Sad for Yahoo, gain for Microsoft (Comment)

A sad day for Yahoo! That’s the consensus — a rare one — across both global technology and investor communities. Yahoo stock dropped 10 percent, Microsoft rose one percent. For once, the markets may have got it right. The decision to work together on their search engines is a big mistake for Yahoo, and a small gain for Microsoft.

But it was coming, even if we didn’t see exactly this 10-year deal in which Microsoft’s Bing will power Yahoo Search.

When Yahoo India started shopping for public relations services recently, I had a number of phone interviewers asking what I thought was great about Yahoo. I had to say: Nothing. There is no outstanding feature or technology I could think of. But there were so many where they led the way, to give it up to others.

Yahoo is nowhere in search. They gave that up to Google, the company that was powering Yahoo Search in the early years of this decade. Even Microsoft overtook them — something few would have imagined was possible. Google, Microsoft Bing and Yahoo have 60 percent, 16 percent and 10 percent of search traffic, according to a major web analytics firm.

Yahoo was early into mail, communities and mobile tech. But it couldn’t hold its lead. It’s strong in its finance portal and Yahoo groups, but not enough to sway users away from the search-centred Google, which has rapidly gone past Yahoo, investing in Gmail, maps, mobile, and a range of other tech ahead of the curve. Yahoo missed the writing on the wall about the power of search, something Google saw and used effectively — creating its Gmail offering centred on its then-path breaking 1 GB free space and Google search.

What happens in India? There is little effect. With or without the deal, Yahoo could have made an impact on this virgin market, but it didn’t.

India’s Internet business itself is limited by low penetration of personal computers and Net connections. There are just over six million broadband connections. But the real excitement is in mobile, with well over 400 million subscribers. And one tech industry group has set a target of 100 million broadband connections by 2012.

This is, thus, the land of opportunity. These new broadband users will not be tied to Google and could be swung by innovative bundles and deals that Yahoo could, in theory, push aggressively. In practice, it has not done any such thing.

At even 50 million, the likely mobile-Internet users, who aren’t tied to a Google legacy on the phone, could have been virgin territory for Yahoo to tackle. It did not. It did go for some early tie-ups for mobile search but again has been overtaken by Google on a host of mobile applications such as mail, maps and location-based social networking.

Yahoo also has some 500 research and development (R&D) engineers in India, and they are unlikely to be affected, except that they won’t be doing any search-related R&D. Yahoo has taken the tactical, but strategically flawed, route all through: Outsource core search tech, invest instead in marketing.

It outsourced search to AltaVista, then turned to Inktomi, and then finally, to a start-up called Google, even promoting the latter’s brand on its search page. That’s where the world learnt of Google. And it’s all back full circle. While worrying about what price to sell to Microsoft at, Yahoo appears to have slowed down on innovation and R&D even further. It is back to outsourcing its search. This time, Microsoft Bing will power Yahoo Search.

The charitable view, however, is that search was a lost case for Yahoo anyway. And that this deal will let them stop worrying about the lost case and focus on what they could still recover — communities, social networking, all the things they they were strong in. Yahoo was once the place to hang out. Today, that’s Facebook, MySpace, Twitter.

Supporters and some analysts say that Yahoo can now put all its attention on recovering lost ground in communities and social networking.

I’m not so sure. With neither business savvy nor great tech backing it, Yahoo lost its way. The first mover got left far behind. This will not be an easy catch-up game for Yahoo.

(02-08-2009-Prasanto K. Roy is chief editor at CyberMedia Publications. He can be reached at pkr@cybermedia.co.in and twitter.com/prasanto)