Yahoo!'s Deal With Microsoft Is a Mistakehttp://www.fool.com/investing/high-growth/2009/07/29/yahoos-deal-with-microsoft-is-a-mistake.aspx Rick Aristotle Munarriz
July 29, 2009
Yahoo! (Nasdaq: YHOO ) CEO Carol Bartz doesn't look much like Wile E. Coyote, but she sure has a funny way of falling into the same animated traps her predecessors did.
Despite the colorful "Microsoft, Yahoo! Change Search Landscape" headline blaring out at us all this morning, the announcement of a partnership with Microsoft (Nasdaq: MSFT ) really doesn't change much at all.
Silly Yahoo!, rifling through the Acme Products catalog -- as if it will ever come up with a third-party contraption to catch up to Google's speedy roadrunner.
Yahoo! could have done better. Microsoft continues to lose money in cyberspace, and it should be on the ropes right now, just days after posting its first annual revenue decline since going public. It's enough to make one wonder whether Yahoo! conducted a sobriety test before handing the software giant the keys this morning.
Microsoft will compensate Yahoo! for rolling over. In exchange for letting it plaster Yahoo!'s query result pages with Microsoft-sold ads, Yahoo! will receive 88% of the resulting revenue through at least the first five years of the 10-year term. That's a big number -- Google shared just 74% of its gross partner revenue with publishers this past quarter -- but it's not big enough.
Slicing pies and taking names
Google's girth should translate into higher click-through rates, so 74% of something is better than 88% of nothing.
Yes, Microsoft is guaranteeing revenue-per-search minimums in every country, but only for the first 18 months of a 120-month deal.
Yahoo! claims that it will be able to reap immediate results. Operating income will grow by $500 million annually. The consolidation will allow it to shave annual capital expenditures by $200 million.
Missing in the mix is the long-term cost of letting Microsoft become the silver medalist in search algorithms and paid search. By ceding its search capabilities to Microsoft and getting rid of its search developers, Yahoo! is putting itself in a weak negotiating position when it comes time to renegotiate this deal 10 years from now. What's more, taking a weedwhacker to capital expenditures is a eup