If there’s a deal with Microsoft on search, will Yahoo just be stuck with leftovers?

Given that everyone seems to love a deal, any deal, the valley is once again salivating that something seems to be happening between Microsoft and Yahoo. That something seems to be some deal involving selling or outsourcing Yahoo’s search business to Microsoft. In theory, a sale would result in Yahoo getting some big chunk of change, while an outsourcing deal might include some cash and some share of ad revenues. In theory.

But if Yahoo punts on search, then what’s left?

According to Yahoo’s annual report, it divides its business into five categories:

  • Search (Ahhhhh, see ya!)
  • Communications and Communities (Yahoo! Mail; Yahoo! Messenger; Yahoo! Groups; Yahoo! 360o; and Flickr)
  • Media (Yahoo! News; Yahoo! Finance; Yahoo! Sports; Yahoo! Music)
  • Front Doors (Yahoo! Front Page, My Yahoo!, and Yahoo! Toolbar)
  • Connected Life (Yahoo! Mobile, Yahoo! Digital Home, and Yahoo! Desktop)

Getting rid of search makes a lot of sense on a number of levels. If you look at those five categories above, Yahoo is incredibly strong in four of them, much stronger than either Microsoft or Google. Its biggest problem in recent years is that it has let itself be defined by search, an area where it’s getting killed by Google.

But as Gartner analyst Allen Weiner noted while we were chatting by phone today, search wasn’t originally central to Yahoo’s mission. Yahoo was a directory, and at first didn’t even have its own search algorithm. Famously, Yahoo used Google as it search engine for a bit before parting ways. Eventually, Yahoo bought Inktomi and then Overture to bulk up on search. Now, despite being one of the most visited sites on the Web, it’s being defined as a failure because it’s an also-ran in search.

“I think all this focus on search has been distracting to their mission,” Weiner said. “I don’t think that Yahoo has done enough to play on its strengths.”

So what is that mission? What sets Yahoo apart is that it’s a place where people come and hang out, store their stuff, and create things. Google has been adding copycat services like groups and mail, but Yahoo still has much bigger leads in these places, and other ones like Messenger and content.

Charlene Li, Forrester analyst and author of “Groundswell”: “What Yahoo has leftover is one of the most passionate bases of users.” Yahoo has long said it wants to be the starting point of its users’ Web experience, and getting out search means that Yahoo would be “doubling down” on that strategy.

So could it work? Weiner and Li think so. And so do I. Getting little attention was Yahoo’s recent announcement about its “Yahoo! Open Strategy.” While details are still rolling out, Yahoo plans to open up its platform to developers, and make a much better social experience for its users who have put so much energy and time into creating communities and archiving their stuff within Yahoo’s sites.

Getting the search monkey of its back, collecting a bunch of money from Microsoft, and getting disgruntled shareholders off their back could provide Yahoo time to make this strategy work. The question now is this: Are the right people in charge of Yahoo to make it work? And why did it take them so long to get here?

 

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