Oow, Eew, Ouch…Yahoo!

Update: It isn’t quite black Thursday, but it is still a day Yahooligans are not going to forget for a while. First they announced that their deal with Microsoft is off. Microsoft responded with a note of disappointment. Their stock tanked — down $2.63 a share, or 10 percent, for the day. The continuous slide in Yahoo stock — now less than $10 a share than what Microsoft offered — assures that Yahoo has lost almost all of its friends on Wall Street. The greed gremlins like Carl Icahn are only going to increase their attacks on the beleaguered Internet company, and would like to be off with Jerry Yang’s head.

And if that was not enough, the exodus of executives — Usama Fayyad, Yahoo’s chief data officer; Jeff Weiner, executive VP (network division); and Jeremy Zawodny — continues, indicating that in this battle to save itself, the commander-in-chief lost the support of his key lieutenants. (Apparently, a hiring freeze has gone into effect as well.)

Yahoo also announced that it is going to use Google for search and contextual advertising.

The deal is expected to add $800 million in revenue and between $250 million and $450 million in operating cash flow in the first year. As a comparison, Google signed a deal with MySpace for $900 million in 2007 that ends in 2010.

I think this is yet another critical blunder by a company that lost its way three years ago when then-CEO Terry Semel lost interest in the company, putting it on a path of mediocrity. Of course, as one of my gurus once said, in hindsight, everyone is an idiot (or a genius).

And while that might assuage the short-term concerns Wall Streeters have, the company is shooting itself in the face with this deal. It’s almost like knowing your spouse is going to divorce you while you’re standing in the aisle, waiting for the priest. This is akin to Chrysler going to Toyota with its hat in its hand, asking them to sell them engines for their car. I bring this up mostly because on their blog, Google writes:

Toyota sells its hybrid technology to General Motors, even though they are the number one and number two car manufacturers globally. Canon provides laser printer engines for HP, despite also competing in the broader laser printer market.

Did Google doyens check on GM’s performance lately? Or their hybrid sales record? Or, for that matter, Canon’s printer market share? Oy vey! Where is Business 2.0’s “101 Dumbest Moments in Business” list when you need it? In my opinion, with this deal, Yahoo has publicly acknowledged that Google is superior to them when it comes to search and contextual advertising.

More importantly, the Google-Yahoo agreement is most definitely going to be investigated by the Department of Justice. (Senator Kohl, chairman of the Senate Antitrust Subcommittee, issued a statement saying that they are going to be looking at this deal very, very carefully.) One attorney very familiar with anti-trust law pointed out that there is a reason Google and Yahoo announced the deal for the U.S. and Canada — because such a deal will almost never past muster in Europe. On this side of the Atlantic, he pointed out, the language of the agreement is designed to feign innocence.

Yahoo! will be able to complement its own advertising program with Google’s advertising technology. Yahoo can use Google’s advertising technology on as many or as few of its search results and content pages as it chooses. This non-exclusive agreement allows Yahoo! to enter into similar agreements with other advertising providers. [Google Press Release]

How stupid do they think the government investigators are to fall for this drivel? Even if Yahoo enters into an agreements with others, Google is going to win. I mean, if Google’s past performance is any indicator, then as a company they enjoy superior technology and offer better inventory for online advertisers. That is precisely the reason why they are a leader, and that is why Yahoo cut a deal with them in the first place.

Anyway, from the looks of it, the U.S. government investigation is going to entangle Yahoo in underwater weeds of uncertainty. Google, on the other hand, will be victorious in defeat — they would have frozen Yahoo into inaction for awhile. Upon thinking about this further, I realize that it also buys the company some time: It throws Microsoft, Icahn et al off its trail, for another three months while the government investigates.

Yahoo’s best hope now is that someone wants to buy it — News Corp., AT&T, eBay, Microsoft, or even AOL — maybe at a valuation that is much lower than what Microsoft was ready to pay the first time. The sad part of this whole thing is that Yahoo was once a great company that had great products, and that made news by launching great products. Jerry Yang was once Silicon Valley’s wonderboys, and now he is helping his ship run aground.

Author: Om Malik


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