If Yahoo! Outsources Search, Microsoft Must Pay Up

According to The Wall Street Journal, Yahoo! (YHOO) has recently considered outsourcing search to either Microsoft (MSFT) or Google (GOOG). Although it recently launched its own new search function, Panama, it does not seem to be doing terribly well. The paper writes: "Such a move would likely give Yahoo an immediate revenue bump representing hundreds of millions of dollars annually, because Google, for one, generates about 40% more revenue for each consumer search than Yahoo!"

Yahoo! may have shelved that idea for now because it does not want to give up such a strategic part of its business to an outside competitor, but the fact of the matter is that it has about 25% of the US search market to Google’s 50%. Microsoft’s share is about 12%.

If Yahoo! has another poor quarter, it may turn to Google because it needs the extra revenue to get its stock back on track. The company’s stock was at nearly $44 in early 2006 and now trades around $24.

Microsoft cannot afford to let the Yahoo! business go to Google, no matter what the cost. If Google effectively powered 75% of the search queries in the US, Microsoft’s attempt to move up the hierarchy of the business would be dashed. It would  have no chance of recovering.

Google’s search system is almost certainly more efficient for delivering results and related ad revenue, so Microsoft might have to guarantee Yahoo! certain revenue floors. It would be worth it to keep from being shut out of such an important market.

Douglas A. McIntyre