Say No

The Insiders Nicholas Carlson acknowledges that theyve long said Yahoo should go for a Microsoft deal for three reasons:

• Like Microsoft CEO Steve Ballmer, we believe that combining Yahoos bidders with Microsoft bidders for the same search keywords would drive up cost-per-click.
• Jefferies analyst Youssef Squali says outsourcing search infrastructure to Microsoft could save Yahoo $1 billion to $1.3 billion per year.
• Finally, ad agencies tell us they dont care if they buy search and display advertising from the same place.

But new information from a source very familiar with Yahoos advertising business yields four reasons why they #2 search company should just say no:

• While most agencies and ad buyers may not care if they buy their search and display advertising from the same place, some do and the number is rapidly growing. Our source estimates that two years ago, probably 30% of Yahoos advertisers bought into this convergence, 50% buy it now and next year, 70% will prefer taking their business to a search engine that can also sell display advertising and vice-versa.
• About 25% of Yahoos display revenues come through behavioral targeting, which doesnt work if Yahoo doesnt know what search queries its users are using"giving up search could drastically damage Yahoos display business.
• Google would be the only major Internet player that sells both forms of advertising. If Yahoo and Microsoft split the baby, Google that will become much stronger in the display space, says the source.
• Selling search would make it more difficult for Yahoo to recruit top engineers and sales people.

Clearly, Yahoo doesnt want to sell off half of its core business and cripple the rest.

The source also gives a list of stipulations Yahoo should make to be sure to maintain its search and display businesses:

• Feed its display advertising buyers into the search buying process without Microsofts help.
• Gain access to all search activity on both Microsoft and Yahoo search entrances.
• For good measure, Yahoo should be able to track how users interact with Microsofts Web properties " including its ads.

While it has always seemed obvious to some people that a deal with Yahoo and Microsoft was not only beneficial but inevitable, clearly this isnt a fait accompli. The source tells the Insider that no one at Yahoo really wants to make the deal, although the bottom line may end up dictating.

What do you think? Would a search deal with Microsoft really hurt Yahoos display business? Or is this source just worried about Microsoft taking over?

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