Why Yahoo (YHOO) Should Go Ahead With Google Outsourcing Deal (GOOG)

Yahoo’s search partnership with Google (GOOG) played a major role in allowing the company to fight off Microsoft (MSFT). By offering the hope of immediately higher cash flow, it should also stop Yahoo’s stock price from falling back to the teens.

In his sayonara letter, Steve Ballmer urged Yahoo to kill the partnership, arguing that the engineers behind Panama were one of the main reasons Microsoft wanted to buy Yahoo and that, if Yahoo did the deal with Google, they would leave.

And he’s right: They will (or at least they’ll move on to other projects). That’s part of the reason the outsourcing deal makes sense: It allows Yahoo to focus on businesses it can win, instead of throwing money at a war it has already lost.

Others argue Yahoo should now abandon the Google partnership because:

  • It’s a “now and forever” decision–there’s no going back.
  • Google will now rule the world.
  • AOL outsourced–and now look at it.
  • Microsoft’s search solution will now be even more marginalized.

Only one of these reasons is valid: There’s no going back. The rest aren’t Yahoo’s problem.

Query share is all that matters–and Yahoo’s down to 20%

What will determine the future of the search business is not back-end ad technology but user query share. And Yahoo, Microsoft, and the rest of search sites have been losing share since Google entered the game. This loss of share will likely continue, no matter what Yahoo does on the technology side.

The decision for Yahoo on whether Yahoo should outsource, therefore, should come down to the following:

Does Yahoo realistically believe that continuing to invest in Panama will allow it to start regaining query share? If the answer is “Yes,” then Yahoo should NOT outsource to Google. If the answer is “No,” it SHOULD outsource.

Based on the past five years, the answer would seem to be “No way, ” which means that Yahoo should go ahead and outsource and get as much profit as it can out of search while it still has some share. This is what AOL did, and this decision, at least, was a sane one. AOL’s outsourcing hasn’t stopped the loss of AOL’s query share, but AOL would have lost this anyway.

Bottom line, if Yahoo is finally ready to wave the white flag on query share–which, by now, it should be–then outsourcing makes sense. No sense in continuing to fight a battle you have already lost.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.