The devil is in the details, and the details of the Yahoo-Google search advertising deal reveal the desperate, possibly neurotic state of Yahoo these days. Quite simply, it looks to me like Yahoo is effectively paying Google off to step in and (1) keep Jerry Yang, Sue Decker and the current board of directors in power, and (2) avoid a desperation deal with Microsoft for as long as possible, or longer. It’s not even clear to me that Google wants this deal, based on the terms. It almost looks like they’re just doing Yahoo a favor, and trying to keep them out of Microsoft’s hands.
My guess is, Yahoo is wondering exactly why they didn’t take that Microsoft acquisition offer back when it was on the table. Those were the days that Yahoo was a key asset in the Microsoft/Google war, and most of their best employees hadn’t bailed. Of course, that was $15 billion ago, and that offer appears to be long gone.
I’ll get more specific below, but the combination of a basically non-binding agreement combined with a complex termination clause and associated termination fee to Google, suggest that the deal is little more than a favor to Yahoo, with a payoff to Google for their trouble. And there are some other agreement oddities mixed in that are probably driven by both companies strong suspicion that at least a few politicians intend to make hay by trying to kill this deal. The Department of Justice, which will review the agreement for compliance with Antitrust laws, is going to have massive commercial (Microsoft) and governmental (Congressional members up for reelection) pressure to find things to object over.
I’m not going to quote language in the half dozen press releases, leaked internal memos and blog posts that all parties have now published. The actual language of the agreement Yahoo signed with Google tells me everything I need to know about why both sides did the deal, and what they think is likely to happen next.
Microsoft’s Last Offer
Microsoft last offered Yahoo a combination stock, asset and business deal that sources with knowledge of the situation summarize as follows:
- Microsoft to acquire 16% of Yahoo’s outstanding stock from existing stockholders for $8 billion, or $35/share.
- Microsoft to acquire all of Yahoo’s search and search marketing assets - servers, code, advertisers, third party publishers, intellectual property and employees (perhaps 3,000 of them) for $1 billion in cash plus a guaranteed CPC rate that is higher than what Yahoo can generate itself.
- Yahoo gets increased search revenue from the deal over what they generate now, and get to remove people and operational costs of search.
- Yahoo agrees not to touch the search or search marketing businesses directly ever again. All their searches are controlled by Microsoft.
Here’s what I think of this deal - it stinks. Microsoft isn’t marrying Yahoo, they’re just getting her pregnant, setting her up in a nice apartment and telling her not to talk to any other guys.
But either way, Microsoft is signaling that their offer remains open. And Yahoo can probably pick and choose parts of it to accept, within reason.
The Google Deal
Forget the flowerly language about how this deal “strengthens Yahoo’s competitive position” (Yahoo press release) or “is good for competition” (Google blog post). Both are flat out lies. The deal crushes any notion of a competitive search advertising market and turns Yahoo’s search and search marketing efforts into the undead.
The deal allows Yahoo to put Google ads along side their own, presumably to maximize revenue to Yahoo. Google’s good at the top search terms (probably 80% or so of revenue potential), but Yahoo thinks they do fine in the long tail. The problem, of course, is that they’ll show Google ads for all the good stuff - and advertisers will go to Google to bid for those ads. More advertisers will leave the platform, further degrading Yahoo’s core search economics.
The four year deal (which Yahoo can extend to ten years) seems great on the surface. It’s non-exclusive and doesn’t require Yahoo to place any ads.
But the non-exclusivity isn’t real, because there’s no one else out there that can compete with Google’s search ad rates anyway. And while there is no requirement for Yahoo to place any number of ads, if they don’t generate at least $83 million in revenue to Google every four months Google can terminate the deal.
And then there’s the matter of the extremely complicated $250 million (minus any net revenues Google received from running advertisements) termination fee should Yahoo merge with anyone else (with easier triggers for mergers with Time Warner, News Corp. or Microsoft). If Yahoo merges with anyone Google can terminate the agreement and force Yahoo to pay them $250 million. Time Warner, News Corp and Microsoft only have to acquire 35% of Yahoo’s stock to trigger this position.
