Yahoo chooses Google over MS

By Candice Jones, ITWeb online telecoms editor

Johannesburg, 17 Jun 2008

Internet search giants Yahoo and Google have signed an advertising collaboration deal that Yahoo expects will provide an $800 million annual revenue opportunity.

In an official statement, Yahoo says expectations for the first year after implementation, will be $250 million to $450 million in incremental operating cash flow, as well as the revenue opportunity.

The agreement enables Yahoo to run advertising supplied by Google alongside its own search results and on some of its Web properties in the US and Canada. According to Yahoo, the agreement is non-exclusive, which will allow the company to display paid advertising search results from other organisations.

"This agreement provides a source of funds to both deliver financial value to stockholders from search monetisation and to invest in our broader strategy to transform display advertising and advance our starting point objectives with users," said Yahoo president Sue Decker.

Bidding closed

The deal has sparked concerns across consumer groups and has raised the eyebrows of the US anti-trust subcommittee. Microsoft is also seeking support to have the deal halted; just days after Yahoo culled any possibility of a transaction with the software company.

According to Reuters, Yahoo turned down Microsoft's final offer on Friday, following continued talks over a possible acquisition, or partial acquisition.

Microsoft first offered to buy Yahoo with a bid of $31 a share - a value of $44 billion - at the end of January. However, the Yahoo board publicly rejected Microsoft's offer. Chairman Roy Bostock and CEO Jerry Yang said Microsoft's offer did not meet the actual value of the company.

Subsequently, Microsoft threatened Yahoo with the possibility of a hostile takeover, if the Internet company did not come to the negotiating table. Microsoft did not follow through with the proxy contest.

The latest offer included $9 billion in cash for a 16% stake in the company and $1 billion a year in additional operating profit for the search businesses, says Reuters.

"With respect to an acquisition of Yahoo's search business alone that Microsoft had proposed, Yahoo's board of directors has determined, after careful evaluation, that such a transaction would not be consistent with the company's view of the converging search and display marketplaces, would leave the company without an independent search business that it views as critical to its strategic future and would not be in the best interests of Yahoo stockholders," the company explained in a statement.

Narrowing options

Frost & Sullivan says online advertising has become even more attractive following the agreement between Yahoo and Google. Frost & Sullivan ICT industry analyst Lindsey Mc Donald says the deal will have a significant impact on the online advertising market.

"An effective oligarchy has been created with no other Internet company being able to attain the combined reach of these two giants. Advertisers will now enjoy the knowledge that one listing is going to achieve - at least - double the reach it would have in the past," she says.

However, she says Google and Yahoo believe the deal was structured to avoid regulatory problems and emphasise that because it is non-exclusive, Yahoo can still acquire advertising from other sources.

"Whether this will be enough to convince advertisers to increase their online ad spend, or if they will still require ratings as hard proof, remains to be seen. But there is no denying that the face of the Internet world has changed significantly."

Still, Mc Donald questions the implications for smaller online players. "It remains to be seen what the implications will be for smaller online entities though - have we seen the end of online competition as we know it?"