Kingmaker? How Yahoo! Might Play with Facebook and Microsoft in Search

NEW YORK ( TheStreet) -- After Tuesday's Facebook ( FB) Graph Search announcement, there was a lot of attention of the prominence of Bing in the Facebook results going forward.

The news was even enough to send Bing-owner Micrsoft's ( MSFT) shares higher -- getting above $27 again, after dipping below that mark earlier in the day.

What does the news mean for Yahoo! ( YHOO)?

On the surface, nothing. Yet, dig a little below the surface and it's interesting where Yahoo! fits in to these discussions.

One of the most intriguing aspects of new CEO Marissa Mayer's first conference call at Yahoo back in October was her mention that Yahoo was in the unique position to be a partner to a great number of players in the mobile/web space.

And she's right.

Yahoo! already provides key data to every Apple ( AAPL) iPhone. It uses Microsoft's Bing search engine to power its own searches. It used to use Google's ( GOOG) search engine and ran to Google after Microsoft made a hostile bid for the company in 2008. And Yahoo! was an early partner of Facebook's Connect program.

Now that Marissa Mayer's come in to Yahoo!, she has squarely refocused the company on mobile. They have revamped key mobile properties like Flickr as well as stalwart Web platforms that deliver important traffic like Mail and Homepage.

The fact that Yahoo! has built great Web services in the past makes them an interesting partner for Apple, which has been rightly criticized for being too slow in Web services in the last year.

Yahoo has great traffic and great relationships with existing brands. They are the No. 3 Web site in the world, behind Google and then Facebook. They've also killed the patent war with Facebook a few months ago. So all this makes them an intriguing potential partner with Facebook.

The search partnership between Microsoft and Yahoo hasn't led to the kind of results that Yahoo! had been hoping for when Carol Bartz signed it in 2009. Yahoo! might seek to end the partnership with Microsoft in March. If they do, they could conceivably turn to Google as a potential partner who could monetize Yahoo!'s traffic much more lucratively than Microsoft can.

If they could strike that kind of relationship and convince the Department of Justice that Yahoo! was no longer a top search provider since it has outsourced all its back-end search talent and technology to Microsoft, it could be a powerful relationship between Google and Yahoo!.

Any one of these kind of partnerships would be a home run for Yahoo!, assuming there really was teeth to the deal which led to real results for Yahoo's shareholders.

Mayer is right that it is conceivable that she could partner with any of these companies. But can she partner with all of these companies simultaneously? Almost certainly not.

There will come a time where Mayer has to bet on one of these horses in a big way. When she does, she will have to ride that horse -- unless of course one of the spurned companies comes back and tries to buy Yahoo to keep them away from their competitor.

We're coming up to a key decision point at the end of March, when Mayer will decide Yahoo!'s future in search.

Kara Swisher has recently said Mayer was actively looking at ways to end the Microsoft relationship in search. That's pretty big news if it happens. I remember tweeting with Swisher on that possibility last summer and Kara thinking it would be highly unlikely. Indeed, it might still be.

There is no question though that Yahoo! could make more money from search by teaming up with Google over Microsoft. I think there's also a good line of reasoning to argue to the DOJ why a partnership doesn't run afoul of antitrust concerns.

However, many observers like Swisher and Danny Sullivan of Search Engine Land have long argued that it would be much easier for Yahoo! to simply re-up a deal with Microsoft on better terms if necessary.

Their reason for saying this is primarily because, after signing the 2009 deal outsourcing search to Redmond, you can't go home again. It would be very difficult to re-start a search business from scratch, which is what Mayer would be signing up for. Better instead, this thinking goes, to just play nice with the devil you know.

Another possibility, if Yahoo! backed out of the deal with Microsoft and wasn't allowed to partner with Google, is that they go-it-alone, but partner with someone like Apple, Facebook, or even Amazon ( AMZN) who might be looking to beef up their search.

The problem with this is that it's still a long, tough road.

Another permutation might have been revealed through today's Facebook-Microsoft announcement. If Yahoo did decide to re-up with Bing in March, perhaps the best approach would be for Microsoft to outsource Bing to Yahoo! and for Yahoo! and Facebook to work closely on search -Yahoo! on the traditional Web side and Facebook on the Graph Search side. Maybe all three parties see this leading to better results than just continuing on with the status quo.

However, there would be a lot of cooks in this search kitchen. They'd all have to come to some sort of agreement on how to work together. That's always tough with multiple parties.

One thing is clear after today though: Search makes a lot of money for these big Web companies or it's a critical product moving forward in the mobile space, even for companies like Apple that make money from selling products instead of advertising. Yahoo! is in a unique position as a potential partner to all the big players.

In roughly 10 weeks, we should hear about a major strategic decision from Yahoo! about who they will get closer to in the future. This could cause big waves to everyone in the space.

At the time of publication the author was long YHOO and AAPL.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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