BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Why Yahoo! Should Exit the Search Business Entirely

This article is more than 10 years old.

yahoo chloe (Photo credit: jencu)

Three years ago, Yahoo! (YHOO) signed a deal with Microsoft (MSFT) to outsource its search to Bing.  It retained the right to sell premium inventory for it.

At the time, Yahoo! was the #2 player in search behind Google (GOOG).  Many thought the deal would lead to lower Yahoo! costs (as they could layoff search employees), and higher revenues.  That was the whole justification for the deal.

It hasn't worked out.  Yahoo!'s now the #3 player in search queries behind Bing and it gave up control of their destiny in that space (by which I mean all the back-end search algorithm magic that returns proper results).  They also didn't get much of a bump in revenues or a big drop in costs.

In fact, search revenue has gone in a free fall for Yahoo!.  It dropped 41% last year from $3.2 billion to $1.9 billion for Yahoo!.  It also dropped 7% in the prior year (and by the way all these numbers I am reporting come directly from Yahoo!'s own 10-Ks where they distinctly compare their "search" revenues compared to "display" and "other" for the years 2008 - 2011; so my observations here are all based on how Yahoo! itself presents its search revenue data relative to its other data).

You think that's bad?  It gets worse.

Yahoo!'s search revenues were almost $4 billion in 2008 and it accounted for 52% of all Yahoo!'s revenues.  Last year, search-related revenue dropped to 37%  of its revenues.

Display revenue for Yahoo! has stayed roughly flat in the last 4 years.  It was $2 billion in 2008 and $2.2 billion last year.  Given search's self-destruction, however, display has become much more important to Yahoo!  It represented 43% of revenue last year versus 28% in 2008.

So, what is new Scott Thompson going to do with search?

According to Kara Swisher's reporting a couple of weeks ago, "everything is on the table" at the moment.  We might find out tomorrow when part of the strategy is released (presumably) during their "all-hands meeting."  But Swisher did say:

The changes being contemplated include, as I have written previously, the possible sale or drastic reconfiguration of its ad technology business, which will effect at least 1,000 employees. Another 1,500 involved in Yahoo’s search business will also be impacted, depending on talks the company has been having with Microsoft, as well as Google, about better monetization.

One thing I've learned following Yahoo! and Swisher's reporting over the years is that most of her "hints" of what is to come tend to be dead on.

So the quoted paragraph above suggests to me that another 2,500 jobs - in addition to the 2,000 last week - are likely on the block soon.

I would assume that the ad tech business gets jettisoned soon.  Will it get back the $524 million that Yahoo! spent in 2007 to buy Right Media?  Probably not but it could end up being worth more than lots of people expect.

And what about search?  Other than Swisher's mention, I haven't seen anyone else pick  up on the possibility that Yahoo! is considering dumping Microsoft for Google.  Maybe it's because no one thinks they can.

After a 2008 flirting, the DOJ put the kibosh on a possible partnership between Yahoo! and Google.  Microsoft seemed like the only dance partner left.

But Yahoo! can cancel the Microsoft deal at any time (after a tail period).

Could they partner with Google instead?  They're the #3 player in the market today and certainly far less powerful than they were in 2008 when they were talking to Google (by half!).

Could they renegotiate the deal with Microsoft? Certainly.  Why not?  It's been a terrible deal for Yahoo! so far.  How have Yahoo! shareholders benefited at all from the 2009 deal?  By Kara's count, they still have 1,500 employees (not including extra full-time contractors that might be hidden from view) and rapidly deteriorating revenues.  (Reuters recently reported that Yahoo! actually had over 1,800 people in search.)  Yet, Microsoft and Yahoo! recently extended the RPS part of the deal.  Why?  It helps Bing but not Yahoo!

But as long as - as one Yahoo! person said to Kara -- "anything could be blown up by Scott," what about Yahoo! shutting down search altogether?  Just completely exit the business.

Here are some reasons to consider it:

- Investors aren't giving Yahoo! any credit for search anyway in the stock price.  At current levels, Yahoo!'s entire core business itself is generating a negative market value.  Turn off search then.

- Yahoo! would immediately save the annual cost of those 1,500 full-time employees in search.  This is likely another $300 million in annual savings, given Yahoo! said it was going to save $375 million annually from sacking the 2,000 product people last week.

- Yahoo! search seems to be going to zero anyway within a couple of years.  It's gone from $4 billion in search revenues in 2008 to $1.8 billion last year.

- Yahoo! profits from search are likely negligible today.  We know Yahoo! generated $1.8 billion in revenues last year, but net profits are likely much less after paying Microsoft and its own employees.  It's not worth the hassle. Shut it off.

- Skate where the puck is going, not where it's been.  Investors are giving the core business a negative value today.  Why not focus on areas that are going to be billion dollar businesses in a few years?  It's too bad Yahoo! hasn't made more from search. It's too bad they didn't buy Google.  But history is history. Move on.

- Focus on using its search patent portfolio to extract a lot of value.  Call it the Tim Armstrong strategy.  Sell the search patents to someone who can use them.  Get an auction going between Google, Facebook, and Microsoft.  Let the highest bidder take on the Overture/GoTo.com patent (which of course was at the heart of the 2004 pre-IPO deal with Google).

- Finally, by exiting the search business entirely and ripping up its search partnership with Microsoft, Yahoo! would be freed to partner more closely with Google in the future in other areas, as it would no longer present an antitrust concern in the search arena.  Google could help sell ads across Yahoo!'s properties.  With a slowing core business, Google could be very interested in such a proposition.

I have no idea if this move will be part of Scott Thompson's announcement tomorrow.  However, the guy seems to be willing to do something bold.  Exiting search would be very bold.

[Long YHOO]