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Google wins as Yahoo allowed Google to paint Yahoo into a corner that hurts Yahoo shareholders

Dominant #1 Google, in calling #2 Yahoo to discuss a slow competitive search surrender by Yahoo to Google, in order to thwart a purchase of Yahoo by #3 Microsoft, apparently succeeded.

  • On the surface, Google looks like the big winner here.
    • Google denied Microsoft the opportunity to merge with Yahoo and stop losing money in online advertising.
    • Google also denied Microsoft the only available opportunity to assemble the scale and scope in users, advertisers and publishers to better compete with Google.
    • Google also has gained precious months and years to further lock up its market dominance of online advertising.
  • Microsoft, decided the smart thing to do was to back away from a game where Google and Yahoo were openly colluding to thwart Microsoft's competitive bid. 
    • Interested parties should go directly to the source document here and read the Microsoft letter to Yahoo very carefully
    • While most will focus exclusively on the price dispute, they risk missing the most important forward-looking information in the letter, which is Microsoft's eleven-sentence description of why a Google-Yahoo outsourcing pact would be bad for everyone but Google.
      • Microsoft strongly indicated in the letter that Yahoo openly threatened to try and thwart a hostile bid by embracing a search outsource deal with Google. This suggests very detailed conversations between Yahoo and Google.
      • If the DOJ is thorough in its reported investigation of Google's involvement in this deal, DOJ investigation staff are now free to depose the key players in this negotiation, under oath, about all of what Google and Yahoo said and did. I'd be surprised, if Microsoft was not cooperative in this inquiry.
      • The big takeaway here is how Microsoft explained that a Yahoo search deal with Google would fundamentally undermine the competitive and investment value of Yahoo going forward.
  • The big loser here is Yahoo.
    • Yahoo overplayed its hand with Microsoft and now it has to live with its bluff.
      • Without the Microsoft offer Yahoo shares will fall substantially.
      • If Yahoo tries to re-inflate its share price with a new search deal with Google, Yahoo irretreivably sets itself down a path of:
        • A very serious collusion antitrust investigation with the DOJ; and 
        • A tradeoff of long-term competitive position decline and destruction of long-term shareholder value for a short-term increase in profitability and share price. 

Bottom line: Yahoo has let Google paint Yahoo into a corner long term. 

  • Yahoo is now left with a choice of options worse than a $33 Microsoft takeover.
    • Wallowing in the steady competitive decline as an independent player at a languishing stock price. 
    • Trying to weather the short-term with a flurry of tactical deals to distract angry shareholders.
    • Selling out competitively to Google in search, but getting to know the DOJ prosecutors much more intimately.
    • Selling out to Microsoft in the future at a lower price. 
  • DOJ investigators ultimately will tell us in their actions how smart Google turns out to be...