Analyst changes tune on a Microsoft-Yahoo deal

Stephen Shankland

Updated 10:30 a.m. PDT with comment relating to Yahoo's new management.

Throughout 2008's on-again, off-again talks between Yahoo and Microsoft, many financial analysts declared the belief that some sort of deal--either Microsoft acquiring Yahoo outright or later just its search business--was a matter of when, not if. One report released Tuesday, though, shows at least one change of view.

Jim Friedland of Cowen & Co. said the relative financial results of Yahoo and of Microsoft's online-services business (OSB) gives Microsoft a bad bargaining position. Specifically, he said operating revenue from advertising dropped 16 percent annually for Microsoft in the first quarter of 2009, compared to a 12 percent drop for Yahoo and a 5 percent increase for Google.

"OSB's profitability has deteriorated substantially due to ballooning depreciation from underutilized data center capacity combined with unprofitable ad deals whose already poor performance has been exacerbated by the recession," Friedland said in a research note. "We believe Microsoft's underperformance in the Internet business limits its options in negotiations with Yahoo, and we have updated our view of the likely outcomes: (1) no deal--70 percent probability; (2) a search-only deal--10 percent probability; (3) an exchange of Microsoft OSB and cash for a large stake in Yahoo--15 percent probability; and (4) a purchase of 100 percent of Yahoo--5 percent probability."

Compare that to Friedland's October opinion, which predicted three possible deals: "In our view, Microsoft is unlikely to allow increasing OSB operating losses to continue in perpetuity, and we expect the company to implement one of the following strategies within the next 18 months: (1) the purchase of 100 percent of Yahoo; (2) the purchase of Yahoo's search business; or (3) the exit of its online-ad and access business, potentially by exchanging MSN/Live.com for a minority stake in Yahoo."

In addition, Friedland added in an interview Tuesday, the arrival of Yahoo Chief Executive Carol Bartz also may make things harder for Microsoft.

"The previous management team bungled Microsoft's generous acquisition offer last year. Yahoo's old management may have been more open to a search-only deal to create a near-term value driver for shareholders in order to compensate for its initial mistake," Friedland said.

"We believe that new CEO Carol Bartz will consider all potential transactions. However, Yahoo is in a solid financial position and Bartz is negotiating from a position of strength. Yahoo has a number of competitive challenges, but it doesn't need to do a deal and there are some serious strategic risks to selling its search asset," he added.

Regarding a search-only deal specifically, Friedland was skeptical.

"In order to get a search-only deal done, we think Microsoft would be forced to offer Yahoo high guaranteed minimum payments and pay a high traffic acquisition rate," the ad revenue shared with Yahoo, he said. "We also believe that the integration of the Yahoo-Microsoft search assets could be challenging. Further, a search-only deal could initially result in an increase in Microsoft OSB's operating loss."

What, exactly, is behind Friedland's assessment of Microsoft's online weakness?

"Microsoft OSB generates a run rate operating loss of $2.3 billion and has been unprofitable for the past 13 consecutive quarters due to: (1) the signing of unprofitable ad partner and toolbar distribution deals with companies such as HP, Facebook, and Verizon Wireless; (2) aggressive spending on R&D, which has not yielded any killer apps...; (3) expensive marketing initiatives, like Live Search Cashback, that have not reversed share loss; (4) an aggressive build-out of data centers ahead of demand that has not materialized; and (5) a secular decline in high-margin dial-up revenues."

Analyst: Yahoo Could Net Almost $2B In Profit With Microsoft Deal

The Yahoo-Microsoft (NSDQ: MSFT) talks have been one of the great soap operas of the internet world over the past year. But Jeffries & Company analyst Youssef H. Squali believes that the likelihood of a deal between the two powerhouses (Yahoo (NSDQ: YHOO) would outsource its search operations to Microsoft and sells Microsoft's display ad inventory) is now real enough that it's time to crunch the numbers. Here are the financial benefits for Yahoo, as he sees them.

—Outsourcing its search operations would save Yahoo $1 billion to $1.3 billion in costs. With the long-term importance of search, Squali points out that Yahoo would be smart to retain the right to take its search operations back at some point and to use its search data for better display-ad targeting.
—Given Microsoft's $300 million to $400 million in display revenue during the fourth quarter 2009 and an assumed 50/50 revenue share , Squali estimates Yahoo would earn about $600 million to $800 million in extra revenue a year -. (But he concedes that the display market may be no better in 2009 than it was in the fourth quarter of 2008).

