Why Yahoo shouldn't sell search

The tech world's worst-kept secret is that talks with Microsoft are on again. But Yahoo should think twice before selling a key part of its business.

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By Jon Fortt, senior writer

Yahoo CEO Carol Bartz

SAN JOSE, Calif. (Fortune) -- During Yahoo CEO Carol Bartz's conference call Tuesday to discuss the company's quarterly results, there was much to discuss:

Sales fell 13% and profits sank 78% as advertisers cut back on online spending. And the company confirmed reports of layoffs, saying it would shed about 675 jobs.

Yet analysts seemed to care about only one thing: Yahoo's search business.

The worst-kept secret in the tech world is that Yahoo (YHOO, Fortune 500) and Microsoft have been talking again about a potential deal. So everyone wanted to know if Bartz would sell search.

But that was the wrong question. A better one: Why would she?

Yes, Microsoft (MSFT, Fortune 500) covets Yahoo's search business as its best hope for taking on Google (GOOG, Fortune 500). Yahoo has a 20% market share in search, which would give a big lift to Microsoft's 8% share. Google's commands 60% of the market.

Less clear is what Yahoo would get from a deal. Microsoft could offer to let Yahoo sell prime display ad space on its MSN properties perhaps, but that would leave Yahoo's ad sales group in the awkward position of selling MSN inventory in competition with space on Yahoo properties.

And it's not as though Yahoo is desperate for cash. It has nearly $4 billion in the bank, and its stock price has been holding up just fine - its shares are up 12% this year.

Meanwhile search isn't just some non-core business that Bartz can toss off.

When Internet users plug a term into a search engine, they're providing clues about what they want, and what advertisers might be able to sell them. That's valuable data for the Yahoo engineers who are trying to improve their system for showing the right display ad to the right person at the right time - a minivan ad to an expectant mom, perhaps.

Then there's the matter of measurement. Ad buyers haven't been shy about telling Bartz that they want a clearer way to prove to their clients that ads on Yahoo lead to a measurable result - a test drive, say, or a purchase. If Yahoo can show that someone who sees a flashy display ad for a minivan later searches for one, that's a step in the right direction.

But none of that can happen if Yahoo surrenders the search business - and that's something Bartz doesn't seem inclined to do. While I was working on a profile of Bartz for the current issue of Fortune, that was a theme that repeatedly surfaced. Ad industry executives who have met with Bartz said she told them that Yahoo's 20% search share in search is plenty to work with, and that she's not going to do any deal that threatens Yahoo's access to search data.

There are also short-term reasons not to sell search. Bartz's sales leaders have told her that the top 200 advertisers like having the option of buying search and display ads as a package from one company. So if Yahoo were to give up, it would be like handicapping the sales force.

That's not something you want to do, particularly during a bruising recession.

If Bartz can ink a search pact with Microsoft that leaves Yahoo in control of the overall search business, that could be a better option. But such a move would add lots of ambiguity to an area that's strategically important to Yahoo, right when Bartz is trying to simplify management and make it clear who's in charge.

With so many minuses and so few plusses, Bartz's best option is probably to keep search close to home. To top of page

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