Kara Swisher

Recent Posts by Kara Swisher

The Yahoo-Microsoft Deal: Tick, Tick, Tick…Boom?

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Things are as tight as a tick over at Yahoo and Microsoft about the deal the pair have been discussing over the last months–as execs shuttle back and forth and forth and back and their boards deliberate on what will surely be one of the most important decisions for either company for the near-term future in the digital space.

And, if the pair don’t succeed in doing a deal this week, as many sources at both companies had thought they would, it will be interesting for those headed to Microsoft (MSFT) for its annual analysts meeting–including BoomTown–to poke at its execs until they give as to why.

It’s probably unfair to put such a focus on this possible partnership to join together on search and online advertising, but it’s also hard to resist handicapping it like a horse race.

That’s a mistake, because–while experts in negotiations often warn that the longer any deal takes to strike, the chances it will be struck become more remote–sources close to the Microsoft-Yahoo talks said the struggle to come to terms is due to the extreme complexity of the possible union.

And, as various reports debate the terms of the deal–from upfront payments to revenue share to the amount of data exchanged to branding issues–it is critically important to remember that, done badly or with too much haste, this massive deal is one with even greater potential to tank.

“It could be game-changing or it could be one the biggest bombs ever,” said one exec close to the situation. “So, obviously, everyone is treating this very delicately.”

So, when BoomTown dubbed Microsoft and Yahoo (YHOO) the Lindsay Lohan and Samantha Ronson of the Internet–as in, either break up or get together, but this endless back-and-forth is killing us–I was mostly kidding.

Even though, like clockwork, after looking happy together, Lohan and Ronson had a meltdown in recent days.

So too did Microsoft and Yahoo, when things looked great last week after a contingent of major Microsoft execs visited the Silicon Valley digs of Yahoo, in what sources close to the situation described as the final round of talks among execs before a board look-see.

Well, close but no cigar, in this case, in a deal that most agree the pair desperately need to strike for a variety of reasons.

First and foremost, it is simply because winning in search has everything to do with volume. As in: More Search Queries+More Ads=More Profits.

And, even at 20 percent share, Yahoo does not have enough of that, and what it has is getting less lucrative, even as its rival, Google (GOOG), surges.

Leaving aside all the money Microsoft has blown in the arena, that was clearly the message I got after rereading some of Yahoo’s financial screenshots from its second-quarter earnings last week (which you can see below in the two charts; click on them to make them larger).

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And while Yahoo makes a lot of profits in search and it needs to keep that record up, its recent record has been lackluster.

In the chart above, for example, revenue in owned-and-operated search’s year-over-year growth declined 15 percent in the quarter, after growing 18 percent the year before.

(In fact, all Yahoo’s O&O businesses–display, listings and other marketing services–were also down significantly.)

This is not the way you want to see the trend lines going, even in a weak economy.

And, in another worrisome trend, there was also a decline in page view year-over-year growth, which went from 23 percent up in the quarter a year ago to only seven percent in the recent one.

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While the new update of the homepage and a renewed marketing push will surely improve that, Yahoo has to once and for all figure out its core goals–which I think have to be clearly aimed at innovating in making everyday digital life easier for online consumers.

As one smart observer told me this week:

“Let Microsoft and Google duke it out in technology….Yahoo’s white space is to simplify everything for its users and neither one of them is as good at it as Yahoo.”