Where does Yahoo Go From Here?

This weekend, Microsoft withdrew their offer to buy Yahoo for $33 a share. This MicroHoo merger has been talked about in many different forums by many different people for quite a few months. In the past few weeks, talks have heated up and culminated in Microsoft basically issuing an ultimatum to Yahoo.

Though Yahoo’s stock price dropped about 20% this morning, word is that Yahoo’s executive team celebrated the withdrawal of Microsoft’s offer. How others at Yahoo reacted to the news hasn’t surfaced yet, but reactions from shareholders have been mixed at best.

Now, the real question is, Where does Yahoo go from here? In what I think is a somewhat questionable move, Yahoo just concluded a two-week test with Google delivering ads on a small portion of Yahoo searches. The test was intended to show that Yahoo can earn more money by allowing Google to serve search ads for them. Both companies described the test as successful.

An agreement with Google serving Yahoo search ads would give Google control of over 80% of the search market. To be fair, the test was only for ads on a small portion of Yahoo’s search space. However, the prospect of Google serving all of Yahoo’s search is a daunting one. I don’t think there are many people outside of Google that would like to see them have this much control over such a large industry.

To me, Yahoo’s major issue has to do with innovation. Google is constantly releasing new products that expand on their search business. Whether it be Google Analytics, Maps, Earth, or Google Docs, they consistently create new, viable products. Yahoo’s main business revolves around their portal, search and display advertising. Without product innovation, though, these businesses are doomed to continue to fade.

Many who talked about this potential merger saw it as a way for Yahoo and Microsoft to present a challenge to Google. It will be very interesting to watch what Jerry Yang and his team do in the next few months to position Yahoo for the future. I’m sure as a large company like this matures it is harder to keep innovation at the forefront. However, if Yahoo wants to keep their search and display businesses healthy and growing, it’s something that needs to happen.

While I don’t know what the exact answer is for Yahoo, I want to see them succeed. It is better for everyone in the digital media business to have many strong players. It is also better for consumers. Competition breeds innovation and creativity, both of which help the industry grow and expand.

So, good luck Yahoo. I hope to read in the next few years about why denying Microsoft’s bid turned into such a great success.