Oow, Eew, Ouch…Yahoo!

44 Comments

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.

44 Comments

Apogee Weblog

YHOO GOOG – MSFT = GOOG…

So, Yahoo (YHOO) chose to do a deal with Google (GOOG) and rejected Microsoft (MSFT). Bottom line: Google extends their paid search hegemony……

Yahoo's dark day - Top Stocks

[…] a viable search advertising product and Google as the only search advertising game in town.” Om Malik thinks Yahoo has made a critical blunder and has lost its way. Antitrust officials will surely be […]

Rav

Om,

Regarding mis-management of Yahoo, I agree it was primarily Terry Semel’s vision that was responsible for Yahoo’s strategic failures. To his credit, he did manage to keep Yahoo alive during the recessionary years of 2002-2003. Yang’s fault was that he let Terry be the CEO for too long. Once the economy improved, he should have taken Yahoo back to its technological roots rather than trying to be a media company.

Also, primary reason for Yahoo’s decline in last couple of years, that is not obvious for most observers is that their competition GOOG is too strong and a better player. If you can hold your own against Michael Jordan and lose the game, you are still a decent player. If we compare to MSFT’s failures against GOOG, even after billions of dollars poured into its online endeavors, YHOO seems to have done much better relatively.

Om and @Vipin

This saga is a lot like http://en.wikipedia.org/wiki/Devdas . But I have a hard time figuring out if Yahoo is going to end up as Devdas or Microsoft.

Om Malik

@ Rav,

thanks for your comments. actually if you read my past articles you would realize that this isn’t about Microsoft or Google. It is about the strategic mistakes of Yahoo which seems to be losing its way even more and more. I don’t say Microsoft did a good job of weakening Yahoo – Yahoo did it themselves, when it became a lumbering bureaucratic mess.

The reason the company finds itself in the current situation is because it could not figure out what it was for too long. Semel made them a media player – that’s all he knew. Everyone cheered him because it made money in a down economy. Yahoo let Google go with search and basically lost that market totally. They had the ability to deliver contextual advertising but under Semel’s watch, we stopped associating Yahoo with search. And that was beginning of the end. Google used technology to become a big player in advertising. Search was their way of finding cheap inventory.

So Rav, when you insinuate that I somehow believe, Microsoft weakened them, you are a tad off base here. I frankly don’t think Microsoft should be worried about the Internet Search. They have to come up with other ways to chart their future.

@ Esme I love their email and I love their MyYahoo pages. Yahoo News is by far the best research tool for looking up information. They have the best Baseball fantasy league. Flickr is totally awesome and so is Delicious. I think their IM client is cool, especially on Mac. Guess what is not good: search, and i don’t care.

@ Vipin, you need directions for the nearest movie theater playing Bollywood flicks. Love or Money. I wonder what Rajshri Films would do with that ;-)

asagefield

Google is basically superior to all its competitors in its core strengths so picking on Yahoo! doesn’t really make it a failure. Google has superior engineering minds and superior, real-time tested ideas that keep it way ahead of anyone.

Vipin

@julian

Really enjoyed your comment. You should be a blogger:). I come to gigaom because I enjoy Omish style articles. This is better than that:)

Tecneira

[…] blogosfera não reagiu bem ao anúncio. O GigaOm considerou este apenas mais um erro do Yahoo, uma “empresa que perdeu sua direção há tres […]

Liz

I use AdSense on some sites and just think that this can’t be good for either advertisers or AdSense clients. More competition always brings better rates.

julian miller

this seems a lot like a situation where some young girl in a town is being pressured by her mother and most of the town to marry the richest and most unscrupulous man in town. she is being told that ‘you are throwing your life away’, ‘your not getting any younger’, and ‘this is the best you can do’. everyone else feels it their job to make the decision and get involved. money seems to be the overriding factor. but the young girl has to make a decision for herself. the young girl girl decides to marry for love. the audience cheers.

ah, the plot thickens. the rich, unscrupulous man does not give up. what will he do in the next episode? attack the younger more attractive suitor? wait for a moment of weakness on the part of the young girl? or perhaps use the mother to bring about the union? wait for next episode….

om, i guess what i am saying is. is it all about money or is it about love?

