning, too.
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