Yahoo! to Strengthen Competitive Position in Online Advertising Through Non-Exclusive Agreement With GoogleHow does a company strengthen its competitive position by allying with its biggest, direct competitor? On the face of it, it fits with Yahoo's 'Open' strategy but this is not a long term solution. This is not enough to pacify the shareholders who feel let down by the missed opportunity to be acquired by Microsoft.
Both Google and Yahoo are cautious by saying that they will wait to see how the regulators react to this agreement:
Although Google and Yahoo! are not required to receive regulatory approval of the deal before implementing it, the companies have voluntarily agreed to delay implementation for up to three and a half months while the U.S. Department of Justice reviews the arrangement.--
So, who benefits from the deal? I think Google does for two important reasons.
1. Yahoo gives one more prominent site(s) for Google's AdSense. It's better to be placed alongside Yahoo's advertisements than be totally excluded from those sites.
2. Google and Yahoo "agreed to enable interoperability between their respective instant messaging services, bringing easier and broader communication to users." Google's IM client has not been a blockbuster success and Yahoo has a significant number of users and this combination helps Google.
Yahoo claims that "this is an approximately $800 million annual revenue opportunity. In the first 12 months following implementation, Yahoo! expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow." This is an estimate and we will see the results when we see the results!
Yahoo has been exploring many 'strategic options' since Microsoft's public offer earlier this year. What they have come up with so far is a potential increase of $450 million operating cash flow by working with its most direct, dominant competitor. How will the shareholders react on August 1?