Yahoo Turns to This Competitor for Help

Yahoo (NASDAQ:YHOO) may be everybody’s favorite underdog, but it’s an underdog nonetheless. Between December 2010 and December 2012, the company fell from being the number two search service, with 16 percent of the market, to number three, with 12.2 percent. Stepping on its toes was Bing, powered by Microsoft (NASDAQ:MSFT), which increased its share of the search market from 12 percent to 16.3 percent over the same period.

The king of the jungle is, of course, Google (NASDAQ:GOOG), but the company seems to have hit a ceiling at about two-thirds of the search market. While Yahoo and Microsoft swapped spots in the top three and moved by 4 points in either direction, Google ticked just 0.1 points higher for a December 12 market share of 66.7 percent.

Like any good triad, the relationship between these three companies is both competitive and complimentary. In 2010, Yahoo and Microsoft signed a 10-year agreement in which Yahoo would use the Bing search engine to support its varied web services, and the two would share the search revenues. Ostensibly, the arrangement would pool their resources against Google, better the user experience, and increase cash flow.

But like many partnerships, the Microsoft-Yahoo alliance has failed to live up to expectations…

“One of the points of the alliance is that we collectively want to grow share rather than just trading share with each other,” said Mayer at the Goldman Sachs Technology and Internet Conference in San Francisco on Tuesday. Referring to the deal with Microsoft, the underwhelming returns on the partnership are just one more thing on Mayer’s list of problems to address as she aims to restore the company’s position in the pantheon of technology and Internet titans.

To get an idea of the long-term difficulties that the company has faced, here’s a snapshot of its earnings over the past few years.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 7,209 6,460 6,325 4,984 4,987
Diluted EPS ($) 0.29 0.42 0.90 0.82 3.28

Yahoo saw a very slight increase in 2012 revenue and a jump in earnings, but the boost was mainly due to the sale of some of its stake in Alibaba, a Chinese Internet company that has become fairly successful. Otherwise, the revenue picture has been consistently grim.

But Yahoo’s long-term struggle with revenue and relevancy in the search market is countered by some positive movement on the stock chart. Investors seem to have faith in the new direction the company is taking under Mayer’s leadership, bidding shares up more than 41 percent over the past six months after a long period of effectively no movement.

Supporting the cause, and adding a shade of drama to the Microsoft-Yahoo-Google triad, is a recently-announced partnership between Yahoo and Google, in which Yahoo will display ads through Google’s AdSense and AdMob services on some of its web properties. Yahoo will not only get a cut of the revenue, but delivering relevant, targeted ads to its users promises to improve their experience. Only time will tell if the partnership pays off, or becomes another unsatisfying relationship.

But no good deed goes unpunished, and the revitalization of Microsoft’s “Scroogled” campaign could attach some public-relations concerns to Yahoo’s flowering relationship with Google. The Scroogled campaign draws attention to how Google gathers the information it uses to deliver targeted ads, and many people feel that its means of data collection are overly invasive.

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