Hey Microsoft, How 'bout We Do That First Deal You Offered?

The devil is in the details, and the details of the Yahoo-Google search advertising deal reveal the desperate, possibly neurotic state of Yahoo these days. Quite simply, it looks to me like Yahoo is effectively paying Google off to step in and (1) keep Jerry Yang, Sue Decker and the current board of directors in power, and (2) avoid a desperation deal with Microsoft for as long as possible, or longer. It's not even clear to me that Google wants this deal, based on the terms. It almost looks like they're just doing Yahoo a favor, and trying to keep them out of Microsoft's hands.

My guess is, Yahoo is wondering exactly why they didn't take that Microsoft acquisition offer back when it was on the table. Those were the days that Yahoo was a key asset in the Microsoft/Google war, and most of their best employees hadn't bailed. Of course, that was $15 billion ago, and that offer appears to be long gone.

I'll get more specific below, but the combination of a basically non-binding agreement combined with a complex termination clause and associated termination fee to Google, suggest that the deal is little more than a favor to Yahoo, with a payoff to Google for their trouble. And there are some other agreement oddities mixed in that are probably driven by both companies strong suspicion that at least a few politicians intend to make hay by trying to kill this deal. The Department of Justice, which will review the agreement for compliance with Antitrust laws, is going to have massive commercial (Microsoft) and governmental (Congressional members up for reelection) pressure to find things to object over.

I'm not going to quote language in the half dozen press releases, leaked internal memos and blog posts that all parties have now published. The actual language of the agreement Yahoo signed with Google tells me everything I need to know about why both sides did the deal, and what they think is likely to happen next.

Microsoft's Last Offer

Microsoft last offered Yahoo a combination stock, asset and business deal that sources with knowledge of the situation summarize as follows:

Microsoft to acquire 16% of Yahoo's outstanding stock from existing stockholders for $8 billion, or $35/share.Microsoft to acquire all of Yahoo's search and search marketing assets - servers, code, advertisers, third party publishers, intellectual property and employees (perhaps 3,000 of them) for $1 billion in cash plus a guaranteed CPC rate that is higher than what Yahoo can generate itself.Yahoo gets increased search revenue from the deal over what they generate now, and get to remove people and operational costs of search.Yahoo agrees not to touch the search or search marketing businesses directly ever again. All their searches are controlled by Microsoft.

Here's what I think of this deal - it stinks. Microsoft isn't marrying Yahoo, they're just getting her pregnant, setting her up in a nice apartment and telling her not to talk to any other guys.

But either way, Microsoft is signaling that their offer remains open. And Yahoo can probably pick and choose parts of it to accept, within reason.

The Google Deal

Forget the flowerly language about how this deal "strengthens Yahoo's competitive position" (Yahoo press release) or "is good for competition" (Google blog post). Both are flat out lies. The deal crushes any notion of a competitive search advertising market and turns Yahoo's search and search marketing efforts into the undead.

The deal allows Yahoo to put Google ads along side their own, presumably to maximize revenue to Yahoo. Google's good at the top search terms (probably 80% or so of revenue potential), but Yahoo thinks they do fine in the long tail. The problem, of course, is that they'll show Google ads for all the good stuff - and advertisers will go to Google to bid for those ads. More advertisers will leave the platform, further degrading Yahoo's core search economics.