Yahoo would rather switch than fight

Yahoo announced this morning it’s giving up on its music rental service and sending customers to RealNetworks Rhapsody service. The deal was apparently in the works prior to Microsoft’s unsolicited takeover offer. My reaction is much the same as everyone else’s — why bother? No one uses rental services anyway; iTunes-style downloads were the dominant paradigm, but now the market is shifting to DRM-free downloads.

But it played rather nicely with another article this morning on the front page of the Merc (and also Slashdot). If Yahoo’s getting its butt kicked on search, why not just throw in the towel and outsource search — by using the industry leader (Google) as its backend? This has a certain logic to it. In the 1990s, Yahoo outsourced search to AltaVista, the then-industry leader. And buying search from Google — even if it’s the industry leader — is not subject to Hart-Scott-Rodino antitrust review.

Of course, this does raise the question: what is Yahoo’s core competency? Is it just that a lot of consumers are habituated into using it as a portal and haven’t gotten around to changing? I used to like their maps, and still use the original (“dial-up”) service when I’m in a hurry or (often) want to find the restaurant closest to a giving street corner. But they keeping trying to force me to use their Ajax maps, which are an inferior me-too to Google’s.

I personally think that Yahoo has done some really innovative stuff in mobile, such as the work of Flickr, ZoneTag and Fire Eagle. But it will never have the resources of Google or Microsoft (or Nokia) to throw at mobile research. Unless it locks in some customers early, it will be left behind as it is in search. Yahoo seems to be flaming out as it hits its teen years, which as a Sunday story in the Merc noted, has been common for Valley pioneers. (Think Apple without the Jobs II era).

This morning’s Merc article also summarized some of the antitrust criticisms made in a Sunday blog posting by Google’s top lawyer. Microsoft-Yahoo may trail in search, but they would lead in webmail and instant messaging. That certainly should raise the antitrust issues. However, webmail is a relatively small portion of the mail market (and, I’d argue, of declining importance). As for IM, not only do Microsoft-Yahoo have a two-year-old interoperability agreement, but AOL still remains the industry leader. (Steve Ballmer was not very impressed by the argument but then Ballmer is more inclined to bluster than most).

Finally, a ZDNet columnist complains (using “Orwelian” scare terms) that Microsoft buying Yahoo would bring all its services under Microsoft’s single sign-on policy. Yep. That’s been the point of all the Yahoo and Google and Microsoft acquisitions — economies of scope through ease of use. Perhaps with such a combination, people would start using Microsoft services and provide a competitor to Google. Or maybe given a stark choice between a Microsoft- and Google-dominated world, more people will switch to Google.

BTW, Microsoft has given so much cash back to shareholders since 2004 that they’ll have to borrow $20-30 billion to fund the $45 billion deal. Obviously they weren’t considering any deals of this magnitude back in 2004.