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Yahoo! cedes search to Google

Lee Hower
June 13, 2008 · 1  min.

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Yahoo! proudly announces a search partnership with Google. What happens next? Their stock plummets 10% yesterday and another 6% today as of this post. For what it’s worth, GOOG is up about 3.5% this morning.

This of course must be viewed with the backdrop of Yahoo! abandoning acquisition talks with Microsoft. And the “partnership” between Yahoo! and Google also provides some outs on both sides… Yahoo! can in theory choose which of their search ad inventory they want Google to fill and Google can walk away if the the deal isn’t generating annualized revenue of at least $250M for them. But I tend to agree with Michael Arrington of Techcrunch will likely create a death spiral for Yahoo!’s search business.

a non-exclusive arrangement that let’s Yahoo take Google’s ads if and when they choose to, and put them alongside their own ads, and/or other third party ads. But the truth is that this will cause even more advertisers to flee Yahoo’s platform. Which will drive auction-determined ad rates down. Which will drive Yahoo to take more Google ads. Which will…

It’s a vicious cycle and they will have no choice, as a public company, but to rely more and more on Google as time goes on.

So in essence, Yahoo! is ceding it’s search advertising business to Google in the long run. Spin the “partnership” however you want in the press release, but in terms of who’s winning and losing here the market has spoken…

Lee Hower
Lee is a co-founder and Partner at NextView Ventures. He has spent his entire career as an entrepreneur and investor in early-stage software and internet startups.