Microsoft+Yahoo vs Google

The biggest deal in the Internet has just happened – Microsoft and Yahoo have joined hands. Google has it’s first SERIOUS competition in the search engine market. And it’s not Bing – it’s Bing on Yahoo!

Any guesses on what the mass media will dub this relationship?

BingYa? Bingahoo? Yingoo?

First, the facts, from the official website*:

The key terms of the agreement are as follows:

* The term of the agreement is 10 years;
* Microsoft will acquire an exclusive 10 year license to Yahoo!’s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing web search platforms;
* Microsoft’s Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites. Yahoo! will continue to use its technology and data in other areas of its business such as enhancing display advertising technology.
* Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers. Self-serve advertising for both companies will be fulfilled by Microsoft’s AdCenter platform, and prices for all search ads will continue to be set by AdCenter’s automated auction process.
* Each company will maintain its own separate display advertising business and sales force.
* Yahoo! will innovate and “own” the user experience on Yahoo! properties, including the user experience for search, even though it will be powered by Microsoft technology.
* Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!’s network of both owned and operated (O&O) and affiliate sites.
* Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88% of search revenue generated on Yahoo!’s O&O sites during the first 5 years of the agreement.
* Yahoo! will continue to syndicate its existing search affiliate partnerships.
* Microsoft will guarantee Yahoo!’s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country.
* At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.
* The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies. The agreement maintains the industry-leading privacy practices that each company follows today.

The agreement does not cover each company’s web properties and products, email, instant messaging, display advertising, or any other aspect of the companies’ businesses. In those areas, the companies will continue to compete vigorously.

The transaction will be subject to regulatory review. The agreement entered into today anticipates that the parties will enter into more detailed definitive agreements prior to closing. Microsoft and Yahoo! expect the agreement to be closely reviewed by the industry and government regulators, and welcome questions. The companies are hopeful that closing can occur in early 2010.

It’s been coming for quite some time, despite Microsoft’s failed bid to purchase Yahoo! last year. Yahoo!’s financial troubles have been well documented over the past few years, with thousands of layoffs in 2008. They need the cost savings and the ability to focus on their strengths, and search is not one of them. Not that they haven’t tried, buying Inktomi and Altavista in recent years. The CEO of Yahoo, Carol Bartz, could not have put it better in her blog:

“With Microsoft powering Yahoo! Search, we’ll be able to focus on the things we do best.”

Microsoft, on the other hand, is desperate to get a hold of the search engine market. They’ve relaunched and rebranded their search service so many times it probably drove away more users than it attracted. MSN Search, to Windows Live, then Live, now Bing. Which, of course, claims to have performed quite well in its short lifetime.

TechCrunch’s post on the conference call is notable.

Q: How can Yahoo be innovative if MSFT takes over search technology?

Bartz: There is a lot of innovation that happens above the search result.

The problem here, I feel, is that Yahoo loses fundamental control. It’s like controlling the packaging but not the product inside. They can not guarantee the quality of their search service. As Larry Dignan points out on ZDNet:

The good news appears to be that Yahoo will control its search sales destiny. The bad news is that Yahoo won’t control its search algorithm destiny.

Bartz is correct in that Yahoo! can be innovative with the search results, but why take that headache at all? To a large extent, isn’t the point of this deal (from Yahoo’s perspective) to save costs on search and finally have a reliable search service? Give that headache to Microsoft, let the Bing brand do the business.

From Microsoft’s perspective, this is a double edged sword in that if Yahoo! packages Bing differently, Bing risks losing its brand identity. There must be a single consistent positioning for Bing, and according to the terms of the agreement Yahoo is not forced to display results the way Microsoft might want it to. Bing must stand on its own to be considered a credible alternative to Google. But as Bartz mentions in the conference call:

“When we talk about internal Yahoo search that is some of the innovation we are looking at doing…We have full flexibility on what to do inside our site.”

That’s a risk for the Bing brand. Period.

PS. Is the fact that Yahoo’s stock has dropped roughly 12% (-$2.09 and Microsoft’s has risen ~1.4% (+0.33c) as of 2:58 PM today indicative of market perception that Microsoft benefits more than Yahoo, or are they just mirroring the rough trend of the S&P so far today? Microsoft is outperforming the S&P so far by the way. I don’t follow the stock markets so I am in no position to do anything but…speculate 😉

*The first time I’ve seen a whole new website dedicated to just a single deal, by the way, and this really shows how important this move is for both companies!


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