Yahoo's Sleight of Hand
Yahoo CEO Marissa Mayer presides over a company in decline. To her credit, she has managed to get two tech giants to compete for her company’s affections.
Mayer announced on Tuesday an arrangement under which her former employer, Google, will serve up the links and ads for up to half of the searches people type into Yahoo websites. The Google deal -- assuming it checks off a long list of “ifs” -- is a hedge against Yahoo’s existing arrangement with Microsoft’s Bing, which has been handling most Web searches and ads for Yahoo since 2010. Mayer reworked the Microsoft contract earlier this year to give her the flexibility to work with Google, which generates fatter revenue than Microsoft does from each search.
For Mayer, the search partnerships give her a longer leash to fix what’s broken at Yahoo. The deal with Microsoft generated about 38 percent of Yahoo’s revenue in the first half of 2015. Jefferies estimates adding Google into the picture could add $5 to $10 a share to Yahoo’s value. The more nickels and dimes Mayer can squeeze out of Google and Microsoft, the more time and money she has to tinker with a business that is like the once reliable family Subaru that has started to break down regularly.
Yahoo’s revenue, excluding what it pays to companies that funnel Web visitors to Yahoo, has dropped or been flat in eight out of the last 10 quarters, according to Bloomberg data. Mayer’s much touted “Mavens” – her favorite acronym for company growth projects in mobile, digital video, native advertisements and social media -- now generate about 35 percent of the company’s revenue but don’t contribute much to Yahoo’s bottom line because the company has to split sales with partners such as Mozilla.
Mayer said Tuesday she was going to throw some unpromising projects overboard to appease investors unhappy with the company’s performance. (One problem, Mayer was wishy-washy when asked on Tuesday what exactly she meant by narrowing Yahoo’s focus.) The money from Microsoft and now Google funnels cash to Mayer’s newer initiatives, including a homegrown Yahoo technology called Gemini to sell mobile and Web advertisements.
That is contingent on Google actually getting into the mix with Yahoo. Even in the bare-bones disclosures released so far about the Yahoo-Google arrangement, it is clear this deal has more outs than an extra innings baseball game. The companies agreed that Google won’t serve up U.S. search results for Yahoo until the Justice Department gets to have a long look around. Either Yahoo or Google can walk away from the deal if one side grows worried about lawsuits or regulatory pokes in the eye over the search arrangement.
These two companies are no strangers to such worries. In 2008, Yahoo and Google backed off a deal that essentially would have outsourced Yahoo’s Web search functions to Google because of concerns that it would make Google too powerful. Business circumstances have changed since then, of course. Alphabet back then was still just a string of letters, not Google’s parent company. If anything, the regulatory scrutiny on Google has grown far, far more intense since then.
One thing that hasn’t changed much since the last go-around with the Justice Department is Yahoo’s central business conundrum: One billion people surf to Yahoo websites and apps every month, but it’s harder and harder for the company to make profitable revenue from all those people checking their Yahoo email or looking up stocks on Yahoo Finance. Company investors are understandably tired of promises that a Yahoo turnaround needs just a wee bit more time. If Mayer can’t generate new revenue on her own, at least she can convince rival tech companies to help her prop up growth.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Shira Ovide at email@example.com
To contact the editor responsible for this story:
Daniel Niemi at firstname.lastname@example.org