Can Yahoo Really Compete In Search By “Owning The Interface”?

During the Yahoo-Microsoft conference call with CEOs Bartz and Ballmer and subsequent discussion with Microsoft’s Yusuf Mehdi and Yahoo’s Hilary Schneider we heard repeatedly that although the two engines would share a single index and Microsoft would incorporate elements of Yahoo Search (e.g., Search Monkey) into Bing, Yahoo would continue to be different and vital in search.

Freed from the cost ($425 million reportedly) and ongoing demands of the back end, it would “innovate” around the interface and search user experience.

Many people in the industry were skeptical and  shrugged it off as something akin to wishful thinking or putting a brave face on Yahoo’s exit from the search business. (Danny wrote “A Search Eulogy for Yahoo” thereafter.) But Prabhakar Raghavan, in charge of Yahoo Labs, discussed on Friday, how the company might incorporate Twitter and real-time search into Yahoo results. He again made the case that Yahoo would continue to innovate and present a compelling search user experience.

“In terms of satisfying user intent, the hard work and in some sense the bigger growth opportunities for differentiation are not the back-end of crawling and indexing, but really surfacing and assembling content the right way to satisfy user intent,” he said.

Real Time search is an increasingly popular online activity where Yahoo’s approach to search could provide a compelling user experience, Raghavan said.

It’s theoretically possible but one of the practical challenges will be recruiting and retaining top search talent, as the NY Times points out:

Yahoo will lose some of its most talented engineers to Microsoft and as many as 400 employees through layoffs. The deal also undercuts years of investment around search technology. By selling the technological crown jewels, the company may lose some of its high-tech credibility among employees and others in Silicon Valley, as well as among customers.

Investors, who had been expected to cheer the deal, punished Yahoo for the terms of the transaction. On Thursday, the day the deal was announced, Yahoo’s stock declined roughly 12 percent — although it has largely recovered since then. Financial analysts and investors saw the deal terms as something of a fire sale. According to the Times article:

Microsoft offered $46 billion to buy all of Yahoo. Analysts estimate that the new deal — involving what many people saw as Yahoo’s most important asset — is worth only around $4 billion to $5 billion.

The deal was largely motivated by Ballmer’s persistence and Yahoo’s inability to compete with Google and Microsoft in search at the required levels of investment. There was also lots of additional pressure coming from the market. All of these things, among a couple of others, perhaps made the deal inevitable.

The deal isn’t done until regulators in the US and EU approve it. That process is not, as they say, a “slam dunk.” But let’s assume that it does go through. Yahoo can’t simply ignore search. It will still be forced by the market to pay attention to search volumes and monetization (RPS).

To that end, Yahoo will in fact need to invest in the user experience to maintain its position. If it doesn’t it will lose share to Google or Bing. If that starts happening Bartz and Yahoo will be under intense pressure. So the notion of “innovating around the user experience” isn’t simply an aspiration for Yahoo, it’s a necessity.