Carmi Levy: Yahoo's options, now that it appears to have some

At this time last week, Yahoo was said to have reached the end of its rope. It didn't appear very viable on its own, and certainly no one would be crazy enough to try to top Microsoft's cash offer. Seven days later, and it's a different world.

Just days after Microsoft's February 1 bombshell that it was going after Yahoo directly, many financial analysts declared Yahoo to be headed to that great collection of defunct Internet brands in the "cloud" someplace, perhaps alongside Netscape.

Then on Wednesday, Yahoo executed what can only be called a masterstroke, announcing a simple beta test involving Google's AdSense for Search, and explicitly telling analysts not to make anything of it, especially since Yahoo has every right to explore "strategic alternatives." Suddenly, it seemed Yahoo had a world of options available to it that weren't available the week before, including a very real chance of its brand and its executive suite surviving mostly intact.

But in the wake of Yahoo's move came a truckload of wild speculation, including the notion that Microsoft could go so far as to elicit the help of News Corp. to mount a joint takeover of Yahoo. And this morning, AOL -- now considered Yahoo's prospective alternate merger partner -- went so far as to fuel the speculation engine even further, with its CEO bringing the subject up in a publicly-leaked memo by way of saying he couldn't talk about it further...and just before talking about it further.

Sense often begets nonsense. So to help us reverse the situation back to making sense again, BetaNews enlisted the help of our perennial sense-maker, AR Communications senior vice president Carmi Levy.


AR Communications Senior Vice President Carmi Levy
AR Communications Senior Vice President Carmi Levy

CARMI LEVY, Senior Vice President for Strategic Consulting, AR Communications: Clearly what precipitated this uptick in activity between Microsoft and Yahoo is the fact that their combined position in the market has continued to weaken since Microsoft first announced its bid. And with Yahoo expected to report later this month much weaker results, that's only going to put Yahoo on an even slipperier slope. So the clock is certainly ticking for Microsoft to consummate a deal; and at some point, it doesn't matter what form it takes, it needs to close this off and move on. Otherwise that window of salvation for Yahoo is ultimately going to close.

SCOTT FULTON, BetaNews: Wednesday's move, you've got to admit, was a masterstroke on Yahoo's part: Google didn't even have to do anything. It was perfectly timed, and a great idea: Open up a little beta test for a couple of weeks, we'll throw some Google ads onto our site. And put out a statement saying that's what we're going to do, [but] don't make anything of this!

CARMI LEVY: They say it's a technical or marketing effort; it has nothing to do with structural rearrangement of the company itself.

SCOTT FULTON: Pay no attention to all these people behind the curtain. Speculate what you will. And it could be nothing, really, but what it does is, it completely changes the conversation. Last Friday...I'm waiting in a lobby and I'm overhearing the TV next door, and they're watching CNBC. And these analysts are saying Yahoo has no choice now; they basically have to face the music, come down off their soapbox, accept the Microsoft bid, take it for what it's worth...and move on to be part of history. They failed, at this point.

And yesterday what Yahoo does is announce a little beta test with Google -- who knows if Google is even involved with this?

CARMI LEVY: Exactly, because Google isn't saying anything.

SCOTT FULTON: They don't have to! Yahoo has every right to be an affiliate as BetaNews does.

CARMI LEVY: As anyone else.

SCOTT FULTON: And suddenly there's all these possible alternatives! Yahoo has life! It can survive this!

CARMI LEVY: But of course, it begs the question, what are Yahoo's intentions in all of these maneuvers? Are they truly fundamentally opposed to a Microsoft bid, or are they secretly pleased that Microsoft continues to pursue them, but they simply want to sweeten the deal?

SCOTT FULTON: I would think their major shareholders have a monetary investment in the technologies that Yahoo is developing, and all the stuff that they've acquired, including the Right Media Exchange and all these new properties -- all that stuff would fall by the wayside if Microsoft got a hold of it. [Microsoft doesn't] want that. They just want the employees and they want Yahoo out of the way.