Jose Miguel Cansado

I have an Adsense account. If Google decides to decrease what they pay me per click and begins to charge more to advertisers (in other words, if they push up and down to increase their margins), can someone tell me who can I switch to for advertisement?

I love Google, and I think they are not evils, but I prefer competitive markets to monopolies, even if just to held companies from falling into evil temptations

Sidharth

Yahoo’s biggest mistake was to try and become a media company. Terry changed the focus of Yahoo and they are still bleeeding because of it. I think that better monetisation of search will help them to improve their expenses on people and hardware to have better search results. I think its still a win win deal for Yahoo and Google

Esme Vos

You say: “Yahoo was once a great company that had great products and made news by launching great products.” Can you name one great Yahoo product? Certainly not Yahoo mail, which is horribly slow and terrible at catching spam. Gmail is much better. What else? What else? Can’t think of any.

himanshu

well Om is correct about one thing:

Yahoo is openely admitting that Yahoo search sucks and that Google search is better …

Search is Yahoo’s main service, and yet..they are admitting that they cant do it right :)

Yahoo is like a monster Titanic without a rudder.

Sink baby sink…

Kumar

Yahoo’s management didn’t want to do the deal with Microsoft. They wanted Yahoo to remain independent.

At the same time Yahoo needed to placate its shareholders.

The Google deal looks like an attempt to say to the shareholders – look we are doing our best.

The problem with this deal is that if it works out, then there will be no incentive to work on Yahoo’s own advertising technology. That will result in Google ads taking over completely.

In the short run this looks like a good deal. But in the long term…

At the same time, I don’t think that Yahoo’s future as an independent company is all that bleak. They might yet recover.

Rav

Om,

I think you are too focused on YHOO, which is really not that important in bigger scheme of things. This is a war between GOOG and MSFT. Just like MSFT lost doubleclick to GOOG, this is another strategic loss for MSFT. Its search share is ~5% and would pretty soon approach ~0%, the way its going down. I’m repeating my comment from your earlier article on this topic, because the events turned out mostly as I expected and some of that comment is still relevant. In that article you called MSFT, “Prince Machiavelli of Technology”. A more appropriate term would have been “Loser”. Its stock is down from ~$32 to ~$28, while YHOO is up from ~$19 to ~$24, since MSFT made the bid.

Numbers don’t lie.
http://finance.yahoo.com/echarts?s=MSFT#chart1:symbol=msft;range=20080131,20080611;compare=yhoo+goog;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

http://gigaom.com/2008/05/03/microsoft-yahoo-bid-over/

Rav said:

Om, normally I agree with most of your articles. But this is way off in my opinion. The whole premise of your article is that MSFT (no.3 in search) did a great job of weakening YHOO (no.2 in search). Although I don’t agree with this conclusion, still why would MSFT want to do this, instead of focusing its energy on no.1? If they really wanted to do this, aren’t they strengthening no.1 in the process?

In my opinion, MSFT shot itself in the foot by this charade of a deal. YHOO was at ~$18 when the deal was announced and it will definitely end up higher than that tomorrow. Those who bought in YHOO after the deal was announced should realize that they were betting on a coin toss and just eat their short-term losses. The implied MSFT put is still there and that will limit the losses on the downside. If YHOO comes up with some deal to improve monetization, that should help as well.

This deal has forced YHOO to evaluate all its strategic alternatives and focus on improving their monetization by signing up a deal with GOOG. It was a wakeup call for YHOO management. I expect them to announce something soon, as they have to justify rejection of a $33/share offer. This will cause GOOG to get stronger and YHOO become a stronger number 2 in search. MSFT would be a distant third and worse off than their original position.

Any bounce in MSFT stock would be short-lived because by walking from the deal, they are just trading short term comfort, with a gaping hole in its long term strategy. Unless MSFT acts aggressively, it would end up like a 10-15 PE dividend yielding tech stock like IBM in a couple of years.

The real winner is GOOG. Both MSFT and YHOO got distracted during the past couple of months and both of them are left in a state of disarray.

Manish Jain

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

spandana

“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’.

Om Malik

@ 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.

drob

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.

Om Malik

@ 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.

julian miller

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.

Wil

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.

Ericson Smith

“…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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