own future too, says John Naughton
Truly, you couldn't make it up - unless perhaps you were a
script consultant for a soap opera. Here's the plot line so far:
Microsoft, a successful but ageing computer company with a vast deposit
account, decides it needs an attractive acquisition to enable it to keep
up with the younger - Web 2.0 - generation. So it makes a generous offer
to Yahoo!, a fashionable but faltering younger company. But Yahoo!
doesn't want to be ravaged by an older corporation and embarks on all
kinds of crazy schemes to repulse its offer, including making overtures
to Google, the new boy on the block.
Microsoft is initially incredulous, then mad as hell, then
conciliatory. But Yahoo! is implacably hostile, so Microsoft retreats to
bide its time. This looks like a smart strategy, because Carl Icahn,
American capitalism's most awkward billionaire, spots an opportunity and
starts buying up Yahoo! shares with the intention of unseating the
board, installing his own stooges and selling the company to Microsoft.
Since Icahn has eaten other corporate boards for breakfast, it
would be foolish to underestimate him. Especially as he's claiming that
Yahoo!'s standoffishness has destroyed 'shareholder value'. Yahoo!'s
leadership then looks for ways to undermine his campaign and ensure a
Microsoft-free future. Since the date with Google seemed to go okay,
they reason, why not ask them for a live-in partnership? Not a
conventional marriage, you understand, but still the kind of
relationship that makes you feel good at the end of a long day in the
markets. Google may be awkward in an adolescent way, but it's fabulously
rich and successful. And it scares Microsoft to death.
Last week's episode involved Yahoo! and Google signing their
prenuptials. This allows Yahoo! to run ads supplied by Google alongside
Yahoo!'s search results and on some of its web properties in the United
States and Canada. The agreement is non-exclusive, giving Yahoo! the
ability to display paid search results from Google, other companies, and
Yahoo!'s own Panama system. The two companies also declared their
intentions to make their instant messaging systems' inter-operable', or
capable of communicating with one another.
Google went to some pains to emphasise the non-exclusive
nature of the arrangement. 'We are proud of the advertising technologies
we have built,' its blog declared, 'which show users a relevant ad
whether they are searching for a specific item or browsing the internet.
This arrangement extends those benefits to Yahoo! and its many users,
advertisers and publisher partners. We currently provide similar
services to sites like AOL and Ask.com, as well as many other partners.'
This verbiage about non-exclusivity is clearly aimed at
anti-trust regulators in Washington, who may now take a much closer
interest in Google. Thus the two partners went to great lengths to point
out that the arrangement was not a merger; that Yahoo! would continue to
operate a search engine; that Yahoo! was free to enter into
relationships with others; that the deal would neither increase Google's
share of web searches nor allow it to raise search prices for advertisers.
But this is really a smokescreen. The fact is that Yahoo! has
played groupie to Google's Mick Jagger. The extent of its desperation
was revealed in its SEC filing, which revealed that the deal included an
$83m escape clause for Google. It has a guarantee of placing at least
$83m worth of ads through Yahoo on a rolling four-month basis, or it can
walk away. As one commentator put it, 'that's a pretty tiny threshold,
considering that Yahoo's quarterly US revenues are $1.3bn. The amount
comes to about 1 per cent of Yahoo's total projected revenues for 2008.'
The SEC filing also contains this mysterious clause: 'If the
services agreement is terminated by either party within 24 months of the
effective date as a result of a change in control of Yahoo! (other than
a change in control triggered only by Microsoft), Yahoo! is required to
pay to Google the sum of $250,000,000.'
What does it all mean? The most plausible conclusion is that
Yahoo! has basically handed the search-based advertising business to
Google. Or, as TechCrunch's Michael Arrington put it: 'Yahoo!'s hatred
of Microsoft runs so deep that they were actually, in the end, willing
to destroy the future of their company just to keep it independent for a
short while longer. They've ignored the wishes of their shareholders,
employees and many now former key employees in killing that deal.'
The deal is dismal news for Microsoft, whose bid for Yahoo!
triggered this chain of events and whose chances of taking on Google in
search-based advertising are now dimmer than ever. There was no
guarantee that a Microsoft-owned Yahoo! would have become a serious
competitor for Google, but at least it would have stood a fighting
chance. Now Microsoft's best bet is to make a case to the Feds about the
dangers of a Google monopoly. Who said irony was dead?
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