Yahoo and Google: A Search For Growth - or an Exit Strategy?

Before Marissa Mayer became CEO four years ago, Yahoo outsourced much of its search capability to Microsoft. It has clawed some of that back but is now proffering some to Google. Microsoft controls @21% of global search, while Google has over 70%. Yahoo, at @4%, is third.

Alas, the question this latest alliance raises is not whether the Google maneuver will revive Yahoo's fortunes, but which of the two bigger companies may eventually acquire it. JL

Hannah Kuchler and Richard Waters report in the Financial Times:

In one change from 2008, when the threat of a lawsuit from the Department of Justice led Google and Yahoo to call off a planned alliance, they now have a significant competitor. Microsoft’s share of desktop search queries in the US has risen from 9 per cent to 21 per cent,
Yahoo on Tuesday struck a deal with Google designed to halt a slide in the search business that underpins its profits. But the former rivals still face a stiff challenge: to persuade regulators who blocked a similar plan seven years ago that today’s more limited agreement will not jeopardise competition in the internet search market.

Marissa Mayer, Yahoo’s chief executive and a self-confessed “search addict”, has long seen search as central to a turnround at her company. At Google, she helped build a search engine from the ground up as employee number 20.The challenge at Yahoo has been different. Her predecessor outsourced search to Microsoft, a move that boosted Yahoo’s profit margins but handed responsibility for future innovation to the software company — along with the job of placing adverts alongside search results.

Despite guaranteed revenue levels, Microsoft has never been able to match the higher amounts of advertising revenues that Google generates from each search. Meanwhile, Yahoo’s share of search queries in the US, its biggest market, has shrivelled from 21 per cent when the Microsoft deal was struck five years ago to only 13 per cent now, according to ComScore.
Ms Mayer hopes that this week’s Google agreement will put her back in the driving seat.
Earlier this year, she renegotiated the pact with Microsoft, limiting it to only 51 per cent of Yahoo’s desktop search business. The new deal could see the rest go to Google — though Ms Mayer has kept full control to redirect the traffic as she likes in future.

Brian Wieser, an analyst at Pivotal Research, said it was not yet clear how significantly the deal could increase revenue at Yahoo, though it was almost certainly positive for the company. “No one can monetise search as well as Google,” he says.

Search contributes more than 40 per cent of Yahoo’s revenue but the purple portal is down to just 4.8 per cent of the US search advertising market, and only 2.1 per cent worldwide, according to research company E-Marketer. Search revenue is rising, but so are the costs paid to other websites to acquire traffic: as a result, net search revenue fell by 13 per cent in the past year.Google has proved much more successful, enjoying 72.4 per cent of the US market and more than half of the $82bn worldwide search market this year, E-Marketer says. Ms Mayer must try to persuade regulators that allowing Google to soak up a few more points of market share through the deal with Yahoo will not “tip” the market inexorably in its favour.
“Everyone is watching Google’s moves extremely carefully,” says Eric Goldman, an assistant law professor at Santa Clara University.
In one big change from 2008, when the threat of a lawsuit from the Department of Justice led Google and Yahoo to call off a planned alliance, they now have a more significant competitor. Microsoft’s own share of desktop search queries in the US has risen from 9 per cent to 21 per cent, according to ComScore.
David Balto, former head of antitrust policy at the US regulator the Federal Trade Commission, said the deal has been “very, very carefully constructed to deal with regulatory concerns”.The agreement is only for a set period of three years, and there is no minimum agreement on how much traffic Yahoo will have to send to Google.
Mr Balto, who has consulted for Google in the past but did not work on this deal, said: “If you are still able to go to Microsoft or someone else, there are many possibilities. Yahoo is free to partner elsewhere.”
The deal also does not cover the one region where Google has been challenged by antitrust regulators: Europe. Instead, it will operate across the US, Asia, Africa and Latin America. Even with those exceptions, Yahoo and Google have made provisions to unwind their plan if they face challenges from the EU.
Yahoo is also pressing on with building its own search offerings. Ms Mayer said it is investing in “new formats and new ideas”, particularly on mobile.

Yahoo also has a deal with web browser Mozilla Firefox and is eager to bid to be the search provider for Apple’s Safari, when that agreement is open to tender.
Ms Mayer is hoping that playing two of the tech industry’s fiercest rivals off against each other will help her pull off the next step in her search plans. On Tuesday, she gave investors a peek into how Yahoo might try to convince the regulators.
“Having partnerships with both major search providers will improve competition . . . it will provide stability, as well as choice, and better user experience,” she said