Huffpost Business
THE BLOG

Featuring fresh takes and real-time analysis from HuffPost's signature lineup of contributors

Henry Blodget Headshot

Yahoo-Google Search Test: Brilliant Counter-Move That Should Extract Higher Price From Microsoft

Posted: Updated:

The Yahoo-Google search test is a brilliant counter-move by Yahoo in the Microsoft-Yahoo takeover battle. It is not smart because it is a credible "Microsoft alternative" -- it isn't -- but because it should allow Yahoo to extract a higher price from Microsoft.

This search test won't block a Microsoft deal, and neither would a full-blown Yahoo-Google search partnership. But if the test works well, it will bolster Yahoo's argument that Yahoo is worth considerably more than Microsoft's current bid, by holding out the promise of increased revenue and reduced cost from a full-blown outsourcing deal (analysts estimate that the benefits to Yahoo could be as much as $300-$500 of incremental EBITDA). And Yahoo has already lost the search game anyway, so such a partnership offers little risk to Yahoo.

Meanwhile, as Microsoft's instantaneous response demonstrates, the partnership will scare the heck out of Redmond. With Yahoo in Google's search camp, Microsoft would become even more irrelevant in search (not to mention display). Unlike Yahoo, however, Microsoft's pride would never allow itself to outsource search to Google, which means it would stay irrelevant in search forever (as its share of queries gradually approached zero). All of which means that, if Yahoo and Google appear headed toward a full-blown search deal, Microsoft needs to buy Yahoo even more now -- if only because it will then be able to fire Google as Yahoo's search partner.

How will Microsoft respond? It will run straight to the antitrust authorities and scream that a Yahoo-Google search partnership is terrible for capitalism, consumers, innovation, etc. But if this test merely leads to a partnership in which Yahoo runs AdSense on its pages, it's hard to see why anti-trust folks would prevent such a deal. All Yahoo would be doing would be buying Google products and taking Google money, and Yahoo doesn't have enough share of the search market anymore for this single deal to constitute collusion between two companies who control the market (only one of them controls the market -- and it will continue to, with or without Yahoo). From Yahoo's perspective, why should everyone else be able to live off Google when Yahoo can't? This isn't like previous anti-trust examples, where, say, Microsoft pointed a gun at Dell's head and said "take IE or you don't get Windows."

Some legal experts do say that a Google-Yahoo partnership would be problematic (Senator Kohl has already promised to look into it), and, in any case, Microsoft would be able to make a lot of scary noise. Of course, if the test works, Yahoo will be able to demonstrate a big revenue lift, and Yahoo shareholders will be able to make a lot of angry noise about how Microsoft is paying way too little for the company in light of Yahoo's recently discovered revenue goldmine.

And this would leave the companies with only one graceful way out: Microsoft jacks its bid to at least $35 and Yahoo accepts it.

See Also: Yahoo Board Bumbling May Have Already Cost Shareholders Billions