The bottom line: Yahoo would net about $2 billion in extra profit per year. For comparison this would represent a little less than one-third of Google's operating income in 2008. Squali also points out that Microsoft's additional display inventory would make Yahoo the largest display network online, which would enable it to increase CPMs. But it's unclear if more inventory would actually meaningfully increase CPMs since advertisers tend to pay more of a premium for targeting rather than scale.

Related

• Microsoft Lands Significant Ad Deal With Discovery
• The Dance Continues: Yahoo And Microsoft CEOs Meet About Search Deal
• Yahoo's Search Share Due For Another Fall

Yahoo's Bartz On Management Reorg: 'You'd Be Amazed How Complicated Some Things Are Here'

Ed: Who are the customers?

• The users of email, readers of news, and billions of visitors who pay nothing.
• The advertisers that are the bulk of incoming revenues.
• The ISPs who partner with Yahoo for services and contribute little in fees.
• The thousands of newspaper partners starving for a hand out.

The blog post seems to target the former. The real work is all the rest.

Yahoo (NSDQ: YHOO) CEO Carol Bartz is implementing a new management structure that she says in a post on Yahoo's blog that aims to remove the "notorious silos" in the name of speed and simplicity. Bartz' memo is pretty vague on what she'll be doing away with. She's more expansive on what she'll be adding, namely the formation of a Customer Advocacy group, which she indicated was inspired after getting a lot of angry phone calls from frustrated users and advertisers. As Bartz notes at the end of her missive, she has a big to-do list.

Surveying her past six weeks at the head of Yahoo, which has included the sudden loss of three top execs in the past four days, Bartz says there's a lot to be optimistic about at Yahoo, but "there's also plenty that has bogged this company down. For starters, you'd be amazed at how complicated some things are here." She also hints that she wants to refurbish Yahoo's brand, saying that the idea of what Yahoo stands for has lost any clear meaning the last few years. Bartz' full memo after the jump.

Getting our house in order

A month and a half in the saddle and today I have the perfect excuse to get blogging.

I've been on a whirlwind tour for the last six weeks, talking with everybody from executive leaders to the guys who configured my laptop. 
I've been in student mode, slowly getting smarter about what makes this place tick. And most recently, I've been gathering information on what it's going to take to get Yahoo! to a great place as an organization –- and one that brings you killer products.

People here have impressed the hell out of me. They're smart, dedicated, passionate, driven, and really nice. There's so much great energy and frankly lots of optimism. But there's also plenty that has bogged this company down. For starters, you'd be amazed at how complicated some things are here.

So today I'm rolling out a new management structure that I believe will make Yahoo! a lot faster on its feet. For us working at Yahoo!, it means everything gets simpler. We'll be able to make speedier decisions, the notorious silos are gone, and we have a renewed focus on the customer. For you using Yahoo! every day, it will better enable us to deliver products that make you say, "Wow."

I've noticed that a lot of us on the inside don't spend enough time looking to the outside. That's why I'm creating a new Customer Advocacy group. After getting a lot of angry calls at my office from frustrated customers, I realized we could do a better job of listening to and supporting you. Our Customer Care team does an incredible job with the amazing number of people who come to them, but they need better resources. So we're investing in that. After all, you deserve the very best.

We're also leaning on this team to make sure we're all hearing the voice of our customers (consumers and advertisers). I'm singularly focused on providing you with awesome products. Period. The kind that get you so excited, you have to tell someone about them.

Whether on your desktop, your mobile device, or even your TV.

And that takes a real understanding of what you want/need/love/hate, how you're using our products, and what you find simple, intuitive, easy and fun. Who wants innovation for innovation's sake if it doesn't make your life easier, more efficient, more productive? So expect us to hear you better and take better care of you.

Finally, a note about our brand. It's one of our biggest assets. Mention Yahoo! practically anywhere in the world, and people yodel. But in the past few years, we haven't been as clear in showing the world what the Yahoo! brand stands for. We're going to change that. Look for this company's brand to kick ass again.

Big thanks to the many of you who've reached out with positive comments. It's clear people want Yahoo! to succeed. I'll try to pop by here again soon, though probably not too soon. I have a pretty long to-do list.

