Ouch! Yahoo! Becomes Major MSN Search Services Provider

Yahoo!'s $1.6 billion acquisition of Overture potentially is a huge blow to Microsoft. Yahoo! announced the transaction this morning. In the Jupiter Research report "MSN Search: Microsoft Guns for Google, the Desktop and the Enterprise," which published today, Matthew Berk and I predicted that Yahoo! would likely buy Overture.

The acquisition puts Microsoft in the difficult position of relying on rival Yahoo! for key services, alogrithmic search technologies and paid search. Earlier this year, Yahoo! acquired Inktomi, which provides alogrithmic services to MSN. The Overture deal is potentially more problematic for Microsoft. That's because the majority of MSN revenue comes from paid search services--or at least it has in recent Microsoft quarterly results. Microsoft announces fourth fiscal quarterly results on Thursday, and it will be interesting to see the extent of paid search's contribution to MSN revenue.

It's not rocket science to guess the possible impact of the Inktomi and Overture deals ending with Microsoft. The latter could cripple MSN revenue just as the long-time, money-losing division approaches profitability. I am not privy to the services contracts, so I won't speculate beyond this obvious observation. Even if the relationships continue, Microsoft will be in the very difficult position of obtaining key MSN search services from a major competitor.

Still, Microsoft is fast, responsive and works best when the pressure is greatest. In the end, Yahoo!'s acquisitons might turn out to be important events in Microsoft's making MSN a better service.

Posted by Joe Wilcox at July 14, 2003 09:55 AM