So I would think that these major shareholders would say, "Well, if I'm not going to see any return on our investment after all these years of working on Panama and Right Media and these other projects, then I'm gonna vote it down." Now, here's a scenario where at least most of these things can stay alive. So would the Yahoo brand, and so would its independent stake as a competitor against both Google and MSN. I would think that major and minor shareholders would be overjoyed by this.

CARMI LEVY: You'd think. Of course, the question is, will the market concur and will the market bolster the share price in response? Because at the end of the day, that's really the only thing that matters. It doesn't matter what one block of major shareholders thinks; it really matters what the entire market thinks. And so far, since the deal was announced, the market has pretty much yawned and driven the stock value down, because they continue to not have confidence that the company on its own will be a viable, long-term concern. At the end of the day, shareholder value is really the only thing that matters, and thus far, Yahoo as an independent company hasn't sent those broad-based messages to the market that it's capable of bolstering and improving that value proposition over time. Hence the latest wave of activity.

SCOTT FULTON: But maybe if they had more intensive and experienced executive leadership helping them out here, they could achieve some of these goals. And some of that leadership could be forthcoming with an infusion from AOL.

CARMI LEVY: Right, and I think there's recognition that Yahoo's current leadership team has pretty much run out of options in terms of positioning the company as a market leader in the future. They've gone as far as they can go, they've done as much as they can do, and I believe that new blood is needed, and I believe that Yahoo itself recognizes that. The question is, who's going to provide that new blood? Will it be Microsoft or will it be AOL? Which of Yahoo's current suite of suitors is best to fit, to provide that kind of expertise that will help Yahoo out of the current funk that it finds itself in?

SCOTT FULTON: Well, let's face it, isn't it the fact that Yahoo isn't the market leader it used to be, with maybe an exception that it has an eyeballs lead in terms of portals, due to the evolution of the Internet in general? We're not talking about a landscape where you can really have one dominant player; let's face it, there are 18 or 19 dominant players.

CARMI LEVY: Right, but I think this is a case where Yahoo's leadership failed to properly lead how the market and how the Internet was transforming itself, and while they were focused on being the dominant Web presence on the Internet, that over time became less and less relevant as monetized search became the engine of growth that Google capitalized on. Yes, Yahoo has the traffic and Yahoo has the eyeballs, but they increasingly lagged Google in terms of converting all that traffic into bottom-line profits.

SCOTT FULTON: But let's face it, wherever Yahoo failed, MSN exploded! It flopped miserably!

CARMI LEVY: Absolutely, but the difference between Yahoo and MSN is that Yahoo's Internet-based operations were the core of the company. MSN's Internet-based operations were not the core of Microsoft, and Microsoft still had revenue streams from desktop operating systems, productivity software, server software, development environments. Microsoft still had a whole other viable business that was able to fund its continued growth through the decades, whereas Yahoo was not so well-diversified.

SCOTT FULTON: So as some financial analysts paint this picture, Microsoft can still acquire Yahoo, continue to fail in this respect, and be buoyed by the fact that it still makes Windows and Office.

CARMI LEVY: Yea, but that's a window that will not stay open for ever.

SCOTT FULTON: I sense a closing in this department, even as I speak.

CARMI LEVY: Exactly, because the transition away from the PC-based paradigm of computing toward the Internet-based paradigm is well under way, and so there is widespread recognition that Microsoft represents the vision of yesterday, while Google represents the vision of today and tomorrow. While Microsoft today still has multiple revenue streams on which it can rely, it's also faced with the cold, cruel reality that its legacy streams of revenue are going to slowly dry up over the next few years, and either it gets its Internet strategy/act together, or it too will find itself in straits similar to what Yahoo finds itself in today -- namely on the receiving end of a bidding war.

Next: Can Yahoo survive the next three years?

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