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Yahoo Destroying Shareholder Value, Internet Balance of Power

by: Michael Arrington June 13, 2008 | about stocks: GOOG / MSFT / TWX / YHOO    

Michael Arrington

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I don’t believe that there is anything Yahoo (YHOO) could do at this point to further destroy their business that would surprise me.

At 1:35 pm EST yesterday we posted that we believed Yahoo would announce a search marketing deal with Google (GOOG), essentially ending their negotiations with Microsoft (MSFT) and, pending government approval, sealing Google’s monopoly position in search marketing. Twenty-five minutes later a massive sell off of Yahoo stock began - the company lost billions in market valuation over the course of the next hour as the market made it’s bets on the news.

At 3 pm EST Yahoo announced that all talks with Microsoft were formally off, and the stock fell further. It eventually climbed back a little, but by the end of the trading day, $3.6 billion had been removed from the pockets of Yahoo stockholders. Well after trading ended, Yahoo confirmed our original report that they’d signed a deal with Google to hand over much of their search marketing business.

The deal terms announced with Google appear to be fairly innocent - a non-exclusive arrangement that lets Yahoo take Google’s ads if and when they choose to, and put them alongside their own ads, and/or other third party ads. But the truth is that this will cause even more advertisers to flee Yahoo’s platform. Which will drive auction-determined ad rates down. Which will drive Yahoo to take more Google ads. Which will…

It’s a vicious cycle and they will have no choice, as a public company, but to rely more and more on Google as time goes on.

Our sources inside Yahoo had interesting things to say about the general state of things at the office today as Yahoo’s stock price fall apart. “Unclear what’s happening,” said one vice president. “F*cking train wreck, total chaos” was the less eloquent observation of a more junior employee.

When I accused Yahoo of playing the crazy card in their negotiations with Microsoft, I never thought these people were actually insane. Handing Google a monopoly in search marketing was just a ploy, I thought. A way to get Microsoft to bid a little higher than $33 per share.

But it turns out I was wrong. Yahoo’s hatred of Microsoft runs so deep that they were actually, in the end, willing to destroy the future of their company just to keep it independent for a short while longer. They’ve ignored the wishes of their shareholders, employees and many now former key employees in killing that deal. And apart from Google, CEO Jerry Yang, President Sue Decker and possibly Tim O’Reilly, I don’t believe there is anyone in the world that is happy with what has happened.

As much as everyone still has lingering doubts about Microsoft after their hardball monopolistic practices of the '90s, it’s clear that they, along with Yahoo, were the only force counterbalancing the massive presence of Google in search marketing.

Without them, Google would continue to keep the lion’s share of search marketing dollars to themselves, and distribute next to nothing to third party publishers. But Microsoft and Yahoo were both willing to fight for some of those deals, at least pushing Google’s profits down a little. Now, with Yahoo taken out of the game, it’s unclear that Microsoft can fight Google on its own. How long will they pour profits from Windows and Office into trying to compete in search?

The delicate power balance among the big players was disrupted today in a big way, and the consequences will be felt over the coming months and years. We needed a competitive market in search to ensure the health of the Internet. Now, it’s nearly impossible to see how that can happen.

It took me about five minutes of watching Yahoo’s top two executives talk last month to realize that they had no fight left in them. The fact that they simply gave up wouldn’t matter so much if the only people hurt by their actions were their employees and stockholders. But that just isn’t the case, and now we all have to deal with the fallout.

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This article has 16 comments:

  •  
    Jun 13 02:01 PM
    As long as Yang is faced with the public humiliation of being booted from his company, at least justice will be served.
    Reply
  •  
    Jun 13 02:23 PM
    It is a must now that Ichan take over the company...oust all the board and officers and sell the company to anyone that is willing to pay over $32 a share. Yahoo should be named yo yo because that is what its stock price does. $22 today $32 tomorrow.
    Reply
  •  
    Jun 13 02:27 PM
    Yahoo's #1 problem is still it's own leahership.
    Reply
  •  
    Jun 13 02:31 PM
    can't believe this amateur article regurgitating what my 13 year old son would say. When a public company makes an announcement about a FAILURE to reach agreement on negotiation with one of the biggest tech company in the world, don't you think this is intended to send a message to Icahn to back the *ell off?
    Read into the hands being played here, Yahoo is not in any position to make uncalculated moves at this point, not matter what your opinion of their leadership team is.
    Reply
  •  
    Jun 13 02:39 PM
    "I don’t believe there is anyone in the world that is happy with what has happened".