But then things get a little neurotic. If Microsoft acquires between 15% and 35% of Yahoo, Google can terminate but not collect the $250 million fee. Over 35%, Google gets the fee.
I’m calling this the “If our shareholders or the government kill this deal, as is highly likely, then we get to try things with Microsoft and don’t have to pay you off” fee.
If you want to wade through the language yourself, the summary is here.
Bottom Line
Yahoo has pissed off shareholders and a looming meeting - they can’t ignore reality much longer. And reality says Yahoo’s future is bleak. They continue to lose market share, they have serious brain drain and morale has never been lower.
The Microsoft search deal seals their fate permanently, and I can understand why they didn’t want to do it. This Google deal is their only alternative at this point. They can get out of it at any time, simply by not serving Google’s ads. But as long as it’s live they’ll see their advertisers flow to Google instead of their own search platform, and they have to pay a hefty fine if they end up selling themselves to a third party.
Microsoft may yet get their hands on Yahoo, or at least the parts of Yahoo they want, simply by default as shareholders continue their revolt and/or the government puts a stop to the madness. Or not, and Google gets a long term pass to transition Yahoo’s remaining advertisers over to their own platform plus a hefty termination fee if Yahoo gets sold off at some point.
Either way, Google wins. Or Microsoft wins.
But Yahoo has lost.
I’m not sure about Microsoft winning in this equation but for sure Google is the winner here.
Brilliant picture. =)))))))
I believe Yahoo is the middle hand.
Just a small point: I wouldn’t get too caught up on the break fee. Though a heap of dough to most people, irrelevant in the face of any merger deal.
lbsterling - yeah, i don’t disagree. I think $250 million is probably just about exactly what Google thinks they’re time is worth is screwing around with this deal.
WNF - is this what Image says or (WTF?) ! Just tried literally translating … !! So who’s gonna win the T-Shirt that Mike is offering via content to one who finds the what the sign says?
Cheers!
I don’t think Microsoft is the winner in this. They can’t sustain a market cap of $270B without buying Yahoo. They know that. If this deal falls and time goes by, they will lose a lot more. At Internet speed, it is imperative for Microsoft to keep their performance going. Microsoft can’t squeeze much more revenue and profit out of their OS and office suite. Seen the latest Microsoft Vista. They created 6 variations to meet all price point. This is a sign, the company is squeezing the last blood out of something that will no longer grow in revenue and profit.
The only other stream of revenue and profit they see and it is evident is search advertisement. Google proven this. The only way for them to get higher CPC is to be the market leader just like how they manage to charge high price for OS and Microsoft Office. You have to be a market leader to maintain good profits. Without Yahoo search, Microsoft will be fcked so bad, the next release showing increased Google search marketshare and dwindling Microsoft search marketshare, you’ll see a big drop in their market cap.
I suspect within 6 months, if Microsoft didn’t get Yahoo search, they will lose more money than they would’ve acquired Yahoo at $45B. Because at $270B, it is unsustainable when software is getting cheaper and cheaper, and most companies are moving away from installed software to SaaS.
I would buy Yahoo shares at this moment because I suspect Microsoft next move is to buy Yahoo in the open market and force the company’s hand. That’s the only way for them to sustain $270B market cap.
“Either way, Google wins. Or Microsoft wins.
But Yahoo has lost.”
Nice, that summed up the situation. This is not anywhere close to over. Now its between google and MS, to fight for the dead yahoo. This deal with google will slowly kill yahoo and it has to end up totally with google or MS. Google cant take up all of yahoo or even search as DOJ will not allow such a thing. So, will they again go to MS after all this!? Would be fun 2 see how MS treats them then.
The image is WTF in sign language meaning What The Fuck
According to http://www.arabic-language.org.....nguage.gif it means WTF
they might as well take the offer!
The solution is very simple: “WTF”
where the hell is the print option. i neeeeeeed it!
@sam … Yahoo won’t be around in 4-5 years. Scratch that, they might be like AltaVista.
The biggest question I have is: Why would anyone trust Yahoo to monetize ANY of their traffic or ad inventory going forward? If they can’t monetize their own search traffic with Overture — the company that invented it — then they are NOT qualified to sell my baniers or anything else for that matter. This is a major blow to them that they may never recover from.
