Mercury New Editorial – June 18th, 2006- The 4 1/2-month drama over Yahoo has ended in momentous defeat for the Sunnyvale Web portal. Yahoo may have succeeded in fending off Microsoft, but it’s in danger of being further eclipsed by a younger, nimbler Google. After repeatedly spurning Microsoft, Yahoo last week struck a partnership that will make it dependent on Google in the key business of Internet search advertising. The deal gives Google, already the dominant player with more than 60 percent market share, even more power. That’s worrisome for competition and innovation in Internet services. The pact that unites the No. 1 and No. 2 players deserves serious scrutiny from antitrust regulators. The rebuff of Microsoft by CEO Jerry Yang and Yahoo’s board also will go down as one of the most blatant dismissals of shareholder interests in corporate history. Yahoo was worth $19 a share before Microsoft revealed its $31 a share offer, later raised to $33 a share, or $47.5 billion. Today, the stock is at $23. With angry investors like Carl Icahn agitating, leadership changes at Yahoo are still possible. Yahoo is a damaged company with a dicey future. It’s likely to remain a pawn as Google and Microsoft continue jostling for strategic advantage. Under the outsourcing deal, Yahoo will publish Google text ads alongside some Yahoo search results, generating up to $450 million a year, but ceding key ground to Google. The deal could make Google’s ad technology an even bigger draw for advertisers, further undermining Yahoo’s ad platform. That could push Yahoo further toward irrelevance and threaten its long-term viability. Microsoft’s unsuccessful pursuit of Yahoo exposed the software giant’s own weakness as a distant No. 3 in Web search and advertising. It showed a befuddling lack of commitment to getting the deal done. And Microsoft is left grasping for a bigger, better foothold in Internet services. Google emerges as the only winner. It’s poised to widen its lead over Microsoft, the aging one-time monopolist, and Yahoo, the first-generation Internet icon. In Silicon Valley, leadership in the market remains the province of those who continue to innovate.
