Yahoo's Tenuous Case for Independence

(page 2 of 2)

Mistake to sell search?

The market will get a better sense of Yahoo's fate after the Aug. 1 shareholder meeting where activist shareholder Carl Icahn and two directors of his choosing are expected to gain seats on the company's board (BusinessWeek.com, 7/21/08). Icahn has insisted his goal is to sell all of Yahoo, or potentially just Yahoo's search business, to Microsoft. Yahoo CEO Jerry Yang and the current board have expressed willingness to do a deal at the previously rejected price of $33 per share.

A search-only deal with Microsoft, however, may not be the best option, given Yahoo's future strategy. Yahoo is banking on a new display advertising network that will let marketers more easily buy multimedia ads across Yahoo's network and search ads at the same time. "We will be in the position to unify the process of buying display and search," Yahoo President Sue Decker said during the earnings call.

Should Yahoo sell its search business, it would lose the ability to offer such a one-stop shop. "I think it would be a big mistake for them [to sell search] because the value that they bring to advertisers and to users is a combined experience," VanBoskirk says.

Report card: Needs improvement

The alternative, should Microsoft not want the whole business, is for Yahoo and Google to expand an agreement whereby Google places ads on Yahoo's pages. Although Yahoo announced that its new search advertising platform is delivering higher revenue per search, it still has not matched Google in profitability. "Google's monetization is head and shoulders above the rest," says Sanderson.

It's not clear whether the government would sign off on a closer collaboration between Yahoo and Google. Already, the U.S. Justice Dept. has announced that it will scrutinize the current partnership between the two companies for antitrust concerns.

For Yahoo to prove it truly deserves to be independent, it will likely need more than the promise of a continuing partnership with Google. It will need to show that, weak economy or not, it is capable of accelerating growth and generating more revenue from its search business. That requires Yahoo to do better than Wall Street's worst expectations.

Holahan is a writer for BusinessWeek.com in New York.