Compare their current search shares…..
@sam…sorry but I’m not impressed with your analysis!
Yahoo! absolutely needed Microsoft and that combination along with the innovation coming out of Microsoft’s other aQuantive acquistion last year would have created a serious contender (eventually) to Google and some amazing innovation and more money in the hands of content providors and not Google.
As has been evidenced through documents obtained from inside Yahoo! Jerry ran roughshot over corporate governance, Yahoo!’s remuneration commitees, reasonable business practices and what was in the best interests of Yahoo!’s shareholders and even employees. Even Yahoo!’s senior executives and remuneration consultants couldn’t believe the absurdity of the poison pills Jerry was single handidly putting in place out of pure spite.
Jerry has just crippled Yahoo!’s balance sheet and destroyed the only real value of Yahoo! Yahoo!’s value was not just in it’s eyeballs (which in a world of social media see’s traffic to mega portals declining) but in it’s advertising systems, technology and innovation and the monetisation of the eyeballs. Google is going to slowly cannabalise tis value to the point there is nothing left. Google now control a monopoy across search for all intents and purposes and its economics to our detriment and this WILL stifle competition and innovation.
So I would have to say in defence of Michael that your views are myopic and that you really don’t understand the fundemental economic, competition and industry structure issues around this whole situation.
Peace from downunder dude! lol
“plus a guaranteed CPC rate that is higher than what Yahoo can generate itself.”
how will they do this?
Yahoo! already actively tries to inflate all of their bidding (ie:screw over) by setting all initial bids to ABSURDLY high bids.
Read this to see what I mean: http://adwordseditor.blogspot......-high.html
As a person who manages a number of HUGE accounts…i am really concerned how they are going to do the Google/Yahoo! integration. I target each engine differently….and am concerned that they will throw this together quickly.
Do I get it the prize for the answer - WTF?
!! Mike??
I think it is too early to say that yahoo made a mistake - to me it is the safest (if not smartest) decision ever. I have very logical point of view:
1. Sometimes leasing is more profitable than selling, and that is what Yahoo has done. Instead of selling search business to MSFT, they leased it out (temporarily) to Google.
*** Getting pregnant by msft is way suicidal than flirting with google for a while and see how it goes (its non-exclusive deal).
2. Yahoo/Google deal is only for north-american market. Agreed that it is the biggest market right now but not for the future, as everyone has predicted, future belongs to BRIC (brazil, russia, china, india). Asian and BRIC is going to be biggest search market, so it is wise that Jerry will take time and resources away( from north-american team) and try to come up with technology/platform that caters to these markets. May be he has a plan to test its Panama platform for these markets and get it mature by the time it is ready to start making money.
*** North-american market is a peanut change compared to BRIC (trust me!!).
3. It is true that desktop search market is the popular right now but in the future the search on other platform such as smart-phones is bigger than desktop - and Yahoo can start looking in to it with the help of freed resources.
4. Google is king in text search ad market and not in display ads, in fact even google executives agree that yahoo is still the market leader in display ads and it is a huge revenue generator. Yahoo can work on the same technology platform to keep bringing more money thru this kind of ads. Also display ads are going to play a bigger role in mobile phone market - so it is wise to concentrate on your strength (display ads) and make money from google in text ads.
5. Yahoo has a strong presence in China, Google is still lacking in getting major revenue from this market. Jerry being from the same ethnic background can understand this market much better than anyone else … also Yahoo is already deep rooted in china, it has to just find out how to monetize their presence efficiently.
6. In couple of years yahoo will know how much it can make from this deal(with Google) and if it is mature enough to sell the north-american search business to someone (msft, google, aol etc.) than it would do so by making much more money than what MSFT is offering right now.
7. Last but not least - It is better that Jerry is more loyal to the people who are loyal to him (employees and endusers) than to be loyal who are least loyal (shareholders) to yahoo …
Conclusion: it is not a worst decision and only time will tell what a smart move it was (or it wasn’t). Jerry needs some time to prove it and now he has got what he wanted to prove his caliber and witty decision making capabilities.
Hear no evil
See no evil
Speak no evil
Cool, I’ll wear the t-shirt everywhere!
