Comments on: Microsoft, Yahoo said in talks on search deal

The Times of London says the two companies are discussing a deal that would see Microsoft acquire Yahoo's search business for around $20 billion.

[Alex Alexzander]

I'd have to wrap my head around buying just the search business. Yahoo would need people to go to the site, and any decline in their membership would ultimately hurt Microsoft's revenue flow. And if Yahoo is not getting revenue from search, what's to keep in them in business for years to come, which is essential to making owning the search component valuable in the first place. I'd have to read the terms of this contract to wrap my head around how such a deal with work in the long term to ensure this is truly an investment and not some massive waste of money. I do agree there is no need to buy the whole company, but I'm missing something here. At least I hope I am.

Perhaps c|net could do more of a story on this and answer the obvious questions of how Microsoft sees this working given certain unforeseen potential situations in the future, such as what happens if Yahoo can't fund future features that draw in eye balls and make the site sticky.

Alex Alexzander

[ralfthedog]

Alex, The Yahoo search engine would not be connected to the Yahoo site. It would not be Yahoo Search, it would be Microsoft Search. I don't think Microsoft would care if Yahoo went out of business, they would have a working search engine.

Yahoo would take Microsoft's money and use it to provide other new services on the Yahoo website. They might even make a new and better search engine.

[Alex Alexzander]

You miss the point entirely. The object here is that Yahoo stays up so that when people use their site, they see ads from Microsoft. That's the search business. It's not search. It's little ads on all those Yahoo properties. Microsoft wants to own that. In order for that to work, Yahoo has to stay alive else all you have is MSN and Google, and thus Microsoft is left with a smaller presents on which to control advertising. You get it now?

It is essential that Yahoo stay alive. But the funding for Yahoo comes from advertising. Without it, they have less revenue. If they sell their future ability to earn money, they die and if they die, they are not useful.

Alex Alexzander

[Mr. Dee]

I agree, the Yahoo Properties are very important. Their portal in fact is way more popular and more visited than MSN. You have take into account Yahoo! Mail is used by over 300 million people. So, it would be a big loss just for the search engine alone, although I would admit Live Search's algorithm's suck, so it might give them a needed boost and Yahoo! could take the money to build something even more innovative and significant.

[Alex Alexzander]

Actually I don't agree about Live Search. I first started to use it on my cell phone and go used to it. So I switched one of the 3 PCs I use every day to Live Search. No real issue, works just as well as Google in my opinion. I have since switched all my machines to Live Search. Perhaps the only true thing I miss is being able to tell someone else a google term to use and what line the result will be that I want them to see. When we all use the same engine, you can do that. But as a switcher to Live, that doesn't work. But I don't see Google as any better or worse than Live Search. At least not for me. I suppose it depends on you though. What terms you use to find what you need play the bigger role.

Going back on topic, Google's ad deal with Yahoo proposed payments to Yahoo, and was really a profit sharing vehicle. So it was clear that Yahoo would still have an income under that deal. With Microsoft owning the search outright, and thus, I assume, owning all the advertising between Yahoo and MSN properties, it's not clear were Yahoo future earnings will come from. And that relates to their long term health. They can't live off 20 billion forever.

So again, who funds expansion of Yahoo in the future? Is there some profit sharing to keep the property alive? What specifically does Microsoft own in terms of this deal? I'd really like to know more about the specifics of this deal.

Alex Alexzander

[MSSlayer]

Microsoft will not be able to buy themselves in this market.

They need competent people who understand the Internet, something MS has never seemed to be able to grasp.

[JunkSiu]

20B? Does yahoo worth that much?

[Nael]

Its still not as easy as typing www.google.com ... Google has a strong brand recognition when it comes to search. And when I think of search, I automatically type google.com , not live.com, not msn.com and not yahoo.com . No matter how much money MS spends, its not the de-facto internet standard for search. Its automatic instinct to just type Google.com ... That's going to be hard to beat.

