Yahoo is between a rock and Google. As Yahoo’s board decides today whether or not to accept Microsoft’s $44.6 billion offer to buy the company, we’ve argued that it really only has two choices: accept the inevitable and go with Microsoft, or outsource search to Google. Both, are in their own way, admissions of defeat and riddled with potential problems. There is another option to consider, though. That is to hit Google where it hurts by truly opening up search. I will explain what I mean below, but first let’s go through the two obvious options.
Giving up search to Google might boost profits in the short term—because Google squeezes more than twice as much money out of every search—but it would set Yahoo on a long-term path towards oblivion (see, AOL). Merging with Microsoft is clearly the better option, but it may not be enough.
Big mergers tend to fail more often than not, especially when companies are trying to combine operations as opposed to adding on new standalone capabilities. One of Microsoft’s biggest mergers was Great Plains Software, which was a success specifically because Microsoft pretty much left it alone for a couple years and let it operate independently. That is not an option with Yahoo. the merger is a collision waiting to happen. Integration is going to be rough and will slow down the merged company. Nobody believes that a combined Microsoft-Yahoo will be a nimbler competitor than either bureaucratic organization is today on its own.
Not that any of this matters from Microsoft’s perspective. The logic of the deal is to gain scale as an advertising platform and as a Web publisher. the two go hand in hand. The more Web pages and traffic you have, the more ad inventory you have to sell. Everyone is focused on search, because that is where Google is so dominant today. But remember, while search ads make up about 40 percent of Internet advertising revenues, display ads still make up about a third. And that is where Yahoo is strongest. Microsoft needs to bulk up on display ad inventory before Google’s DoubleClick deal goes through. If it can fix search, that would just be a bonus.
A combined Microsoft-Yahoo will help it compete against Google in display advertising, which is still an open game. But giving up on search is not an option. Those display ads are becoming just as contextual and targetable as search ads, and soon the market will no longer separate the two. Advertisers will want to buy both as part of the same campaign. And Yahoo actually has an advantage here because it’s advertising system is set up to do that.
Which comes back to the question of how does Yahoo, or a combined Microsoft-Yahoo, make inroads in search. Every quarter Google adds to its market share in search. It seems unstoppable. Combining Yahoo’s and Microsoft’s existing search efforts won’t do much to reverse that trend. After all, two dogs don’t make a right. But there is a long shot Yahoo can try that could just turn things around. That is to open up search in a radical way.
The only way to fight Google is to use its own weapons against it. Google enters new markets by embracing open standards in areas where it does not currently compete. But when it comes to search and advertising (how it makes money), it is a black box. If Yahoo were to truly open up search, it could rally the efforts of hundreds of thousands of outside developers to take on Google on a hundred thousand different fronts.
While it is debatable whether or not they would collectively come up with a better algorithm than Google, they most assuredly would come up with better algorithms—better search engines geared towards specific types of searches (informational versus transactional) or particular niches (health, travel, business). Entrepreneurs could also use Yahoo’s index as a foundation to create entirely new ways to search (semantic, social,etc.). And over time, Yahoo could cherry pick the best of these and incorporate them into Yahoo’s official search engine, or simply sell search ads on thousands of different search engines across the Web. Imagine each Website, with its own customized search geared towards its audience. This has been tried before but has failed for several reasons.
As one former Yahoo executive tells me: “Yahoo should just open up their search APIs and let anyone take their search without ads, and hope the ads come later. Out-open Google.” What do they have to lose?
But wait, don’t both Yahoo and Google do this already? Not exactly. Yahoo does have open APIs for search, and one of Yang’s turnaround tenets is to open up Yahoo to developers more generally. But those search APIs are limited to 5,000 search queries per day. Anything above that, you have to negotiate a special deal with Yahoo. One startup CEO who has a such a deal with Yahoo tells me, “If we had more exposure to their raw data and better access to the paid search results, including conversion rates and the data behind them, it would help us a lot. We are limited in the amount of information we actually have.”
Also, while the APIs make it technically possible to mash up Yahoo’s search results with other results, or tweak them with your own algorithm, Yahoo prohibits developers from using any “non-Yahoo sponsored search elements.” As for Google, it has its own search APIs as well. But if you take Google’s search results, you are not allowed to re-order them, and you must also show Google’s ads alongside the results.
Letting other people re-order the rankings is the key to moving the ball forward on search. Yahoo has a very valuable asset in its index of the Web and its basic search algorithm. Letting others improve upon these is the only way to beat Google in the long run. Google’s greatest strength, its almighty algorithm, is also its Achilles Heel. Opening up its search results to all comers would destroy its business model. Yahoo has less to lose and more to gain. It would still have to be careful not to give away so much information that people would be able to game its regular search results, but there are technical ways to do that.
This would not be an easy road and would require a long-term commitment that is unlikely to come from Yahoo’s shareholders at this point. Yahoo’s board seem to have already lost patience with Yang, Decker, and the rest of Yahoo management, and might lack the confidence in Yang & Co. to pull this off. But here is an even more radical idea: what if Microsoft were to adopt this strategy post-acquisition?
Openness is certainly not in Microsoft’s blood. Yet Microsoft can afford to open up search even more so than Yahoo because it makes up such a miniscule portion of its current revenues. Again, the key to using openness as a strategic weapon is to be open in areas where you don’t compete, or don’t compete effectively. If Microsoft is truly serious about this being a “transformational” acquisition, then it should take the opportunity to try to transform the search industry, not just chase after Google.
Embracing openness would also transform Microsoft in another way. Even though, startups are not as scared of Microsoft as they are of Google, they still don’t trust Microsoft. A sincere commitment to opening up search would go a long way towards winning over the hearts and minds of those “developers, developers, developers.” Yes, it would go against pore in Steve Ballmer’s body, but it would also reinvigorate Yahoo, reinvigorate Microsoft, and maybe even reinvigorate Silicon Valley.