GooHoo Search Ads Outsourcing Deal Moves Forward

The Wall Street Journal is reporting that the “initial test” of running Google ads on Yahoo search results had “positive results” and is thus moving forward. A range of blog posts offers speculation and cynicism about the story and what it may or may not represent for the potential MicroHoo deal. The original test was announced on April 9 and was slated to last “up to two weeks.” Today is April 17, one week and one day later. This suggests the test was already running when the announcement was made.

The implication of the Journal article is that this relationship, if allowed by regulators and circumstances to move forward, would presage an outsourcing of not just a small fraction of Yahoo’s search ad business (as suggested in the Yahoo release), but the entire thing.

Citigroup analyst Mark Mahaney, as well as other Wall Street analysts, have historically argued Yahoo would see billions in gains from increased search revenue via a Google search deal. But longer term the company would likely suffer in giving up a highly strategic component of its business. Previously Jerry Yang and Yahoo had rejected the idea of outsourcing paid search to Google, but the Microsoft bid has put increasing pressure on Yahoo and obviously prompted a different course of action.

As many of the pieces commenting on the WSJ article correctly point out, it’s unlikely that a full outsourcing deal would pass regulatory muster. The article explains, however, that “the two are exploring ways to address potential regulatory problems, people familiar with their discussions say. Possibilities include limiting the partnership to specific groups of search queries or regions, for example.”

Yahoo reports first quarter results on April 22, which will be a very interesting day and earnings call. Yang and Yahoo President Sue Decker will be asked pointed questions about the Google outsourcing deal, among other things. If earnings are as good as Yang implied in his letter responding to Microsoft’s ultimatum letter, then the company will have a somewhat stronger case for a higher bid. The letter also said it wants to agree to be taken over, and a higher bid would certainly help matters.

Microsoft CEO Steve Ballmer’s ultimatum letter provided a “three week” deadline, which would mean the company will move into hostile takeover mode (it already is, actually) sometime during the week of April 21. Meanwhile, talks with AOL reportedly continue to craft some credible alternative to the Microsoft bid.

Yet, despite all the maneuvering and this most recent news of the potential GooHoo search deal, MicroHoo remains the likely outcome.