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Tuesday, August 08, 2006

Where Will Yahoo’s Search Lead?

Stocks: (GOOG)(YHOO)(TWX)(NWS)

Google got the MySpace business from News Corp. The conventional wisdom is now that the search giant has the social networking giant’s business, it can increase its share of the search market from its current 60%. That leaves Yahoo! and Microsoft in the proverbial dust.

Yahoo!’s stock dropped below $27 on the news, moving it back toward its annual low of just below $25. The cost of the deal was reported to be $900 million to give Google the exclusive search franchise, and Yahoo! could certainly afford that. The company has nearly twice that amount in cash and short-term investment.

For some reason, Yahoo! obviously did not think the deal was worth it. With its own upgraded search technology just a few months away, most investors would think Yahoo! would have taken a deal to get this level of market penetration.

But, Yahoo! seems to be playing another game. While content providers are working on Google to get fees for the way that the search engine links to them, and one French news agency suing Google for $75 million for pointing to its content, Yahoo! already has a huge number of content relationships.

Even though Yahoo!’s search upgrade is running late, the company stopped making search the center of its universe a long time ago, and it now gambling that a wide aggregation of content will pull in banner and video advertising. Text ads are there, but they play a secondary roll. Oddly enough, AOL is making a similar gamble. Time Warner’s decision to give content and e-mail away free to many of its current subscribers is based on a belief that its content business and its huge network of instant message and e-mail users will allow it to be a dominant force in online advertising. Yahoo! also has strengths well beyond Google in the instant messaging and e-mail markets.

The market certainly does not like Yahoo!’s decision in losing the MySpace deal and was unhappy about the search upgrade delay. But, Yahoo! is clearly on another path now. Short-term that makes the stock a more risky purchase. But long-term no one knows if Yahoo! or Google is taking the more profitable path. It may take years for that to be clear.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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