Carol Bartz
CEO

Related

• Updated: Another Yahoo Exits: CFO Jorgensen Leaves Amid Reorg
• Updated: Yahoo's Shakeup Continues: Top Mobile Exec Boerries Leaves
• Interview: Yahoo's Khemlani Explains His Move To Hearst As CEO's Top Digital Advisor
• Updated: Yahoo: Major Reorg Coming This Week? Also, Media Changes And APT Rollout Slowed Down

CLIP Yahoo CEO Bartz: “This Is Not A Company That Needs To Be Pulled Apart For The Chickens.”

Yhoo 4 Q08 Earnings Presentation

View more presentations or upload your own. (tags: earnings yahoo)

Yahoo released its fourth quarter 2008 earnings today. Its non-GAAP EPS came in at $0.17 a share, above the $0.13 consensus. (Yahoo lost $0.22 a share on a GAAP basis due to restructuring and impairment charges). Total revenues came in at $1.8 billion, with net revenues (after what Yahoo pays to network partners) coming in at $1.375 billion.

Overall revenues were down one percent. In comparison, Google’s fourth quarter revenues were up 18 percent. Search revenues on Yahoo’s own sites were up 11 percent in the quarter to $436 million, while display advertising revenues was down 2 percent to $506 million. (See chart below). That is pretty much in line with industry trends. Affiliate, listings, and other marketing revenues were also down.

New CEO Carol Bartz finally addressed some questions on everyone’s mind. Addressing Wall Street analysts on the call, she said preemptively before taking questions:

Did I come to Yahoo to sell the company? No. . . . Am I planning on immediately selling the search business? I did not come here with preconceived notions. It is very easy from the outside to have preconceived notions of what Yahoo should do. Now as an insider and CEO it is my job and responsibility to do what is best for customers, shareholders, and employees.

Later on in the call she reiterated:

This is not a company that needs to be pulled apart for the chickens.

Asked about rumors that Yahoo has been meeting with Microsoft, she replied:

We don’t have comments on press reports that come from nowhere.

That would be a reference to Valleywag.

She is basically signaling to investors that they should let her do her job. Her general message on the call is that outsiders cannot really know what is the best course of action for Yahoo. Fair enough. She has only been on the job for eight days. But she also isn’t communicating where she wants to take the company. What’s the plan, Carol?

Crunch Network: CrunchBoard because it’s time for you to find a new Job2.0

Yahoo's New CEO is Carol Bartz

Ed: Apple, Google, Microsoft, Facebook, and Amazon have been led by technologists. Media companies like NY Times and Timer Warner haven't figured the formula for success. Past Yahoo leadership has been from media. 

Why would a media leader be the best choice ;-)

from John Battelle's Searchblog

Not a lot of media experience in this choice, reported here by the WSJ. Kara had speculated on this previously.

Bartz has a lot of experience in other parts of the technology world, to be sure, and is widely respected. And I love that her former company, Autodesk, is in Marin, where I founded FM. But it does strike me that Yahoo needs a stronger suite of media-savvy executives now that Weiner and Rosensweig are gone.

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New York Times: We're Not Going Bankrupt In May (NYT)

from Silicon Alley Insider by Henry Blodget

The New York Times Company responded in detail to Michael Hirschorn's article in the Atlantic worrying that the company might go bankrupt in May. NYTCo's bottom line? We're not dead yet...

CLIP: Yahoo puts meat on Open Strategy bones

Ed: It's 1pm. Nothing released.

December 15, 2008 12:05 PM PST

SAN FRANCISCO--Yahoo on Monday began launching some of the serious aspects of its Yahoo Open Strategy, including a new version of Yahoo Mail that sorts the in-box according to your social connections and that can be expanded with mail-specific applications.

The first big change in Yahoo Mail is with its welcome page, which now spotlights messages from people in your Yahoo social network and invitations from others to join their social networks. Next, the in-box page now includes a new "from connections" button that shows messages only from those social connections.

Second is the arrival of online applications tied to Yahoo Mail. One inaugural program from Xoopit lets you view all the photos in your e-mail archive, even expanding links to online galleries. Another lets you convert an e-mail message into a WordPress blog post in two clicks.

"The opening of the mail platform is a huge benefit to users in terms of the additional forms of sharing and communication we can build in and to the dev who can build applications," said John Kremer, vice president of Yahoo Mail, speaking to reporters at a launch event here.

The Yahoo Open Strategy seeks to increase the number of users on Yahoo's Internet properties and the magnitude of their activity. If successful, both those goals would increase the number of pages on which Yahoo can show advertisements. However, Yahoo has lagged competitors such as Facebook with the addition of applications and a social dimension.

