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Yahoo in precarious position as its CEO beckons to Microsoft

Analysts mixed on whether the end of its Google deal sounds the death knell for Yahoo

By Heather Havenstein
November 6, 2008 12:00 PM ET

Computerworld - Just a day after Google Inc. walked away from a proposed search advertising partnership with Yahoo Inc., the latter firm's CEO said a takeover by Microsoft Corp. would now be the best thing for his company.

Some industry observers maintain that Google's decision to walk away from the proposed deal could be the death knell for Yahoo, forcing it into the arms of Microsoft or another company, like AOL. CEO Jerry Yang may think so too, as he said yesterday that the company is now willing to negotiate a sale price that's below the figure Microsoft rejected during negotiations last spring. 

Mike Masnick, president and CEO of IT research firm Techdirt, said in a blog post that the loss of the deal with Google could represent a big blow to Yahoo's chances of operating as an independent company.

"The company was very much relying on the Google deal to stabilize its financial condition," Masnick said. "Without that, Yahoo is in trouble -- meaning there's probably a good chance that Microsoft takes another look at acquiring the company for much, much less than before. That means, Yahoo as we know it, disappears."

Stan Schroeder, a blogger at Mashable, noted that Google's move sets the stage for a new chapter in the Microsoft-Google-Yahoo saga.

"Yahoo definitely pulled the shortest straw here; Microsoft may be a winner, but whether they're capable of doing something useful with a giant such as Yahoo remains questionable," he added. "The real winner is, once again, Google, who interfered just enough to weaken both Microsoft and Yahoo as much as possible with virtually no downsides. Well played."

Others observers, however, asserted that Yahoo is salvageable as a stand-alone company despite the killing of the proposed Google deal. David Card, principal analyst at Forrester Research Inc., noted that Yahoo has a large and loyal online audience. "They have done a pretty good job of selling advertising against that audience," Card said.

He said he has never felt that Yahoo must become more competitive in the search business to survive. "I don't think they need to be that competitive in search to be a successful online media company," Card added.

None of the other big Internet portals -- specifically AOL and Microsoft -- has managed to be successful in social networking, mobile or online video, which are all keys to success in the online media business, Card said. "Yahoo is pretty strong in all those potential growth areas except for social media," he added.

"Would Microsoft be a good owner for them? It might make sense. The consumer media is the source of most of IT innovation these days. [Microsoft] has not been able to be competitive with Google in search, and they have not been competitive with Yahoo in portals. They should double down in the consumer Internet [space]," Card said.

However, he noted that Microsoft has never successfully pulled off a merger or acquisition with a company as large as Yahoo, and suggested that such a combination could lead to "a ton of blood on the highway."

Andrew Frank, an analyst at Gartner Inc., noted that a Yahoo-AOL merger could hold promise for both companies. "They both face similar challenges in a down market for display advertising," he noted. "There could be some cost reductions based on eliminating redundancy in merging their operations."

He added that the idea of Yahoo continuing solo is not "out of the question." One big indicator of Yahoo's survival chances will be how well its recently released digital display advertising platform performs. The platform is in the process of being tested by a consortia of newspapers.

If the test proves successful in "creating benefits for that particular class of publishers, [it] might signal some hope for Yahoo's ability to get past this current phase and do something much bigger in advertising."

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