Good journalism Mike!
Yang gets to join Larry (Ellison) and Scotty (McNealy) and Ray (Noorda) and countless others in the
“I maintained my ideals and stood up to Bill Gates even though it was absolutely the wrong thing for my shareholders, customers and employees!” club….
like vultures pickin at a carcus. is yahoo in a panic? i think so.
what the hell happened to panama. bunch of little bitches curling up in googles arms when ms leaves them at the alter. what the hell. yahoo has no balls. they need to be slapped. the ass whipping there getting is long over due. i wish semmel was here for this disipline session.
i dont know why so called experts and analyst are missing 2 most important part of this deal ….
1. Text ads v/s Display ads : Yahoo is trying to make money with both the hands. On one hand they will make money out of google and on other hand they will strengthen their position even further in display ads. So a advertiser can go to google for text ad and for display ads they can go to yahoo. ( it is so simple that these 2 companies are trying to capture both the markets, why cant you guy (analyst) see this ??????????????)
Also Yahoo can become so strong in display ads that may be in the future google will like to make a deal with yahoo - so the strategy will be: share the strength and win the game. Let us not forget that this 2 companies have soft corner for each-other, they are no way a typical rivals. They share the common rival (microsoft), and according to the old saying “an enemies enemy is a friend”… in that sense too Yahoo and Google are friends.
2. Secondly (and it wonders me how come these stupid analyst can’t see this clearly), as someone said in the comments above that north america is not the future, there are more internet users in other markets than north america. Also cell phone users are more in china alone than the combined users of america and europe, can u imagine how big a market could be when you combine 2 most populous countries (china, india) with other developing markets like russia, brazil, africa etc. americas would be the smallest market and it would be wise for yahoo to start focusing on other markets and get their position stron (even if it is only for display market).
Google and Yahoo had made such a smart move that others are not even able to analyze it properly. Everybody is stuck with what microsoft is offering and whether or not it is good to make money and run … thats scary and shortsightedness - these 2 giants are for long-haul and i can see that clearly, the only thing that will matter is whether they stay friends for next few years to make microsoft weaker and looser.
The sign means THREE COMPANIES (MS, G, Y!) BECOME TWO (MS, G+Y!)
Send me my Techcrunch tshirt please
It means WTF (http://www.beyondhelp.net/products/wtf-in-sign-language.asp), infact i think this is where the image even came from!
Mat
screw Yahoo and Google. Go play games at harryballs.com.
Then politics cost stakehoders really dreary.
Rajeev Vashisht
http://tekno-world.blogspot.com
Michael, I am not sure that I agree with your analysis. First of all, it is focused very narrowly on advertising networks and not on the more full picture of benefits that Yahoo gains from having more ad revenues plus unification with Google IM - and by extension, AOL IM. If you look at the traffic stats, in spite of all of the negtaivity out there Yahoo’s stats are still gold - it has a ton of page inventory that’s getting visited. The main question for Yahoo seems to be how they can best monetize that inventory. It would seem that Yahoo would benefit from more ads in more places that can draw more revenues, period. If getting more ads from Google helps them to make more money on existing inventory then they have more cash flow to develop more products and make more product acquisitions. This seems to be a perfectly rational thing for Yahoo to do - countless sites mix in Google ads with their own ads already, albeit at a different scale. Why give up your core revenue-generating technology assets for 16 percent of your stock as an alternative? It just doesn’t make sense.
Mike,
What do you think about how MS handled these deals? Do you think they negotiated in good faith? I have never seen so many bad decisions from a Fortune 100 company. Do you think that Ballmer & Johnson should be fired for fudging things this bad?
