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Who Does Yahoo! Want to Wrangle?

Yahoo! has been in talks with both Time Warner and News Corp. this week, according to several reports, seemingly desperate to stave off Microsoft's bid, which it rejected. The Time Warner talks involve Yahoo's potential purchase of AOL, while a deal with News Corp. would have Rupert Murdoch's conglomerate swapping MySpace for a 20 percent stake in Yahoo! (Interestingly, both options have floated around in the past, as discussed here and here.)

Both talks seem to be tactics to pressure Microsoft to raise its bid, which Jerry Yang, Yahoo's CEO, said undervalued the company. In fact, others have quickly pooh-poohed the talks as just that — all talk and no real threat of action. But if the end of the road really is Yahoo! and Microsoft joining forces, what do the talks suggest about what strategy Yahoo! will take to regain strength?

When Microsoft's bid for Yahoo! first became public, the foregone conclusion was that it was a strategy to take down Google, against which both have struggled, in search and advertising. But neither AOL nor MySpace would offer Yahoo! much leverage in that area. Reports have speculated that difficulties in attracting advertising on areas of MySpace might lead Murdoch to drop the social network in Yahoo's hands. And AOL, of course, is struggling on all fronts in the new Internet.

However, as the leading social network (still, despite Facebook's surge), MySpace has considerable value as a destination site. AOL, though continually waning, has some entertainment value as well, with properties like AIM. And Yahoo! continues to be a successful portal. All these sites have engagement assets in common, unlike Google, which dominates search and has plenty of useful tools but isn't really a destination site (unless you count iGoogle, which has plenty of competition from other startpage aggregators like NetVibes).

ZDNet, which takes the minority view that Yahoo! and News Corp. should make a deal, argues that Yahoo! should reframe itself as a media company. Some support for this may also be found in Patrick Sauer's article from our current issue on how Yahoo! Sports is thriving in its competition against ESPN.com.

This repositioning of Yahoo! may be well and good, but does it mesh with Microsoft's goals for an acquisition? Seemingly not. And considering that Microsoft and Yahoo's combined forces still wouldn't be enough to topple Google in search, figuring out the next steps after the deal, should it happen, would be quite a cumbersome process. It may very well set both companies back even further.