Yahoo to Outsource Ads to Google for Two Week Trial Run

So much for Steve Ballmer’s attempt to get a Yahoo (YHOO), Microsoft (MSFT) deal done more quickly by making threats. Now it looks like Yahoo is really serious about fighting back (or they’re just pissed).

This afternoon we learned that Yahoo is going to use search advertising technology from Google (GOOG) on its own site for a two week test period. The goal of this trial, of course, is to see if Google’s system can boost Yahoo’s advertising revenue substantially. If it can then Yahoo certainly has some ammunition left as it tries to argue that Microsoft’s current bid actually undervalues the company.

It is pretty fascinating that in a few short years we have the old search leader (Yahoo) outsourcing its search advertising to the very upstart that took over the top spot (Google). What makes this even more interesting is that some are speculating that if the Google test is successful, Yahoo could choose to merge with AOL, not Microsoft.

Why would that make sense? Well, AOL looks a lot more like Yahoo than Microsoft does, so merging those two companies could yield sizable synergies and help them both slow their path down the road to irrelevancy. Time Warner (TWX) would also benefit not only by unlocking the value of its AOL unit, but also strengthening it by combining with Yahoo.

Google also wins under this scenario. They potentially could take over all of Yahoo’s search advertising, which clearly would be a positive growth driver. Google already manages AOL’s search advertising and owns 5% of AOL, so a Yahoo-AOL deal strengthens that investment too.

The lone loser here would be Microsoft, in their eyes anyway. Wall Street would likely cheer and send Microsoft shares higher. Remember, MSFT shares were in the mid thirties before the Yahoo bid and dropped to the high twenties on news of the hostile offer. The other option, of course, would be for Ballmer to raise his bid to try and squash an AOL deal.

Whether you own shares in these companies or not, if you are interested in how the Internet landscape is going to shift, this saga is pretty darn interesting. Stay tuned.

Full Disclosure: Long shares of GOOG, MSFT, and YHOO at the time of writing

UPDATE:
Now rumors are that News Corp (NWS) could team with MSFT in a higher bid. Here is my question: Why did it take an unsolicited bid from MSFT for these Internet companies to actually start discussing bold moves to boost profits and shareholder value? These companies were perfectly fine making no progress competitively but now they all of the sudden have a “reason” to get creative and make some positive changes? Better late than never I guess, but these companies don’t need buyout fights to do something bold. Standing still against upstart companies (like Google was five years ago) is essentially moving backwards.

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3 Thoughts on “Yahoo to Outsource Ads to Google for Two Week Trial Run

  1. Rubens on April 12, 2008 at 6:31 AM said:

    The Economist provides a good interpretation of the latest developments, like Yahoo outsourcing ads to Google (which to me is like GM outsourcing car manufacturing to Ford), the approaches to AOL (a rapidly dying portal and brand), etc. These are all little tricks to tempt Microsoft to increase their bid. In my opinion Yahoo shareholders should take the Microsoft offer and run. If I were Steve Ballmer I would go hostile with a lower bid, but I don’t think he will do that as he might upset key Yahoo employees and executives.

    On another note, I don’t understand what the rave is all about social networking sites, instant messaging, free e-mail, etc. These business have millions of users but make little or no money. I thought ‘eyeballs’ was so much 1999 but I guess I am wrong.

    Link to The Economist article:

    http://www.economist.com/business/displaystory.cfm?story_id=11036768

  2. I believe that Yahoo is worth more than Microsoft is offering, but I think that a lot of people have mischaracterized Yahoo as Google’s competitor. Maybe 5 years ago, Yahoo had a chance to try to keep up and try to out-google Google at search and contextual advertising, but Yahoo’s strategy has been very different since its creation. Yahoo was and is a content network through and through. As such, it’s positioned as the most powerful content distribution network on the internet. It’s issue has been that it spends inordinate amounts of money trying to monetize the network itself while simply allowing search to be handled by a specialist (Google) would give it more ability to focus on its core business, cut costs, and increase revenue.

  3. Yahoo is not a content company, but a content distribution company, which is very close to content search company.

    Nowadays if you look for content you don’t anymore look at Yahoo , you look at Google.

    They are two different approaches – Yahoo’s structured form versus Google’s free search, and Yahoo had the benefit of being first in the game, but after a few years of sitting in one place they are now out of time and chance to win.

    I think Yahoo costs *less* than what Microsoft is bidding for it.

    And, what’s more, there is nothing Microsoft can do to improve it.

    If they could they would have done it with MSN.

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