NEWS: Google Search for Missing Yahoo Revenue Returns $1 Billion

Ed: Damage done. Whatever the outcome, Yahoo admitted that Google search returns better results.

Google Search for Missing Yahoo Revenue Returns $1 Billion

Boy, that was fast. Yahoo’s (YHOO) limited 2-week test of Google’s (GOOG) AdSense for Search service has yielded wondrous results. So wondrous, in fact, that we’re only a week into it and “people familiar with the matter” are already telling The Wall Street Journal that the trial may well lead to a broader outsourcing deal between the two companies.

$5 and a Yahoo Insta-Yodel! says the search pioneer’s having another sitdown with Microsoft this week

Anyway, by some estimates, a deal with Google would increase Yahoo’s cash flow by more than $1 billion a year. A nice little spike in revenue like that would certainly bolster Yahoo’s efforts to spur Microsoft (MSFT) into increasing its unsolicited buyout bid for the Internet search pioneer. That being the case, why didn’t Yahoo forge such partnership with Google last July when it was restructuring the company’s “ecosystem” and slaughtering sacred cows? Perhaps government approval was a concern?

Yahoo Puts All The Chips On The Table. Time For Somebody To Fold.

by Michael Arrington

The WSJ, ...

What’s the translation? It means that Yahoo is hyping its last (barely) credible alternative to Microsoft - a full outsourcing of search marketing to Google to boost revenues and shareholder value.

Citigroup analyst Mark Mahaney previously said that a Yahoo-Google search deal could boost cash flows by 25%. Experts we talked to estimated that could boost Yahoo’s market valuation by $7 billion or so, less than half the premium Microsoft offered on February 1.

That Mahaney estimate of increased cash flow from a Yahoo-Google deal is now “more than $1 billion a year,” a 50% gain in cash flow from 2007. That puts the offers roughly on par, give or take a few billion. And it gives Yahoo a potentially viable alternative to the Microsoft deal.

Except, not really. Everyone, even Yahoo, realizes that a Google search deal is a slow but certain death for the company, even in the unlikely scenario of government approval. Those cash flow boosts are based on current traffic, but its very likely that Yahoo would see a gradual decline in search volume if they were to outsource to Google (as has happened with AOL, which moved to Google search in 2002 and has dropped from 30% to less than 5% market share). Expect Yahoo to take the same hit over time.

But Yahoo has played the crazy card perfectly to date, suggesting that any alternative to Microsoft, even a slow suicide at the hands of Google, is a preferable outcome. And Microsoft must acquire Yahoo to ensure their long term viability. Further, while losing the Yahoo deal may be something Microsoft can live with,losing Yahoo to Google is not an option (Mahaney says that a full Yahoo outsourcing deal to Google would be the worst case scenario for Microsoft).

Both companies need the deal to happen. Yahoo is screaming “do you dare me!?” and so far Microsoft is saying “sure.” But Yahoo isn’t really crazy, and Microsoft needs this deal more than they let on. Both companies have everything to lose, and someone is going to fold. Yahoo announces Q1 earnings on April 22. I’m sticking with my prediction of a negotiated deal in the near term.

Meanwhile, Google is the clear winner from this whole episode. They either get a huge win (Yahoo search) or a slightly smaller win (their biggest competitor acquired and mired in merger logistics for a year or more).