    I am. I don't own Yahoo! shares (sold last year at 29), but I am Yahoo! customer and don't want to be Microsoft customer (to much of negative experience with Mr Softy services).

    Mind, shareholders night not be happy, but customers are.
    Reply
  •  
    Jun 13 03:09 PM
    @user151634:

    Dude what are you smoking? The only company that considered paying Yahoo $32 walked away. Pay attention. No one else is stupid enough to pay more than $25.
    Reply
  •  
    Jun 13 05:12 PM
    Though there is some duplication, an AOL + Yahoo ( Yaol? , Yahaol? ) merger would appear to be the only course of action for growth. Absent that, Yahoo has a good technical group, lots of Internet assets and traffic. They just need to identify a few good strategic niche areas from those assets and focus on them, they could remain profitable.

    MSFT/Yahoo would have been a disaster from a business point of view, but would have bailed out those shareholders that made an untimely investment in the company.
    Reply
  •  
    Jun 13 05:19 PM
    "It’s a vicious cycle and they will have no choice, as a public company, but to rely more and more on Google as time goes on."

    Gee, doesn't EVERYBODY depend more and more on Google everyday? At least Google tries to not "be evil".

    I fail to understand how tying a mediocre company (Yahoo) to execrable, unethical, technological "has-been" of a company of a company like MSFT could have benefited EITHER company or their customers. Has MSFT managed HoTMail well? Nope. MSN? Nope.
    Reply
  •  
    Jun 13 05:35 PM
    It just keeps getting better and better! Wonder if Icahn is talking to CN or BIDU about buying Yahoo either as a whole company or in pieces? He could then command at least $34.00 per share, turn a healthy profit and make all the yahoo shareholders, "Happy Campers", course, Yang and his group would be ousted and new, more responsible leadership installed at the helm of Yahoo!
    But before you start counting your profits, hold on, there is more to come in the way of the bad news bears for good ole Yahoo! As my name implies: sweetrevenge!
    Reply
  •  
    Jun 13 05:53 PM
    Yahoo's message is very clear: pay us at least $37 a share or we will give away the company to Google. Search is only the beginning, email user accounts, Alibaba, Japan's auction market, key employees, etc may all follow. If we go down, so be it, but you (Microsoft) will never have a chance in internet space again!
    Reply
  •  
    Jun 13 06:47 PM
    The goog deal is just unbelievable. It's as if GM said "screw it" and just started selling Ford's cars instead of their own. It's far worse than if yhoo had kept stumbling along on its own -- as the author observes it provides a clear path to monopoly for goog. The long-term result of this, it seems, will be a not-so-gradual transfer of business/market cap from yhoo to goog.
    Reply
  •  
    Jun 13 07:39 PM
    The disconnect here is between those who think there is more at stake here than money, and those who don't.
    Reply
  •  
    Jun 13 07:42 PM
    The disconnect is between those who think there is more at stake here than money, and those who don't.
    Reply
  •  
    Jun 13 07:42 PM
    Lest I repeat myself...
    Reply
  •  
    Jun 14 01:11 PM
    I said all along that Yang hates Ballmer so much that Yang would do practically anything, to stay out of Ballmer's hands.
    Reply
  •  
    Jun 14 03:49 PM
    Yahoo's problem is a lack of leadership and it starts from the top. Jerry Yang is a good guy but he does not seem to have the interest (or competence?) to really get down and clean house. Yet that's what Yahoo desperately needs -- a micro-managing Steve Jobs type CEO that is simply not going to accept the fact that Yahoo employees working on the same projects CANNOT EVEN SCHEDULE MEETINGS WITH EACH OTHER. That's right, many meetings at Yahoo are scheduled the old-fashioned way by manually comparing calendars verbally or over 10 emails back-and-forth. Seems like nitpicking? Well this is just a fundamental example of the lack of leadership.
    Reply
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