Will the Yahoo / Microsoft Search Deal Advance Both Companies' Goals?

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 |  Includes: MSFT, YHOO
by: Seth Gilbert

Micro-hoo, the nickname for Microsoft’s (NASDAQ:MSFT) effort to buy Yahoo (NASDAQ:YHOO) outright, was the deal that wasn’t. At the end of a long and winding road, Microsoft-Yahoo Search is finally the deal that is.

Nearly a year and half removed from Microsoft’s initial buyout offer, a crashed ad market and a new CEO later, the two rivals have joined together in a complex pact aimed at wrestling a greater share of the search market away from Google (NASDAQ:GOOG).

Combining interests, at June levels (ComScore), the newly announced deal would give the joint effort a 28% share of the U.S. search market compared to Google’s industry leading 65%. (Independently, Microsoft had 8% and Yahoo 20% in June).

The combination would still represent a minority stake but both companies believe the added scale will make a significant difference in their ability to compete.

“The more searches you serve, the more you learn about what people click on and what’s relevant,” Microsoft’s Steve Ballmer said. That knowledge than translate to smarter search, which in turn, leads to more customers.

The deal isn’t expected to close until next year but its terms more or less match those reported speculative reports that began appearing last week.

Per the early morning conference call, and related press release, Microsoft will gain a ten year exclusive license to Yahoo!’s core search technology. Microsoft’s Bing search engine will become the exclusive algorithmic search and paid search platform for Yahoo’s sites. The partnership will apply only to search. Each company will maintain its own display advertising business groups.

Yahoo will take on direct sales responsibilities, becoming the sole sales agent for premium search advertising across the platform. Self-service search ad sales for both companies will be handled by Microsoft’s AdCenter platform.

In compensation, Microsoft will pay traffic acquisition costs (TAC) of 88% to Yahoo for search revenue generated at Yahoo “owned and operated” sites over the first five years. Microsoft will also guarantee Owned and Operated revenue in each country for the first 18 months following implementation. Yahoo will receive no upfront payout (contrary to some rumors that spread from early speculation).

Yahoo estimates the deal will provide it a $500m operating income boost and could save as much as $275m a year in capital expenditures. Microsoft will shoulder costs estimated to be at least several hundred million.

As part of the integration, an unspecified number of Yahoo! Search employees will be offered jobs at Microsoft. Other employees whose roles are deemed redundant will be laid off.

The companies say a full implementation of the partnership is expected within 24 months of regulatory approval but they are not speculating how long they think regulators will take to give the deal terms a check. At this stage, Yahoo and Microsoft are only “hoping” the deal will close in early 2010.

Assuming that happens (a potentially big assumption), will the deal help advance both companies’ long term goals?

Probably, for Microsoft. Possibly for Yahoo. Scale is unquestionably a big factor in search and combining forces will provide a significant amount, quickly. But everything will hinge on the companies' combined ability to anticipate issues and integrate the service effectively. That would be a challenge if it was happening internally at one company, it’s extremely tough when it has to happen amongst rivals. It won’t be easy.

More information on deal terms and the integration plan is expected to trickle out as the companies move forward with their plan.

A few questions for starters:
What are the Traffic Acquisition Cost arrangements for the deal’s second half?
Yahoo is getting 88% for the first five years. What about the second five?

How will customer service issues be handled across the joint venture?
Microsoft is handling self service sales and technology while Yahoo is handling premium sales. As Business Insider put it in its coverage, “When a Yahoo client is unhappy with the technology execution, will Yahoo salespeople call Microsoft engineers to complain? When Microsoft is unhappy with the way Yahoo is selling search, will Microsoft engineers call Yahoo to complain?”

Mobile Search?
Other than being non-exclusive, how will the two work together in the mobile market?

If Yahoo is cutting back development of its search technology, will that hurt other business lines that glean insight from that technology today? Is more sharing going to be the remedy?
Yahoo has said in the past that its search technology provides it with important insight and business intelligence used across its businesses, including to enhance their display advertising services. Under the deal, Yahoo has the right to continue to use its technology for these ends (and others) – but won’t the results suffer if Yahoo’s investment in search is cut back as planned? Will data and analytics from Bing searches be available for Yahoo’s interpretation and use in its other business groups?


These questions and more will likely be answered as more information becomes available. That said, the integration still sounds like a complex and risky process.

From the Yahoo Blog, here is what Yahoo CEO Carol Bartz had to say announcing the deal Wednesday morning:
It’s inhumanly early in California, but it’s already a great day at Yahoo!. We’ve just signed a major search deal with Microsoft. Under the terms, Microsoft will become the search engine behind Yahoo! and we will become the worldwide exclusive relationship sales force for both companies’ premium search advertisers.

While you’ll read a lot about why this is good for our business and for advertisers, I want to talk about what’s in it for you -– the Yahoo! fan.
Here’s the rundown:

  • Better search: You’ll still find search boxes all across Yahoo!, but this deal will make the difference between a great Yahoo! search experience and an awesome one. Some of the biggest brains in the business work on Yahoo! Search, and they will continue to innovate to create a better search experience on Yahoo!. As a result of the deal, Microsoft, which has great technologists and deep pockets, will have the scale to bring users faster, more useful and more personally relevant search.

  • Better everything else: With Microsoft powering Yahoo! Search, we’ll be able to focus on the things we do best -– being the center of people’s lives online with properties like our homepage, mail, finance, news, sports, entertainment, mobile, etc. Sure, we’re the world’s largest online media company and your loyalty has made that possible. But we’re not satisfied – we still want you to say “wow” a lot more often. And that’s what makes this deal especially exciting.

  • Better competition: Competition equals innovation. But with one player dominating 70% of search, that field has been pretty lopsided. This transaction will create a healthy competitor that’ll keep everyone on their toes.

In short, everything’s just going to get a whole lot better for you.
And one final note — what this agreement does not cover is any of Yahoo!’s other properties or products. In those areas, Microsoft can expect a fierce competitor.

We’ve set up a special site, www.choicevalueinnovation.com, that answers your questions.
Carol Bartz
CEO