Analysts’ Consensus: Microhoo Is Slow Death For Yahoo

Your mission, should you choose to accept it, is to find someone who doesn’t believe Yahoo committed slow-motion suicide with the ten year search and search ad deal it struck with Microsoft on 29th July.

For starters, there was no upfront payment of billions of dollars, despite early reports claiming Microsoft would pay Yahoo $3 billion upfront.

Microsoft, whose Bing search share is 8.4 percent, agreed to power Yahoo’s search and search ads on the back-end with Bing. Yahoo, the No. 2 player in search at 19.6 percent, will gain a respectable share of the search ad sales.

Microsoft will pay Yahoo traffic acquisition costs (TAC) at a rate of 88 percent of search revenue generated on Yahoo’s sites for the first 5 years of the agreement. Microsoft will guarantee Yahoo’s revenue per search in each country for the first 18 months following initial implementation in that country.

Yahoo shares spiral downwards

Just how bad was the reaction to the deal? The announcement sent Yahoo shares spiralling 11 percent in morning trading.

Eric Jackson, managing member for Ironfire Capital, which sold its shares in Yahoo after the company refused to sell itself to Microsoft in the first go-around in 2008, told eWEEK Yahoo’s agreement is a head-scratcher.

“I think (Yahoo CEO) Carol Bartz is a really smart leader and I think she’s done a lot of things that three years ago I and others were calling on Yahoo to do, but to walk away from search for this kind of deal… They weren’t No. 1 but they were still in a pretty good position in that space, so it leaves me scratching my head about why they would do that. I think probably their board felt pressure to show their shareholders that, ‘hey look, we’re doing something to create value for you,’ but I don’t know if this is the best way to do it.”

Yahoo loses, Microsoft gains?

But here’s the kicker; Jackson was pleased with the deal from Microsoft’s standpoint. That’s because Jackson and Ironfire have been investors in Microsoft since March this year, when Microsoft’s shares fell to $15 per share.
“It’s a good deal for Microsoft,” Jackson “They didn’t have to pay anything upfront, and in three years they’ll effectively become the No. 2 player in the space, pole-vaulting over Yahoo.”

That has to burn the eyes of any Yahoo executive or board member who reads that. So does this interview on TechFlash, with Bartz and Microsoft CEO Steve Ballmer laughing like friends who just pulled the wool over the world’s eyes.

Bartz was asked specifically, during the conference call which announced the deal, why Yahoo elected not to have any cash up front. “Having a big cash payment up front doesn’t help us from an operating standpoint,” Bartz said. “What was most important to us was a significant TAC rate so that we could therefore have revenue to support an expense line, so that we could invest in the business.”

Worse, Bartz’ introductory speech about the deal signalled to analysts and press that Yahoo was acknowledging defeat in the search market to Google, which owns 65 percent of the market to Yahoo’s roughly 20 percent.

“We face a formidable competitor in one aspect and that aspect is search,” Bartz said. “It became obvious to us that working with another great technology company would help us share the investment expense to scale the market. This deal enables us to keep a healthy revenue stream and invest in areas critical to our future, while Microsoft invests in search technology. We want to invest in what is really important to our future success, including winning audience properties, display advertising and mobile experience