What if Yahoo! had purchased Google?

Yahoo + GoogleFred Vogelstein published an article in Wired last week entitled “How Yahoo Blew It.” It’s gotten a bit of buzz in the blogosphere since then.

The article discusses Yahoo!’s (YHOO) potential purchase of Google (GOOG) in the summer of 2002. (Disclosure: I’m a Yahoo! employee and shareholder.)

It made me wonder. What if Yahoo! really had purchased Google back then?

In Terry’s Shoes

Before we get there, let’s first re-examine Terry Semel’s decision. Put yourself in his shoes. It’s the summer of 2002. The dot-com had dot-bombed. Lots of Internet companies had gone or were going out of business. Even you had to lay off some of your employees last year.

But this year, your finances are improving. You’ve raised your free cash flow to rougly $220 million. Your market cap is about $10 billion. The next step for Yahoo! is to purchase some competent search and search advertising technology, since Google and Overture are proving that these business models work.

So you make a pitch to Google for $3 billion dollars. It’s a lot for you, but you figure it’s a fair sum. They turn it down. So then you make a pitch for Inktomi and Overture for a combined total of about $1.6 billion. They accept. At that price, it feels like you’ve gotten a great bargain!

In Terry’s defense, he made what he thought were smart business decisions. I don’t know if many others would have made different decisions back then.

Yahoo! + Google

Now let’s say Google accepted the $3 billion. Yahoo! gains search and search advertising technology. The search advertising market grows exponentially and Yahoo’s stock soars. Maybe not at the levels Google reached, but it’s an impressive climb.

The integration with Google is relatively easy. Any software engineer will tell you that massive integration projects rise in complexity with the number of integration points. Inktomi and Overture would have been two integration points. Google is only one.

(This is just a gross generalization, of course, but from a high level, it probably would have been easier to integrate Google than Inktomi and Overture.)

The search market now consists of Yahoo!, Microsoft (MSFT), and AOL (TWX). The press cries that it’s Yahoo! vs Microsoft. MSN enters desktop search immediately, followed by a late entry into the search advertising market when Ray Ozzie climbs on board.

Yahoo!, on the other hand, doesn’t provide any major updates to Yahoo! Maps or Yahoo! Mail, at least not in the way that it has now. Without the threats of Google Maps and Gmail, Yahoo! doesn’t push into the rich internet application space as quickly. Also, the mash-up phenomenon is birthed from start-ups, instead of Google Maps.

So while Yahoo! is making all of its shareholders happy as clams, it doesn’t innovate its web products as much. Instead, it turns around and fights Microsoft in the desktop and device markets. The press heralds this as a smart move; Yahoo! has dominated the web products world, so now it must contend with Microsoft in desktops and devices.

Competition Makes One Stronger

The lack of a formidable competitor generally means a company doesn’t fight as hard. That’s not to say Yahoo! wouldn’t have continued to evolve its web products, but it might not have evolved as aggressively. Ironically, many of Yahoo!’s products may have become better because of Google.

Does this mean Terry Semel made the right decision? Well, I think he made the rational decision at the time. It’s the relatively slower integration of Overture that hurt Yahoo!, not the presence of Google in the market.

Author: Mike Lee

An idealistic realist, humanistic technologist & constant student.

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