Yahoo Mail's new welcome page spotlights activity from a person's social connections. (Click to enlarge.)

(Credit: Yahoo)

Other changes
The Yahoo Mail change is one of a host announced Monday. Among others:

• Yahoo also announced changes to its customizable home page, My Yahoo, that lets you add applications and customize the page's appearance.

• A new toolbar for Web browsers also gets drop-down interactivity that can show what your contacts are doing, what e-mail you've received, and other information.

• Yahoo's media properties can spotlight your contacts' activities, such as when they assign a five-star ranking to a particular song.

"We wanted to establish a social dimension to a product," said Ash Patel, executive vice president of Yahoo's audience products division of the Yahoo Open Strategy goals. "We wanted to engage with the developer community and to open up the power of Yahoo's products and platforms."

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Hiring Numbers in Tech Show Which Sectors Are Strong, Which Skills Are in Demand from ReadWriteWeb by Marshall Kirkpatrick

We've just published aggregate stats for the past 6 weeks of new hiresreported over at Jobwire today and we think the numbers are pretty interesting. Marketing and social network companies are making lots of hires and both developers and community managers/new media specialists are getting a lot of those jobs.

Join us over at Jobwire to check out our pie charts and where tech and new media companies are putting their money these days.

Yahoo To Relaunch Launchcast Next Year With CBS Radio

Ed: Yahoo provides distribution, gives up content and ad sales.

Yahoo To Relaunch Launchcast Next Year With CBS Radio

Yahoo continues to outsource lots of businesses it previously built and maintained directly. Especially in music - In February they shut their subscription music service, and in September they announced a deal to allow full song playbacks through the Rhapsody service.

Next up is Yahoo’s radio product, http://music.yahoo.com/launchcast. The site today, which draws 3 million monthly unique visitors says Yahoo, allows users to listen to music based on preferred genres and artists. But Launchcast is limited only to Windows users on Internet Explorer, shutting out a large percentage of the Internet.

Next year they’ll shutter the service and relaunch with CBS Radio, much as AOL did earlier this year. CBS provides streaming for 144 owned radio stations, as well as providing some Internet-only content.

CBS will also take over ad sales for Launchcast, offering advertisers both display, video and audio ads...

Yahoo Ties Up With CBS To Save Streaming Radio Service

Yahoo has turned to CBS to help keep its LAUNCHcast streaming radio service alive. As part of the new partnership, CBS Radio will provide the player and handle the ad sales for LAUNCHcast, and various CBS (NYSE: CBS) stations will be available on Yahoo (NSDQ: YHOO) Music. Yahoo will also incorporate more radio content throughout its news and sports portals. It's the latest move in Yahoo's strategy to "completely open" its music operations to other services: the company recently launched an enhanced music search service with Rhapsody (the same company it offloaded its premium music subscription business to in February). 

Yahoo started shifting the focus away from LAUNCHcast late last year, plagued by the higher royalty fees that threatened to shut smaller Webcasters like Pandora down. Michael Spiegelman, head of Yahoo Music said CBS came courting at the most opportune time: "We didn't want to scale down or put up a lot of barriers with LAUNCHcast, but the economics of online radio had changed. It made sense to have a partner like CBS Radio ... They've made the investment in the infrastructure, the platform and the sales force to operate in a sustainable way."

CBS Radio's ad sales expertise is a big plus: it has a 1,600-member sales team, can sell ads on national and local levels, and has a vested interest in TargetSpot, the ad technology firm that can serve hypertargeted ads into various types of streaming media. CBS also has experience with a partnership of this size, as it merged its online radio network with AOL's back in March. 

Yahoo! Glue Finally Comes to the US and It's Awesome

Yahoo Brings Glue To U.S.: A Plethora of Aggregated Topical Third Party Content

by Michael Arrington on November 19, 2008

Yahoo Glue, a new search results page design that the company has been testing in India, is rolling out to the US market this evening. You can view it at glue.yahoo.com, although Yahoo says it is rolling out in stages, so sit tight if you don’t see it.

It’s also a little different than the Indian version, and includes a number of resources beyond what India’s version of Glue offers. On a typical query, content from Wikipedia, Yahoo Shopping, Yahoo Answers, blog search results (from Google) and YouTube videos are shown.

