Yahoo Search: Sell It, or Keep as a Buffer?

Includes: AABA, GOOG, MSFT
by: Larry Dignan

Yahoo’s (YHOO) second quarter results yielded information that may indicate that selling its search division to Microsoft wouldn’t be such a bright idea.

After perusing Yahoo’s second quarter results and the conference call transcript one conclusion screams out for attention: Search revenue is the great buffer in this recession.

Google's (NASDAQ:GOOG) results showed search is recession resistant. Yahoo confirmed that theory. Yahoo’s second quarter search revenue was up 11 percent compared to a year ago (Google’s search revenue growth was 22 percent). Yahoo’s search revenue helped offset a 2 percent sales decline in display advertising.

Yahoo CFO Blake Jorgensen said:

We are pleased that over the last four months our US web search share has stabilized according to comScore, demonstrating that the search product investments we’ve made over the last couple of years are paying off.

New Yahoo CEO Carol Bartz was vague about a potential search deal with Microsoft (NASDAQ:MSFT). Wall Street analysts estimate that Microsoft would fork over a big upfront payment and minimum revenue guarantees in exchange for Yahoo’s search market share.

Should Bartz sell Yahoo’s search business?

On paper, the deal makes sense. Yahoo could focus its business on content and reap billions in revenue – not to mention save hundreds of millions in operating costs.

Here’s what Yahoo CEO Carol Bartz had to say about Yahoo search:

Am I planning to immediately sell the search business? I did not arrive here with preconceived notions about anything. I’m still learning about the business, and our integrated search and display model. It’s very, very easy from the outside to have a strong opinion about what Yahoo! should or shouldn’t do, not just about the search business, but I’m finding out about everything.

Like all of you, my opinions as an outsider were influenced by all the extraordinary attention we received last year. But now as an insider and CEO, it’s my job and my responsibility to do what’s best for our customers and our shareholders. After a short time on the job, it should be obvious I’m still working my way through that thought process. That said let me make a few observations about search.

Search is a very valuable part of our business, understanding the intent and goals of our users as they seek information online is extremely useful to our franchise in many ways. There’s been a lot of talk about Yahoo!’s position in the search market, but some of the most important Yahoo! search stories are being overlooked. We’ve been introducing new features and capabilities to search at a faster pace over the last year, and in late 2008 Yahoo! query share began to stabilize. Our share remains almost three times the size of the number three player.

The fact is, that the quality of our search product is improving and the share staff supports that. Providing the best quality product that we can give our users always makes sense in search or anywhere else, that kind of focus increases the value of the product, which is good for our brand and good for our shareholder, no matter what our long-term plans.

Bartz may have missed the most important part of the search equation: Yahoo will need that search buffer for the foreseeable future. If display advertising continues to be weak, search will matter. Perhaps search will matter so much that a sale to Microsoft doesn’t make sense.