Google cancels its ad deal with Yahoo! due to US government antitrust measures.

It was a strange deal from the very beginning: Yahoo! asking Google to serve pay-per-click ads on its sites, in spite of Yahoo! having its own ad service.

It was definitely an admittance of defeat. Yahoo’s ad service is not on par with Google’s, in spite of the fact that Yahoo! has based its technology on the pay-per-click pioneer Overture which Google copied.

But these were desperate times. The Yahoo! leadership wanted to avoid a Microsoft take-over, and this was one way of proving to the shareholders that money was coming their way. Some argue that the deal would have added some US$ 250 to 450 million annually, others as much as US$ 800 mill.

It was not to be. The threat of a US justice department antitrust lawsuit made Google abandon ship.

It is amazing that Yahoo! finds itself in this position. It is admittedly not number one in search, but its sites generates more Web traffic than Google. In an age where more advertising money is moving over to the Web, Yahoo! should be in an excellent position to be successful.

Still, the company has reported no increase in its cash flow for four years, according to the Financial Times. Part of the explanation can be found in a lack of a clear overall strategy and a bad compartmentalisation of its activities. In short: Company units are competing as much against each other as against external competitors. Yahoo has, for instance, two bookmarking services.

Furthermore, the company are keeping too many alternative search technologies alive at the same time, and have failed in turning its pay-per-click solution, code named Panama, into a worthy challenger to Google Adword.

One alternative to the Google deal has been a merger with the AOL part of Time Warner. To us that seems like madness. AOL is firmly locked in the past and has not been able to adjust its strategy to the changing times. Why it should help Yahoo! to marry an even weaker old-timer is beyond us. But then again, we are not economists.

To the extent AOL brings in the money, it is because its ad revenue is delivered by Google ads. That would have to stop if Yahoo! took over.

This brings us back to Microsoft.

Microsoft’s Steve Ballmer says that the company is not interested in restarting talks, but given the right incentives, they are bound to make a new offer. Microsoft has neither a search engine nor an ad system that can rival Google’s, but by buying Yahoo! it could at least get a search engine brand that is well known among people.

That is one reason we think option B – buying the Yahoo! search engine only and leaving the other Yahoo! properties out of the deal – is unrealistic. Microsoft’s Live Search isn’t that bad. It is the brand that doesn’t communicate.

“To this day the best thing for Microsoft to do is buy Yahoo,” Jerry Yang is reported to have said at the Web 2.0 summit in San Fransisco. “I don’t think that is a bad idea at all, at the right price whatever that price is. We’re willing to sell the company.”

Is he panicking? Yang seemed to be vehemently opposed to such a take-over earlier this year. Now he says he was never fundamentally against such a deal.

From this we can at least conclude that Mr. Yang does not consider continuing alone as a viable option.

Yahoo’s choices: Go it alone or cut a deal (CNET)
Yahoo Invites Another Bid From Microsoft Search Engine Land
Jerry Yang Speaks At Web 2.0: Our Live Notes TechCrunch
Yahoo tells Microsoft: ‘Buy us’ BBC