Page last updated at 17:02 GMT, Wednesday, 5 November 2008

Why Google put another nail in Yahoo's coffin

By Tim Weber
Business editor, BBC News website

Can Yahoo survive the collapse of its advertising deal with Google?

Yahoo billboard
The collapse of the deal is a blow for Yahoo

Poor old Yahoo. Can nothing go right for this grizzled pioneer of the internet world?

Its attempts to create bespoke content fit for the age of the internet have gone disastrously and expensively wrong.

Huge investments and numerous acquisitions have done little to improve its standing in the web's most lucrative money spinner: paid search advertising.

Earlier this year, Yahoo founder and chief executive Jerry Yang and his company's board rejected a juicy takeover bid from Microsoft. The software giant was prepared to pay $33 a share. These days its shares trade closer to $14.

Hope evaporated

When Yahoo's bosses said no, they promised shareholders that an advertising alliance with Google would deliver bigger rewards.

Now their hope to divert some of Google's huge advertising income into their company's pockets has evaporated.

The deal failed simply because together Google and Yahoo would have dominated the markets in both display advertising (the big picture ads on web pages) and paid search advertising (the small text ads shown on a page that complement the results you get when using a search engine).

That made competition watchdogs around the world sit up and take note. The US Department of Justice had made it clear that it would try to block the deal as it stood.

Yahoo still insists that it can tweak its terms to make the regulator happy, but Google had neither the stomach nor the need to fight this one out.

After all, it was not just regulators who were unhappy. Companies of all sizes - from advertising giant WPP to tiny e-commerce firms - where worried about being dependent on a single company to do their online advertising.

In its statement cancelling the deal, Google said it did not want to "damage [the] relationships with valued partners".

No buzz, no business

For Yahoo, the situation is getting increasingly dire.

Yes, its websites are still the most popular internet destinations in the United States (more popular than Google), but this huge presence on the web is simply not generating enough revenue.

The company is lacking the buzz that it needs to grow, is short of a business model and is wearing thin the patience of its shareholders.

Microsoft will have enjoyed the fact that for once the spotlight of competition authorities was directed at its rivals, especially Google.

One winner

Unsurprisingly, Microsoft's lobbyists were busy fanning the flames that devoured this ad deal.

But their spectacular success is not enough to make Microsoft a happy company today, because at the end of this chapter of internet history, there is only one winner: Google.

Its brief collaboration with Yahoo scuppered that company's merger with Microsoft.

The protracted and ultimately failed takeover bid itself, meanwhile, consumed a huge amount of Microsoft's corporate energy.

At the end of it, Google stands unscathed, with two important competitors weakened.

Yahoo, meanwhile, may find it difficult to find the cash for the investments needed to compete with its web rivals.

At the same time, it is doubtful for how much longer shareholders will trust Jerry Yang's leadership of the company.

Yahoo is not dead - yet. But if somebody is building a coffin for Yahoo, they can go to Google to pick up some nails.

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