Yahoo's Search for SalvationJerry Yang is digging himself into an ever-deeper hole.
The Yahoo chief executive's latest effort to keep the company independent, disclosed Monday, is a proposal to outsource just 25% of Yahoo's search-advertising revenue to Google for just two years.
This half-baked plan is worse than his original idea: to outsource an unlimited amount of Yahoo's search advertising to Google for 10 years. That plan, which ran into government opposition, would likely have allowed Google to cement its domination in search. But in return, Yahoo would have significantly boosted its search-ad revenue, giving it breathing room to put the rest of its house in order.
Now Yahoo is essentially cutting back on its competition with Google, without getting much in return. With only 25% of revenue from Google's more-efficient ad engine, Yahoo won't get a huge sales boost, but will have less incentive to invest in improving its own search technology.
Yahoo, meanwhile, needs to revive its lucrative display-advertising business. Yahoo still has a chance to dominate the market for online display ads -- those big graphical ads that can take up more than a quarter of a Web page. But it has pursued a misguided advertising strategy, combining its search- and display-advertising sales forces and focusing on technology to try to boost the rates of lower-priced ads running across the entire site.
The strategic change meant Yahoo neglected its core business of selling premium ads on its front page and lucrative section fronts such as Yahoo Finance. Amid the turmoil, Yahoo's respected ad chief, Wenda Harris Millard, left the company with other top talent, taking with them some of their cozy relationships with Madison Avenue marketers.
An overall downturn in online display advertising and increased inventory from high-traffic rivals such as social-networking sites has further hurt Yahoo. The company has hired Microsoft's longtime ad sales executive Joanne Bradford to turn the situation around. But that is a big task, which could be muddied further by a partial reliance on Google.
Yahoo doesn't have many good options. A deal with AOL would simply yoke two sinking properties together, possibly making them sink faster. Traditional media companies that have sniffed around Yahoo are too weak themselves to make a bid. And, given the economic weakness, any Yahoo recovery could be far off.
Shareholder patience will be finite. Earlier this year, Yahoo failed to grab Microsoft's discussed $33-per-share offer. Now, Microsoft might be able to snap up a weakened Yahoo, which is trading at about $13, for closer to $20. Having fought Microsoft so hard, Mr. Yang faces the prospect of being forced back to Microsoft chief Steve Ballmer to lift him out of his hole.
