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Yahoo Exits Search With Microsoft Deal


Yahoo CEO Carol Bartz was right: Yahoo is an Internet King Maker: by inking a 10 year search deal with Microsoft yesterday Yahoo has opted out of the search battle, and given Microsoft the opportunity to take on Google in the domain where Google is most dominant. Yahoo will host Microsoft’s recently launched search bing on its Owned & Operated (O&O) sites, give its search technology to Microsoft and replace its Panama advertising platform with Microsoft’s AdCenter.

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Readers will remember that until they parted ways in 2004, Yahoo search was powered by Google, giving the startup a significant leg up, and access to web users. Now it’s Microsofts turn to benefit at the expense of Yahoo Search.

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Jobs

Bartz said yesterday that once the deal is operational, many Yahoo Search employees will be asked to take jobs at Microsoft, some will be moved to the Display advertising business that Yahoo has chosen to focus on, and some will be made redundant.

The Transition

The transition is expected to take 2.5 years, once regulatory approval is received, expected early 2010.  A combined team of Microsoft and Yahoo executives will jointly execute a transition to bing. “We’ll begin with major markets including US, and the transition should take 3-6 months, and plan migration to all migration to all advertisers from Panama to adcenter in about 12 months,” Bartz said during a joint conference call yesterday.

What Microsoft Gets

Microsoft CEO Steve Ballmer said that the company will invest a few hundred million dollars over the first couple of years.

Search On Yahoo sites and Affiliates: Microsoft will get access to Yahoo’s search advertisers, and more importantly, the search operational on Yahoo Owned and Operated sites and affiliates. Yahoo will continue to syndicate search affiliates to Microsoft for the first five years. Bing will be integrated throughout Yahoo web properties. Yahoo hasn’t decided on what happens to ‘paid inclusion’ in search.

Technology: Microsoft also gets an exclusive 10 year license to Yahoo’s core search technology, and will integrate that into bing. The self serve search advertising on Yahoo will be powered by Microsoft Adcenter marketplace, which will be able to offer advertisers greater scale: a majority of the small advertisers are with Google because it offers just that. It will be a combined marketplace.

Scale and Data: More usage means that the search and advertising algorithm learns more about users search habits and clicking tendencies. Bing will be able to deliver better search results, and better ads. As Ballmer put it: “We have access to two of the best technologies. There’s a feedback loop in the search business: scale drives knowledge. The more paid search ads you deliver the more you learn about what people click on. There’s a return to scale.” In addition, and perhaps tellingly, this will become a two horse race with Bing and Google, instead of three. Yahoo’s approximately 20 percent marketshare will go to Bing.

“As far as the scale for advertisers is concerned,” Bartz said, “the smaller advertisers want to make sure that there’s enough meaningful market for them, and they dont want to learn 3 platforms.”

What Yahoo Gets

Majority Revenue Share & Assured Revenue: Microsoft will pay Traffic Acquisition Cost (TAC) at 88% of search revenue generated on Yahoo’s O&O (Owned and Operated) sites during the first 5 years of the agreement. Microsoft will also guarantee Yahoo’s O&O revenue/search for the 18 months following implementation in each country. Bartz declined to share details of how the TAC scenario will change after the first five years. Also note that Yahoo gets no TAC on what is sold on Bing, though Ballmer said that advertisers will not know whether a search campaign will be delivered on Bing or Yahoo: it’s a combined marketplace.

Opportunity To Focus On Big Advertisers: Yahoo will serve as the exclusive worldwide sales for both companies’ premium search advertisers. Yahoo wants to focus on display advertising, which it has retained, and developing relationships with larger advertisers will be key to Yahoo. Note that Yahoo hasn’t got rights to sell display on Microsoft properties.  Also keep in mind that after five years, Microsoft will be free to set up its own sales force for servicing these advertisers.

Reduced Capital Expenditure: Bartz said that revenue will come a bit due to the revenue share, though the company expects that their operating income will be roughly $500 million higher and save around $200 million a year in terms of CAPEX – in terms of data centers for indexing. “Operating Cash Flow will benefit by approximately $275 million/year. These are our assumptions at full implementation.”

Retain Branding: The search on Yahoo will carry the Yahoo brand, while at the bottom of the page, there will be a ‘Powered by bing” logo.

Regulatory Issues

The partnership is going face significant regulatory scrutiny: what the regulators have to decide is essentially whether the partnership increases or decreases competition. Microsoft and Yahoo are arguing that the partnership gives users and advertisers a viable alternative to Google, whose dominence is worrying. The filing process with regulators in Washington, according to the companies, is expected to begin next week. There’s a regulatory filing with the EU in Brussels as well.

Mobile

Yahoo has kept its options open regarding mobile: the partnership is about search, and its up to Yahoo to integrate mobile with Bing as well. Ballmer said that “it wont make sense to do a separate crawl of the Internet for websites to do mobile search, even as the ad model for the mobile search looks like the ad model for PC search.”

Our take

Ever since Carol Bartz has taken over, she’s focused on Yahoo as a property, and highlighted the display advertising virtues that such a premium property offers. Search is a fight that it appears Yahoo has decided it cant win, with bing achieving the success it has in such a short span of time. Insteading of spending money on search, Yahoo has decided on reducing search related costs and focusing on premium advertisers. The writing on the wall was clear: that bing is more likely to give Google a run for its money than Yahoo Search, and it’s likely that without a competitor, Google’s dominence would only increase over the next 10 years.

Yahoo wants to focus on being a media company, and invest its properties, on mobile, and the display advertising business. Even then, the appears to favour Microsoft a lot more than it does Yahoo, with Yahoo not getting any share of the Traffic Acquisition Cost outside its own properties. The other thing to keep in mind is – what happens to Yahoo’s search revenue after five years? Yahoo has no guarantees, and Microsoft can build its own search advertising team. The onus will be on Yahoo to ensure that it remains a viable enough bing affiliate by the end of 10 years.

  • Gaurav

    Google is already trying to move away from their dependence solely on search (Youtube buy, OS launch etc etc etc)

    they know sooner or later someone will catch up and they will have to innovate to stay on top.
    Microsoft themselves are a case in point, their ability to impact the masses seemed to be falling in the search, browser and to some extent OS wars.

    Yahoo again have shown that they dont have the ability to take the battle to google or anyone else. What next for them.. ? they do brilliantly as a portal but need another weapon in the arsenal.

    it will be interesting to see how this plays out over the next 3 odd years..

  • Marie

    I don't care about the details of the deal. I can already search on Yahoo and Bing at the same time. It's called http://www.dogreatgood.com. You also get Google and Ask and they donate to charities like the humane society and petfinder. Done & done!!