Yahoo + Microsoft still can't stop Google

Yahoo's sales growth, Microsoft spending tell the tale

Here's something neither Carl Icahn nor Microsoft is going to change anytime soon: Google's momentum.

Yahoo's earnings report today, combined with the numbers posted last week by Microsoft and Google, is the latest chapter of what's become a familiar story.

Google is eating both company' lunch in the online ad market.

A quick look at some figures tells the tale.

Yahoo's net sales after subtracting payments to its ad affiliate partners rose just 8% from a year ago, while Google's rose 44%. That discrepancy in their trajectories has been accelerating even though Google's sales are now about three times Yahoo's.

Google's profit, which rose by a third from a year ago even as Yahoo's fell, is now about 10 times that of its rival.

Meanwhile, Microsoft continues to lose money in its online operations. Last week, it said it expected that to continue as it spends even more.

All this leads one to wonder, as I have since Microsoft bid for Yahoo, why CEO Steve Ballmer is so intent on acquiring the fading Internet pioneer.

Unless I've missed on in the last 10 years, a merger that combines a fading No. 2 with an unprofitable No. 3 in a particular market doesn't add up to a threat to that market's No. 1 player.

This is why Icahn's decision to cozy up with the Yahoo board, rather than instigate a proxy fight he was likely to lose, is a gift for Ballmer, if only he could see it.

Why? Because with Yahoo founder Jerry Yang remaining at the helm, a radical course correction by Yahoo is less likely, which means the company will very likely continue its present trajectory and make it easier for Ballmer to justify walking away from any deal.

True, Yahoo's search ad deal with Google is going to make things even tougher for Microsoft, which is why the company is lobbying against it.

If it can't get antitrust regulators to buy into that argument, Microsoft needs a Plan B.

Buying only Yahoo search business looks like a way to buy market share. But given all the problems at Yahoo, and all the talent heading out the door, Microsoft would be better off pressing on with its own efforts and buying a few startups with technology that could help it leapfrog Google.

Wait, it's already doing both of those things, the former with more investment and the latter with its acquisition of semantic search company Powerset last month.  

This is why an outright purchase of Yahoo makes even less sense and looks less likely than ever,   especially with Microsoft's lone ally on the board co-opted into a minority role.

Much more likely is a combination involving Yahoo and AOL, especially if its former president and current Yahoo board candidate Jonathan Miller is elected at the company's shareholder meeting.

Icahn was smart to put him on the slate, because AOL's parent, TimeWarner, is the only company that might compete with Microsoft for Yahoo. That might be the only thing to get Ballmer to re-bid, if only so as not to lose something he once wanted so badly. The man is a competitor.

Miller's nomination tells you that Icahn knows that the longer the prevailing financial trends continue, the less desirable Yahoo becomes, and the more his losses mount for Yahoo shares.

Ballmer may feel like he has to do something quickly to stem Microsoft's sliding position relative to Google.

But he'd be better off  giving the keys to the search technology over to the guys at Powerset, rather than paying for the guys who've failed for years to find a way to catch Google, while letting Icahn ponder his errors.