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Yahoogle? Microspace? It makes Google look good

More radical scenarios are sweeping across the Microsoft-Yahoo landscape. All the ruckus makes Google's position in Internet advertising look that much more solid.

In 24 hours, we've gone from plain old Microhoo to Yahoogle and Microspace. What's next--Yahoobay?

Clearly, Microsoft's attempt to acquire Yahoo has prompted some serious outside-the-box thinking. But now is a good time to think carefully about what's a thought experiment with tactical value and what's a real business possibility.

First, to recap: Everybody knows that Microsoft wants to acquire Yahoo and has threatened a proxy fight and lower price if Yahoo doesn't sign up within three weeks. Another definite move is a limited Yahoo trial of search advertisements from Google, Yahoo's largest rival and Microsoft's, too, when it comes to online aspirations.

Later Wednesday came two unconfirmed reports: Yahoo is considering absorbing AOL in exchange for a big investment from AOL parent Time Warner, and Microsoft might get some help from News Corp. to acquire Yahoo, a move that could provide acquisition funding and add News Corp.'s MySpace into the mix.

Confused by all the companies trying buy or partner with Yahoo? Don't worry. Click to see our handy guide. Susan Dove/CNET

Through the flurry of activity, Google's competitive threat has remained constant. If anything, it looks like a stronger, more stable option than before.

"We view Google as a winner," said Stanford Group analysts Clayton Moran and Frederick Moran in a report. They believe the new options have the potential to slow Microsoft's acquisition attempt, complicate already formidable integration challenges by Google rivals, and increase Google's share of the search market if Yahoo relies on it.

It's probably healthy for the industry to be shaken up this dramatically every now and again and for executives and programmers to be faced with the possibility that their sacred cows could be sacrificed. But how realistic are all the ideas? Here's a closer look.

A survey of some Wall Street analysts reveals a general belief that the Google ad partnership is a serious business possibility but more skepticism about the News Corp. and Time Warner deals.

First, view the machinations within context: Microsoft wants to acquire Yahoo and doesn't want to increase its price. Yahoo wants to fend off Microsoft unless it can settle on a price that "fully values" the company. And both sides want to curry favor with the large shareholders who hold much of Yahoo's fate in their hands.

At this sensitive time of move and countermove, news of alternative business deals can have tactical value, even if the deal itself never comes to pass. Even if none of the new possibilities ever amount to anything, they all send messages to shareholders that the companies are marshaling resources, exploring options, countering strategic threats, and generally paying close attention to the stock price.

The Google ad option
So how about Yahoo using Google for ads? "We believe that a full search outsource decision could generate well over $1 billion in incremental cash flow to Yahoo," said Citigroup analysts Mark Mahaney, James Samford, and Brent Thill in a report Wednesday. That's because Google makes more money off its search ads than Yahoo does--the Citigroup analysts estimated 9 cents per search for Google and 4 cents per search for Yahoo in a February report--and even sharing a significant amount of the revenue with Google, Yahoo could still come out ahead.

Merely testing the service can bring some value to Yahoo. "Assuming Yahoo comes back with positive data..., we believe the company will be in a more favorable position than it was before," said American Technology Research analyst Rob Sanderson. "Rather than the lower bid that Microsoft threatened over the weekend, Microsoft could end up raising the offer price by a nominal amount."

Yahoo is a massive Internet site, but it's important to bear in mind that a Google outsourcing deal need not mean Yahoo is scrapping its entire ad infrastructure, either its Panama system for delivering search ads or its AMP system for display ads. There's a broad spectrum of possibilities between the current limited search ad test and going whole hog.

On the other hand, the smaller Yahoo's reliance on Google is, the more Yahoo must invest in its own systems, the less it would benefit from any higher per-search revenue, and the less bold it would appear to shareholders wondering whether Yahoo might be better off as part of Microsoft.

There would be difficulties with a Google ad deal. Even if it did keep Microsoft at bay, Yahoo would have to share ad revenue with its biggest rival. And Yahoo could have a hard time reversing its current in-house strategy.

Microsoft also was quick to point out antitrust implications of Yahoo relying on Google for delivering ads, and that's indeed likely to get antitrust regulators' attention, said Robert Lande, professor and antitrust expert at the University of Baltimore School of Law.

"It's much more likely that the Yahoo-Google alliance would raise very serious antitrust questions" than the Microsoft acquisition of Yahoo would, Lande said. If regulators agree that there is such thing as a market for online search ads, "then Yahoo Google together would have...alarming market share. Whereas Microsoft and Yahoo together--their market share isn't nearly as much so it isn't nearly as much of a concern for antitrust regulators."

News Corp and AOL deals?
What about Microsoft and News Corp.? As with AOL, it likely doesn't want to be left on the fringes as Internet operations consolidate. But Heather Bellini and analyst colleagues at UBS Securities expressed skepticism in a report.

"A joint bid could make sense if Microsoft is looking for a financing partner, which we do not believe it needs," the UBS analysts said. "A tie-up (with Microsoft) could make sense, but we think it would increase the integration risk and may not outweigh the decrease in financial risk."

That deal, along with the possibility of an AOL deal that involves Yahoo repurchasing stock at more than $31, both could have the same result, though, the Citigroup analysts said: forcing Microsoft to raise its bid.

"We continue to believe a Microsoft-Yahoo deal is the most likely outcome and continue to believe that it will happen at a higher price than the initial $31 bid," they said.

The UBS analysts concurred. "We continue to believe reaching a mutual agreement with Microsoft would be the best way for Yahoo to potentially extract a higher Microsoft bid," they said, expecting Microsoft's offer to arrive between $32 and $35 per share.

Clearly, all the new moves show how much room there is for maneuvering as all the companies try to get the upper hand. Just be sure to bear in mind that a lot of the maneuvers are only feints.