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Summary:

Yahoo, once known for great products and their ability to connect to the common man, now makes news of the wrong kind by tussling with Microsoft and waging a war of words with investors like Carl Icahn that lead to sharp declines in their market valuation. Against such a bleak backdrop, talent exodus continues and signs-up arch rival Google as an advertising supplier. What next? Perhaps, an anti-trust investigation. Continue Reading.

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.

  1. “…Yahoo’s best hope now is that someone wants to buy it – News Corp., AT&T, eBay, Microsoft or even AOL…”

    Now that’s just silly. Think about it, you basically wrote a story with no opening for the company, no future, then say that they should be sold.

    Wall Street will shoot themselves in the foot with this one. If the company is sold to any of those people, what difference will it make? Can they help better monetize the Yahoo properties, which is what needs to be done?

    The answer is no.

    And for all Microsoft’s bluster, there is no way that they could monetize those properties any further given their dismal track record. Icahn is no fool, he knows that a sale would mean the end of the road for Yahoo as a business, since no one (except Yahoo or Google) can increase monetization.

    Yahoo will do better to remain an independent company and focus laser-like on monetization efforts instead of trying to find a buyer.

    Because finding a buyer is a signal that they’ve thrown in the towel and are just waiting for the doors to close in a few years.

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  2. Ericson,

    Yahoo’s laser-like focus on monetization efforts (can we say “Panama?”) has failed them.

    What they just did is give their business to Google at a significant discount… because Yang doesn’t like Microsoft.

    I’m no Microsoft fan, but I think Yahoo just cut off its nose to spite its face. I don’t see any short-term future for the company. The Google deal destroys a ton of value in exchange for a little bit of cash – maybe they have a long-term plan for how they’re going to spend that cash and recreate some value, but I have very little faith in Yang and Decker at this point.

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  3. julian miller Thursday, June 12, 2008

    i like yahoo and always have. they are a good company liked and respected by many. they have a very very very good thing going and that is why microsoft wanted to buy them for so so so much money. they don’t have ms’s money but they still have the same company as before this whole event.

    stocks go up and down all the time. they have maintained their independence. if the the stock holders wanted the big bucks they could have sold on the rumours. yahoo is a big, strong company and is in an enviable position they are where microsoft wants to be. not bad.

    whats most interesting is the bad pr microsoft has. how does one company manage to generate so many enemies and such amazingly bad pr. that is the remarkable thing.

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  4. @ Ericson Smith,

    You do bring up some good points, and I updated the post accordingly, though it still doesn’t quite answer all your questions.

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  5. Amazing how everyone is quick do discount. Yahoo! has it’s problems for sure but AOL, ASK, MSFT, AT&T it is not. Credit where credit is due. Sure, search isn’t happening but search isn’t where everything happens. Terry fucked up, yes. Jerry may have not been as quick to act as we would have hoped and the Red Sox were cused until they weren’t.

    I for one hold out hope. I have always loved Yahoo! and still do. There’s a difference between what the street wants and what people [outside SV] want. I see that in Yahoo!’s products everyday. Yahoo! has always been a company that’s tried to do the right thing even if it’s failed at times, I’m proud of you Yahoo!. Always have been.

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  6. @ drob,

    Good points and I think why Yahoo are still is in business because like you, people love them. I have been following this company for a while and somehow they because to bloated, bureaucratic and forget that they are a product company that makes great products. Now they do consensus-driven products, and that is systematic problem. Lets not confuse love with reality. Like you I continue to use their products including their new email, MyYahoo and IM client on Mac.

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  7. Remember YahooBay? May be it is time to resurrect the concept!

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  8. “Now they do consensus-driven products, and that is systematic problem.”
    may be it’s time to think about ‘who does what’ to ‘who is doing what’, and ‘who is not doing what’.

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  9. [...] own lifeblood and survive as a husk of its former self. Also, notice that the deal only applies to the U.S. and Canada; Yahoo’s European market share is being left out to slide into [...]

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  10. YHOO is a train wreck. I was a user of many of their services but slowly left as they seemed to be clueless.

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