Bernstein vs. Bear Stearns on Outsourcing Search

Sanford C. Bernstein’s Internet analyst has taken the opposite view of Bear Stearns’ Internet analyst on Yahoo! outsourcing search to Google. Bernstein is taking the popular and long running view that Yahoo should outsource search to Google, while Bear is taking the very unpopular view that Yahoo! should stick it out and compete. Both provide compelling arguments, though Bear does provide valuable insight. Bernstein is just reiterating the popular argument that has been around for about 2 years.

Bernstein (from John Battelle): outsource search to Google, and cut staff by as much as 25%. He thinks the company could boost 2008 operating income by $565 million, and EPS by 24 cents, by outsourcing search; cutting a quarter of the staff could add another $658 million in operating income, and another 28 cents in EPS, he figures. He also contends Yahoo needs to restructure its display advertising business to boost growth to the industry average; if they can do that, he writes, the company can add another $376 million in revenue and 15 cents in EPS.

Bear Stearns: Bear believes that it is important that Yahoo! remain a principal in search in the U.S. as it would: a) be able to offer advertisers a combined display and search offering, b) it would bolster their chances of winning partners like Bebo, c) their share loss would accelerate if they outsourced search, and d) they would fall behind in developing next generation online search products if they no longer focus on search. Bear goes on to say that those who take the view that Yahoo! should outsource search (like Bernstein) are taking a myopic short-term view and are not taking into account that the branded advertising business could be negatively impacted if search were outsourced to Google. Further, Bear thinks that if Yahoo! must go down that path then they should do so in Europe where the gap with Google is significantly greater and the impact from the 4 issues mentioned above would be less pronounced.

I am willing to side with the Bear analyst. If Yahoo! outsourced search to Google, then Yahoo!’s main competitor would be AOL, which would be an embarrassment.

What do you think?