[MadLyb]

If MS really does do this, then they are brain dead.

As you mentioned the current market cap for the whole company is less than what they are paying for one piece.

[amoschinoz]

I'm really dissapointed with Microsoft. As much traffik as Yahoo has how can MSFT not go all out and purchase the whole thing. $20B for just search?! Tha's ludicrous. Bad business decision right there. Hope they change their mind.

[Penguinisto]

Mr. Trebek, I'll take $500 on "Blind Rumors", please. :)

[Vegaman_Dan]

I think the price is $20B on that rumor and yes, it was only a rumor which has been debunked as 'total fiction' by those involved. The story here has been updated accordingly.

It only shows how easily people are deceived on this topic.

[ralfthedog]

Mr. Veg, That is the nicest thing you have ever said to the Peng.

:)

[Alex Alexzander]

Actually, if you read the times online article, which I just read, Microsoft's is able to buy in for just $5 billion. Another $5 billion comes from investors. That $10 billion gives Microsoft 30% control over Yahoo, and the terms of the deal state that Microsoft manages search. There merely have an option to buy the whole search business for $20 billion. This is actually pretty smart, and so I have changed my tune and now agree with this where as before I did not.

This allows Microsoft to make a much smaller investment to test the waters at how much of an 18% marketshare in search they can control in addition to their 5% for $5 billion to start rather than jumping in with a $47 billion-dollar buyout. Controlling a potential 23% stake rather than a 5% stake for $5 billion up front is a small price to pay. Assume it doesn't work at all, they lose little. You have to imagine in the short term it will see it's best return as no one is going to leave Yahoo simply because someone else is managing their search. So right off, they will see a good return in revenues. Easily enough to pay for this investment in a couple years time. It also gives them a true window in which to gauge how well the concept works. It's a baby step. One that likely pays for itself.

The real issue for Microsoft is perhaps not owning Yahoo. Or even owing 100% of the revenue from this deal. The real goal here is to control a larger stake of the search ad space because that truly puts you in the ballpark. It's not just the profit engine. At least not right now it isn't. Right now, it's merely a way to lay claim to a potential 23% vs. Google's 77%. Which is a far better place for Microsoft who now stands at just 5% vs. 77%. That lift in space alone will allow then to at begin to be competitive against Google. Without it, they simply don't exist.

$5 billion is a small price to pay to truly see if the $20 billion is worth it. Remember, they expand revenue by controlling this larger property under the terms. So $5 billion isn't truly $5 billion. They will get money back from this, as I am assuming Yahoo will because the Times Online article states it could raise Yahoo revenue by $2 billion a year.

I say go for it. And I see why Carl is buying up a block in this. There is a profit to be made. It is said every 1% of the search business is worth about a billion dollars. $5 billion used to leverage 18% is a good ROI if that's true.

Alex Alexzander

[humanssssss]

Microsoft has to buy Yahoo search. There's no way around it. They need to recoup the money they invested by creating an economy of scale. Without Yahoo search, it will take them a lot more years to accomplish, and as a capitalist, that's an opportunity cost and you don't wait.

[Alex Alexzander]

You don't have to buy anything. You need controlling interest. And you Yahoo to survive or else you risk defections on a mass scale which only translates into losses. It's in Microsoft's best interest to control Yahoo search in order to argigate it, and to grow both MSN and Yahoo as that gives you a better chance to compete with Google.

HotMail is number 1. Followed by Yahoo, and followed by GMail. Yet Google has 77% of the market for search ads. Yahoo 18% and Microsoft just 5%. Even though a lot of people go to MSN and Yahoo, advertisers don't buy ads on these two sites. Microsoft needs to be more competative, and you do that by offering a lot of eyeballs at a comepative rate, and of course increasing the popularity of your search engine. But that doesn't mean you have to own Yahoo. You just need to control is ad business and search.

Alex Alexzander