The future of Yahoo

With Microsoft walking away, Yahoo still has opportunities for other potential partnerships.

Hi, I'm Yi-Wyn Yen with Fortune, and I’m here today with senior analyst Jeffery Lindsay of Stanford Bernstein. Why don't you start this off by telling us what's going on with Microsoft walking away?

Well, it came as something of a surprise on Saturday evening when, um… we heard that, um… basically Microsoft were not prepared to increase their offer above 33 dollars and the Yahoo management team, Jerry Yang and David Filo, were still sticking hard wanting 37 dollars for the stock, so the deal broke down and Microsoft walked away.

Now that Yahoo’s got the monkey off its back. What other options now?

Well, I think it, it at least initially has some breathing space. And, um, it… Many analysts including ourselves expect it that may announce a deal in the next, you know, days or weeks. Probably with Google, or possibly even with AOL, and, or Google. Google, it’s been rumored for some time that Yahoo might consider outsourcing its page search functionality to Google. And, it's well understood that Google can monetize page research advertising much better than Yahoo. Yahoo’s closed some of that gap, and not all of it, and so a very straightforward way for Yahoo to boost its cash flow and its profitability, is simply to have Google outsource some portion of this activity. So, people think that the test was really a precursor to see if the monetization improvement would be as big as was hoped. In both sides, both companies announced that the test had been successful and we understand it basically met all the criteria they were seeking.

But won't a No.1 and a No.2 player combined? Have all sorts of entire regulation problems?

Well, that will be one, you know, position that certainly Microsoft was taking at the beginning. And certainly it will give them a very high access to a very high portion of the page search business in America. But if you look at, you know, overall advertising, it’s only a tiny amount, and even you look at online advertising globally, including display, it's really only about 35% of the market. So it's not as if anyone was cornering particularly any major share of the market, but it is true that the two combined companies would have a certainly large percentage of the US page search business.

One last question, what's the next step for Microsoft?

For Microsoft, it's difficult. They will have to really check with my colleague Charlie DiBona, but he thinks that they're likely to pursue acquisitions of a bunch of small and interesting companies in order to rebuild the position in the internet airspace.

Thanks so much for meeting with us today, Jeffery.

My pleasure!