To all who looked up the sign language on other sites: Try saving the picture — the solution is in the file name…
Can we have a picture puzzle every Saturday and a crossword puzzle every Sunday — and you give up the Twitter/Rails/Blaine Cook bashing?
hahahahah, this is a classic: Google is going to make money off of a possible Yahoo! sale (via the fine). This way they’re going to ‘hurt’ Microsoft no matter what - 10 clever points. I can’t imagine how Yahoo! could possibly bring themselves into a worse position for ANY negotiations - 1000 dumb points. Unbelievably brilliant management!
online basketball game, free
http://www.cyberdunk.com?ref=63163
This is playing out as expected so far. We’re in Act II of the performance called “Y!/M$ deal is a foregone conclusion:”
1. M$ still desperately needs Y!’s assets
2. M$’ latest offer does seem like a pure cherry-picking attempt. I think M$ should’ve opened with this type of offer to get a sense for what an outright acquisition would cost
3. The deal w/G may appear like a terrible move by Y!, but it’s the right one–it helps justify the boost in valuation to M$ (M$ can now justify a higher offer and save some face) and the deal has all sorts of “outs,” making a deal with M$ possible (probable)
4. It will be wasted time and energy for M$ to fight this out via the regulatory route
- agent mulder lives
I predict 7 new posts about Yahoo/Google which essentially are meaningless in the next 4 days.
The content is irrelevant, and at least 1 post that ties in Twitter to the deal, in some unrelated capacity.
@ Sri .. yes not over .. kind of like the feeling when the wizard says “The battle for middle earth has just begun”
“Yahoo agrees not to touch the search or search marketing businesses directly ever again. All their searches are controlled by Microsoft.”
M$ already controls ads in Digg and Fakebook.
Instead of spending billions buying whole companies, they are just buying their best assets with a handful of millions. They paid $250 for fakebook’s and lot less for digg’s.
Clever move for M$, retarded move for digg and fakebook (well, poor kids didn’t know better)
I say great move for Yang not underselling his best asset for pennies.
It is about controlling the media and the ads.
Not sure I understand Yahoo’s scorched earth policy. It seems they are willing to ruin the company in order to keep the status quo.
It seems either way, Yahoo is going to lose. What is their upside with at this point? A slow death vs. a quick death?
Good post Mike!
In baseball terms, this is the first inning in online business, and declaring ‘Yahoo lost’ seems a tad premature.
I originally thought that Yahoo! screwed things up.
But on careful reflection, I find that Yahoo! may be right. Microsoft needs Yahoo! more than it needs Microsoft.
I think eventually Microsoft will end up with Yahoo!
The sign means $33 - the original price that MSFT offered.
What probably would have been bright would be if they had some kind of technology sharing agreement. MS has the cash to build out an infrastructure if they have the right recipes. Buying eyeballs wouldnt hit the root of the problem. The problem being providing something better than google so people will use it (both in search and ads). Then maybe undercutting googles price to draw advertisers. May take a little more time but would definitely be the “google” way of beating google. It would be nice if someone would chime in as to what the heart of the technical problems to matching google’s tech is. Putting together the different components google has built up (bigtable, mapreduce, gfs, pagerank+all the other variables added to the search algorithm, ad relevance) would at least be a start - then augment it with MS’s own innovations, things that google is way behind on like maybe a rich client interface or maybe giving voice commands to the engine that it can understand. Into the mic “tell when the next euro 2008 game is”.
The Google/Yahoo Deal is a Tragedy
Google fears Microsoft, they did everything they could to block the deal.
I call them as GYM (Google, Microsoft, Yahoo!), there is no doubt in my mind that Yahoo! has lost and giving up search is another signal towards that direction. Google is more stronger now and even advertisers will be spending more money with them after this deal. My advice to Yahoo! management is leave the board and let right people drive it rather than people have their own interests.
I agree with Mike. Yahoo’s responsible for a major internet disaster!
Btw, in case Mike decides to give t-shirt to everyone with the right answer, I don’t want to be left out.
The answer is W-T-F !
[T-Shirts, please!]
Out of spite, Microsoft should issue a press release that says the first 5000 Yahoo employees to seek jobs at Microsoft will get their current salary as a signing bonus. It would only cost them a few billion to destroy Yahoo. Ok, yeah it’s vindictive… but it would be interesting.
Gee, perhaps Yahoo should just hire you as CEO? Or, hey, maybe a job at Wilson Sonsini. Or, hell, the Supreme Court, man! If all you have to do is read some legal paperwork to be able to tell what strategic intent is then we would not need all those folks out there to interpret such stuff after the fact! Well, I’m sure TechCrunch will get it’s chance to do things like this when it has a multi-billion market cap from a company you build from scratch, right?