Yahoo! & Google Pact Called Off is GOOD for Yahoo!, Not Bad (YHOO, GOOG, MSFT)

Media reports are saying that Google (NASDAQ: GOOG) walking away from the Yahoo! (NASDAQ: YHOO) search pact is a bad development for Yahoo! and its shareholders.  Do not fall for that trickery.  This is a great development for Yahoo! and it is great for anyone wanting to find at least some differences in web search results and advertising.

Google is the king, that is obvious.  Yahoo! has lost its dominance and is under pressure, which is also obvious.  But this pact was a defensive move by Yahoo! management to fend off any attempted re-bids from Microsoft (NASDAQ: MSFT) or to keep any other suitors from buying it on the cheap.  It would have essentially put a poison pill over the search and part of the ad business of Yahoo!.

It is true that over an eight year or more period that it couldhave generated hundreds of millions of dollars in revenue.  But itwould have also come with the cost of homogenization of search and ad results.  Itwould have also given Yahoo! the excuse to throw in the towel on anyinnovation as it could have just used Google for search.

Extra sales are good in a vacuum, but if the extra sales come at thecost of any upside then it merely becomes a baseball equivalent of abunt.  It can keep a team in the game or win a game, but it doesn’tsell many tickets.  Investors are essentially the same mentality assports fans.  That is even more the case in internet stocks.  Buntssuck.  Investors only want homers and triples.

That search pact also could have run the risk of killing any searchresult variances from source to source on the web.  Imagine if all of the ads on Yahoo! and Google were also exactly the same everywhere under the same categories. That would have been a loss for the consumer.   

This won’t likely bring Microsoft back as a buyer immediately, and we are notin possession of any knowledge that Steve Ballmer and friends are eveninteresting in calling Jerry Yang and friends back to the table.

Lastly, no major company wants to deal with the DOJ.  Google and Yahoo! would have had to deal with the DOJ in a serious way.  Look at whathappened to Microsoft and other companies which have had to deal withthe DOJ.  It isn’t a business killer, but it is a monster distractionand it can turn the public against you.  In a world where anyonewilling to invest time for algorithms and a room full of servers canclaim to have created "the next Google," it just isn’t worth having to deal with the legal side of Uncle Sam. 

Yahoo! shares are actually up 4% now at $13.91.  That is a far cry fromthe highs, but it is a start.  If you are a Yahoo! holder you shouldactually be glad that this deal was terminated.

Here is the full release from Google as to why it walked away.  You can make you own determination on the outcome.  Our take is that this forces Yahoo! to compete against Google rather than to just turn over the technology side of the business to focus on being a content provider.

Jon C. Ogg
November 5, 2008