Microsoft-Yahoo Alliance Comments

By Eric Goldman

Some comments on the proposed search alliance between Microsoft and Yahoo:

* I remember a time, long ago back in the mid-1990s, when Yahoo was the unquestioned leader in search.

* The beginning of the end is when Yahoo outsourced search to Google almost a decade ago (check out the old 2000 press release). We all know how that turned out. Yahoo lost control over one of its core assets, and Google proved to Yahoo’s customers that Google could do a much better job.

* Yahoo is now in its weakened position in the search industry due to this choice from a decade ago. Google has been and will continue to be a formidable competitor, but Yahoo’s current search problems are partially its own making.

* Outsourcing its search operations to Microsoft can’t possibly work out better for Yahoo than the initial Google outsourcing. I can’t conceive of a circumstance where Yahoo will exit the Microsoft deal stronger than it enters it. Obviously Yahoo sees value in being a mass-market media company, but without any proprietary differentiation in search, I wonder how successful that will be. To me, it looks like Yahoo has conceded one of its core assets to others.

* As a result, I assume that Yahoo necessarily is going to exit the search business one way or another. It will exit by outsourcing its search operations to someone else, or it will continue its ongoing slide to irrelevancy. Either way, it is not a viable long-term competitor against Google.

* Yahoo was unbelievably crazy for passing on Microsoft’s acquisition proposal from a year-and-a-half ago. It looked like a foolish mistake at the time, and hindsight has definitely not improved that assessment! Danny Sullivan points out how badly Yahoo’s assets have depreciated in value, saying “Microsoft is getting a huge bargain courtesy of the US Department Of Justice.”

* Assuming that Yahoo is going to exit the search business one way or another, the DOJ has the following options:

– it could let Yahoo hand off the search reins to Google. The DOJ has already voted no on that option

– it could let Yahoo hand off the search reins to Microsoft. This makes Microsoft a much more potent competitor to Google

– it could veto the Microsoft-Yahoo deal and let the Google juggernaut continue to flatten a limp competitor

From a pro-competition standpoint, it seems fairly clear that option #2 is better than the first and the third options. So if the DOJ thinks it can help the search marketplace, then it should approve the deal as fast as possible.

* Despite this, I bet Googlers are wearing a big smile today. Grabbing the business from Yahoo would have been a more definitive win for Google, but this deal should be good news for Google for two reasons. First, it should provide ample fodder for Google to argue to the DOJ to call off the dogs and stop hassling it; after all, the combined Yahoo-Microsoft efforts will have significant marketplace presence of its own, and Microsoft is a well-funded and aggressive competitor. Second, Google should be licking its chops at the prospect of tangling with the alliance in search. I expect Google can steamroller even the combined operations, so getting some breathing room on the antitrust side while still continuing to roll up the competition would be very helpful for Google.

* I could see the DOJ slightly hesitating about the deal solely because the Google alternative will be…Microsoft. I’m sure the DOJ would much prefer a marketplace competitor to Google who didn’t have so much antitrust baggage of its own!

* Although I think Google oversimplifies things by arguing that its competition is always a click away, I do think that the competition to Google isn’t just Microsoft even if the alliance is completed. It’s hard to know exactly who will provide a bona fide competitive offering to Google, but it could come from anywhere. For example, Twitter’s real time search has lots of advantages over Google’s real-time search (and will improve if Twitter can ever figure out its search algorithms). The search market is simply too big to ignore, and consumers will find and embrace solutions that offer real value.

UPDATE: Lots of folks are writing on this topic today. I liked Jason Calacanis’ title: “Yahoo committed seppuku today.