Just moments ago Yahoo! announced their quarterly earnings. And turns out they blew through expecations by just a smidge. A smidge, it’s now apparent, they got from a 100% boost in earnings on the advertising they outsourced to Google. For anyone who’s been asleep, here’s the backstory:
Google: Google is 2 things: people who are hitting searches and clicking on links, and advertisers who are bidding on keywords and then putting their ads next to search results hoping someone will click on them. When somone searches and then clicks on an ad, Google get a cut. Google has more advertisers bidding on words, it has more people searching on it’s site, and it has better technology, which together means that Google gets paid way more in advertising for every click than Yahoo or MSFT.
Yahoo: Yahoo is desperately trying to avoid getting eaten by MSFT. Or at least get a better offer out of the Evil Empire. They’re claiming the offer way undervalues the company, even thos MSFT says it was a whopping 40% premium. So today was the moment of truth, because if Yahoo did well, it meant that they would be valued higher than the MSFT offer. And if they fell short, that would mean death.
Yahoo’s been looking for a white knight to save them. They talked to NewsCorp and to AOL. They even talked to Google. Here’s the problem with talking to Google. Google already has a near-monopoly on search advertising with no signs of losing ground. If Yahoo gets into a deal with Google, they give Google even more power and turn Google into a full-monopoly, and then the anti-trust guys get involved and soon enough someone’s slapping YahGoog with multi-million-dollar fines for jay-walkign in Europe.
So what do they do? Trial outsourcing of a tiny fraction of their searches to GooG. Initially this just scares the crap out of MSFT while they negotiate for a higher offer. But now it’s apparent that the ulterior motive is that tiny number of searches that were being outsourced brought in 100% more revenue for Yahoo, which put them just a little above analyst expectations.
Now they’re in a much better bargaining position when dealing with MSFT. Meanwhile MSFT is still insisting that this quarter’s earnings won’t change their bid. So what happens Next????
Endgame Scenario 1:
Y! stock rises on exceeding expecations of earnings, and everyone figuring this means MSFT will raise it’s offer. Yahoo signals that they’re going to continue outsourcing a fraction to Google. Stock rises again on that news. NOW with a higher valuation. MSFT takes their offer directly to shareholders but it’s too late Yahoo announces that they are merging with AOL and become Yay-OL. They both outsource a bit of their searches to GooG and compete poorly for a few years before folding on the ad-game and stick to online portals which continues to shrink.
Endgame Scenario 2:
MSFT partners with NewsCorp, raises their offer quickly before Yahoo can make any other moves, and eats Yahoo! once and for all. They combine MSN, Yahoo, and NewsCorp’s Assets into one entity that rules the world of online portals. Soon MSFT either eats NewsCorp or convinces NewsCorp to switch to MSFT’s Ad Network taking MySpace away from GooG.
Endgame Scenario 3:
Everyone stays on-plan. Yahoo valuation goes up. MSFT takes deal directly to shareholders who eat it up. Long messy integration process where all Yahoo’s talent leaves for start-ups and the entire valley hates MSFT and vows to destroy them, killing the little bit of anti-Google pro-MSFT sentiment that had been brewing. Microsoft owns all the portals – but it’s a shirking piece of the online ad pie.
Or at least, that’s what I’m thinking.