Conventional wisdom holds that wherever there's a winner, a loser can't be too far behind. So, Wall Street's knee-jerk reaction when Google won the bid to handle search for News Corporation's Fox Interactive Media (NWS) was to pronounce Yahoo! the clear loser in the deal. After all, Google (GOOG) is the No. 1 search engine and Yahoo (YHOO) is No. 2, and the agreement ties Google with MySpace, which surpassed Yahoo mail last month as the most visited destination on the Internet, according to market research firm Hitwise.
In their notes to investors following the deal, analysts declared that Google, once again, had shown that it was better, faster, and miles ahead of the competition. Citigroup analyst Mark Mahaney termed the deal "a nice competitive win" for Google, writing: "Google has locked up a large partner vs. MSN and Yahoo!—in a scale game, Google is becoming harder to beat." Similarly, a Merrill Lynch report noted, "the deal reinforces our view that the competitive efforts from Yahoo! and Microsoft (MSFT) will not impact on Google's growth in the near and intermediate term."
DIFFERENT STORY. Clearly Google is the winner. But it's not clear how badly Yahoo has been hurt. The reason is that Google is, first and foremost, a technology company focused on search and search-based advertising. As a result, it stands to gain considerably from the additional eyes and search traffic brought by MySpace.
Yahoo is something different. It is partly a search engine—controlling about 22% of queries compared with Google's 60%—and, as such, stood to gain considerably from MySpace. But it's also a destination site that provides online media and social networking components, some of which compete with MySpace, says Mark May, an analyst at Needham & Co. in New York. Yahoo is attractive to advertisers, in part, because its users spend time on its site, increasing the ability for Yahoo's banner ads and videos to penetrate.
"Google is so focused on search that they want to get all that business," says Brian Bolan, an analyst with Jackson Securities in Chicago. "Yahoo is concerned with the search space but they have a broader platform at play, and how that works out financially is a different story."
WAITING FOR PANAMA. Yahoo's slightly different focus, plus the demand for advertising, keeps it from being in a zero-sum game with Google, Bolan explains. If Google's share of the search business grows bigger, Yahoo can probably sustain the hit and keep growing its revenue. "Most analysts and investors are not looking at Yahoo to grow from growing their network partners. They are looking for Yahoo's growth to [be in] improving their search monetization platform and increasing the amount of money they generate from their own site," says Needham's May, who rates both Google and Yahoo as buys. "So it is a loss, but it is not as big of a loss considering the Yahoo story."
The bottom line is that winning the MySpace deal, while it would have been a great upset victory for Yahoo, wasn't as important to Yahoo as it was to Google. It certainly wasn't $900 million important, the price that Google offered in revenue sharing (see BusinessWeek.com, 8/08/06, "Google Gets Back into MySpace"). Yahoo said as much in a statement following Google's announcement. "We did not see this opportunity as financially prudent or in the best interest of our advertisers," said spokeswoman Joanna Stevens.
Still, Yahoo can't just sit back and let Google gobble up search advertising. Investors are eagerly waiting for Yahoo to release "Project Panama," enabling it to better link searches to ads by factoring in relevance as well as what advertisers pay for a keyword, and thus boost the profits from advertisers. But a delay until 2007, announced in July, hammered the stock by 20%. Conversely, Yahoo stock ticked up by 36 cents, or more than 1%, on Aug. 8, the day after Google announced the MySpace deal. THREE EASY PIECES. "If Yahoo doesn't innovate and doesn't continue to be competitive, they will find themselves in the position of traditional media companies," with relatively stagnant growth and a fight to maintain its audience, says Paul Keung, an analyst at CIBC World Markets. The threat is real: Yahoo's audience of unique users grew only a slim 2% sequentially, while the number of registered users remained flat in the same period, according to its last quarterly earnings statement.
To remain competitive, Yahoo needs to "get Panama out. Get the monetization rates back up … continue to innovate," Keung says. In short, it needs to fight a bit harder to increase the three pieces of the advertising pie: audience, advertisers, and ad-targeting ability.
If Yahoo can do that, it won't need to worry about losing such big deals to Google. Investors will already see it as a clear winner.
Holahan is a writer for BusinessWeek.com in New York
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