Microsoft or Google - what might be the Yahoo employee perspective? While guaranteed outcomes may trump the unknown for investors, a different logic seems to apply for Yahoo employees thus far. That’s understandable at this early stage of the process. It was assumed that Yahoo would occupy its current industry position for a long-time, fighting infinite rounds with Google. Being part of that battle within an independent Yahoo has carried a huge sense of purpose for employees. It’s only natural to want to see this set-up continue, especially since the web remains in its infancy and Yahoo is still the # 2 player. I’m not saying that the fight won’t continue as vigorously under new ownership. But it will be different.

The prevailing view on tradeoffs for employees has gone something like this — the ambiguity of a Google deal buys time and preserves the dream, whereas the Microsoft option brings certainty of the “not-so-fun” variety. I’m interested in opinions that dig into these assumptions and will offer ideas to kick-off that thread.

Teaming-up with Google on search buys independence but introduces unresolved issues about long-term positioning of the business. Yes, Yahoo would continue to operate an independent search product as well as it large web apps network such as email, jobs, movies, travel, personals, social bookmarking, photo sharing and finance, while better monetizing search through Google. That sounds great in theory because the only thing changing is that Google’s under the hood of search advertising. The user experience that we know as “Yahoo” would remain in-tact.

But two related issues surface as a result of such a partnership. First, Google has its own ambitions in web apps and their footprint is on a natural collision course with Yahoo’s established properties. Head-to-head overlap is growing (email, maps, personal finance, personalization, and video sharing are directly competitive). You might say that coopetition is a common dynamic across industries. In case you didn’t know, Ask.com, has an ad-sales outsourcing deal with Google while maintaining its own competitive search technology. They don’t seem to be complaining. One objection to this set-up, however, would be that the “cooperation” side of the strategy only makes Google better at the “competition” side of it. In the long term, the relationship feeds Google’s coffers to catch-up on the applications side. Unless there’s such a sustainable advantage in these web content properties, which don’t have the network effects of Google’s ad network, it’s possible that Yahoo would be accelerating Google’s entry into its prized content network spaces and categories. On the other hand, Yahoo can argue that with this new focus, it can build out new properties with greater effectiveness. It has, after all, been very successful at it both organically and through acquisition. Yahoo does know web content better than everyone else.

A second consideration is the lack of “clean separation” of ad inventory in the context of how stuff gets sold. It’s not as if search engine marketing is sold as an “island” since ad inventory of different varieties are likely to be packaged, especially in the case of direct sales. According to Jerry Yang’s most recent letter to shareholders:

“We also integrated our search advertising and display advertising sales forces, creating a one-stop shop for all of advertisers’ online marketing needs.”

This raises complexity in terms of coordination between sales and marketing organizations at the two companies. Who gets to sell what and how does this reconcile with the notion of integrated advertising and marketing programs? Structuring and managing this complexity with a partner (aka, competitor) is not going to be easy. I also wonder about the dependencies between controlling search advertising and search results quality. Amongst the many signals which search engine providers use to assess relevance, isn’t user behavior to search advertising part of that?

On the positive side, the deal does allow Yahoo time to drive some of its newer strategies. The company has been far more successful, for example, than Google in social networking (Delicious, MyBlogLog, etc.). Perhaps it can figure out a way to take these properties mainstream. Also, it has been developing technology that anticipates declining barriers between search and content. Yahoo has been very aggressive in cross-programming of related content across its network and some of those techniques could be based on newer “search-based” technologies. In web 3.0, we can imagine search being a less explicit user experience and more like the aforementioned approach.  In addition, new products like Structured Search, Blended Search and Shortcuts hold potential.  This ambiguity raises complexity for Google in terms of valuing a partnership. How can it guarantee specific revenues in a multi-year deal if Yahoo has the right to use advanced technologies to pre-empt traditional search behavior? I’m thinking about a scenario where Yahoo figures out the next disruption in search which causes it to make search a less prominent aspect of the Yahoo experience. I call this “search will eat itself.” Granted, this is all very speculative and not immediate, but it does make putting together a long-term partnership challenging.

Acquisition by Microsoft simplifies the fate of the business, no doubt. The combined business would make Microsoft number two on the web and dominant in certain categories, while combining efforts to catch-up in search. But Yahoo employees have their reasons for dampened enthusiasm about the Microsoft option. Here are some potential gripes. It brings finality to the Google vs. Yahoo rivalry. Motivation will decline. Microsoft is not a Valley company. A web-only company is different than a broad-based technology firm. Yahoo’s way of doing business is different than Microsoft’s. The Redmond-guys will be in control. Things will be more political and beaurecratic. Microsoft stock has less upside than an independent Yahoo (despite its prior slide). Whether or not these issues can be managed, they’re more personal in nature than the deal-related non-sequitors of the Google option. So while collaborating with Google might leave Yahoo in a potential no-man’s land of industry positioning, it might have greater appeal to employees because preserves the familiar way. Of course, hostile behavior has put a unique context around this situation too. Consider Peoplesoft employees, who were part of a company more dominant in business applications but smaller in size as an overall organization than hostile acquirer, Oracle.

Teaming-up with News Corp. doesn’t help matters too much at this point either. Tying Yahoo’s breakout strategy to a social networking angle via My Space is a sound objective when considered by itself. But in the context of this scenario (exit option for shareholders at a premium from Microsoft) it’s a weak alternative. This is because My Space is still doesn’t monetize well and Yahoo hasn’t cracked that nut either. Social network monetization is in the early stages. That means nothing fundamental to drive the stock price in the near-term. Perhaps this can work in Microsoft’s favor (recall its courting of Facebook). Assuming that Facebook cannot get the revenue engines moving, can you imagine Microsoft pulling off that acquisition too, say 18 months following a Yahoo deal? They are raising debt in the capital markets for the first time. This would be a tough scenario for Google. A potential response from Google would be to pull together a News Corp deal which merges MySpace into Google for a stake and, separately, buy AOL from Time Warner. At that point, we have Google and Microsoft with comparable product portfolios (search, portals/content networks, social networking). I’m totally disgressing, but some variant of these configurations are bound to happen if current trajectories persist.

Rolling-up the major tradeoffs for Yahoo employees, this appears to be a choice where certainty collides with the upside potential of an ambiguous alternative. Ultimately, employees won’t have much a say in the resolution of the matter and if Microsoft structures the incentives appropriately, they’ll get used to life with a new owner. After the dust settles, the main event will resume, albeit with a shuffling of the board.  It’s not lost on anyone that the web is still in its infancy. We’re still early in the game and people will still have a lot worth fighting for even if they change uniforms and teams.

That’s too bad for standalone Yahoo - it’s got a lot in the hopper right now and significant differentiation to leverage (plus it’s been doing algorithmic search since only 2004).  Wouldn’t it be strange if we sat here a few years from now acknowledging that all that potential was in fact realized by Microsoft?

• The Letter Where Yahoo Makes Its Case to Shareholders
• Will Yahoo Feel the Love?
• Yahoo Weighs Outsourcing Search Ads to Google
• Yahoo Partisans Go Online with Buyout Opinions
• Murdoch's News Corp Negotiating Alliance with Yahoo
• A Media Buyer's Perspective

Filed under: Google, Online Advertising, Search Marketing, Web Apps

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Tags: Acquisition, Employee Morale, Monetization, Coopetition, Ad Sales, Search Wars, Shareholder Activism, Capital Markets,