Yahoo! Glue Finally Comes to the US and It's Awesome

This May Yahoo! started testing an "all in one" search product called Yahoo Glue in India. It's a really cool service that tonight becomes available to US users of Yahoo.

Yahoo! Glue search results include web search, images, news, blog search, Wikipedia and YouTube videos. That's right - in the India version at least Yahoo! displayed search results from both Google's YouTube and Google Blogsearch. The end result - all these links on one page - is pretty awesome.

Pundit Picks For Yahoo CEO

Everyone's Pick For Yahoo CEO

Read up on what everyone is saying about who should or inevitibly will be Yahoo's next CEO. Then go vote for your choice or write-in a name in the comments.

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Writes BoomTown's Kara Swisher: "Obviously, the dream CEO for Yahoo is News Corp. President and COO Peter Chernin. Chernin has the right resume: Experienced at running large and complex organizations; savvier than most in media about the Internet; able to make the kinds of dramatic decisions needed; and, perhaps best of all, signaling-via the Los Angeles Times-just this past week that he was open to leaving the powerful media and entertainment conglomerate for something new.

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Writes Bits's Saul Hansell: "Yahoo doesn't need a chief executive so much as an editor in chief. And I mean the sort of imperial editor who has a vision of how to create an environment that lures in both readers and advertisers, like Tina Brown, Clay Felker or Adam Moss."

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Writes PaidContent's Rafat Ali: "Whether it wants a Silicon Valley-engineering-culture-steeped executive; or a media-business-New York-centric executive who will be the ad-industry bridge; or for that matter, an entertainment executive from LA, who would help build Yahoo's brand reach and bring in the big bucks (Terry Semel experience will make it wary, though). That decision would help define the future of Yahoo, and whether it survives as an independent company"

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Writes GigaOm's Om Malik: "Hopefully they will bring on a no-nonsense, [HP CEO] Mark Hurd-style executive who can stabilize and revive the company by making it leaner, simpler and have it focus on its core competencies. For PE investors, there is also comfort in the fact that Yahoo can at anytime sell its Asian holdings for a ton of cash. They might be able to find some takers for their European properties as well."

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Writes Valleywag's Owen Thomas: "[Frontier CEO Maggie Wilderotter] has several pluses: She's actually been a Silicon Valley CEO, unlike Yang, previous to his current run in the position, and Decker, who's long aspired to a top job somewhere, but now looks farther than ever from getting it. With media, advertising, computing, and telecommunications merging into a single business, it strikes me that most of Yahoo's board and management are ill-equipped for the transition. Not Wilderotter, who's worked for Microsoft and AT&T and run Wink Communications, an interactive-TV company which she took from startup to IPO, through boom and bust."

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Writes CNET's Stephen Shankland: "Analysts also believe it's better to hire a new CEO whose experience tilts more toward the advertising and media realm than the technology realm. Yahoo still has a powerfully large audience, and it's not going to outdo Google when it comes to letting the robots rule the roost."

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Writes the Daily Beast's Eric Jackson, picking Microsoft CEO Steve Ballmer: "The best outcome for Yahoo! shareholders of course would be if the new search committee never selected a CEO. This company should use this change in leadership to go back and open discussions with Microsoft about selling the company. This made sense when Microsoft made its initial offer last January at $31 and it makes sense (triply so) now."

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Writes TechCrunch's Michael Arrington: "Who will be the next CEO? We speculated back in June that Jeff Mallet orDan Rosensweig were possible candidates. Mallet wouldn't consider the job, we've heard. But Rosensweig would probably take it if offered. Whoever ends up with the job, let's just hope it's an outsider. Yahoo is being clear that they are considering internal candidates. President Sue Decker is likely being considered. But ex-execs we've spoken with say she was a big part of the problem at Yahoo, and if she takes over as CEO it will likely be more of the same."

Ed: Left brain or right brain. 

The answer is both. The CEO must know both the technologies that drive innovation and the editorial skills to sustain audiences. 

A superficial executive who does not understand the robotic, statistical, and fast evolving nature of the Internet will fail to make the right decisions. Conversely, the Internet is the largest global, consumer market - a challenge beyond the editorial experience of any past media executive. 

Yahoo is not ready for a financially focused executive like Hurd. Top sales guys can be hired. The company needs to respond with innovation to match Google and Microsoft. 

Given Ballmer at Microsoft, Schmidt at Google, and Jobs at Apple - I suspect the left brain will dominate, but the choice will be a consumer savvy executive.