Microsoft has finally struck asearch advertising dealwith Yahoo, 16 months after
its first attempt to buy Yahoo failed.
Microsoft has signed a
collaborative agreement with Yahoo, which will see Yahoo use
Microsoft's Bing search engine as its search platform. Yahoo will
provide search advertising both for Bing and its own search
site.
The agreement is an important step for Microsoft, as it shifts
its strategy from the traditional business of selling business and
consumer software towards building a viable cloud business. Free
software and search, using online advertising to generate revenue,
will become increasingly important to its strategy.
Microsoft is facing increasing competition from Google. The
search company is building a portfolio of software through Google
Apps, the Chrome browser and the Chrome operating system, which
could undermine Microsoft's strength as a leader in desktop
software.
Both Microsoft and Yahoo are confident the deal is good for both
companies, online advertisers and internet serach engine users.
In a join conference call with Microsoft CEO Steve Ballmer,
Yahoo CEO Carol Bartz, described the deal, which will be
implemented within 24 months of regulatory approval, as a
"game-changer".
The agreement will boost Yahoo's annual operating income by
about $500m and lead to capital expenditure savings of
approximately $200m. It will increase annual operating cash flow by
approximately $275, said Bartz.
Ballmer said, "This agreement has been a long time coming. It is
great news for all our customers. It will enable us to innovate in
search and provide consumers and advertisers with better
transparency and choice."
The agreement could also help momentum for Bing, which was
launched a month ago, Ballmer said.
| Microsoft-Yahoo deal at a glance |
|---|
| Microsoft will acquire an exclusive 10-year licence to Yahoo's
core search technologies, giving it the option of integrating Yahoo
search technologies into its existing web search
platforms. |
| Yahoo sites will use Microsoft's Bing as their search
platform. However, Yahoo will continue to innovate and "own" the
user experience. |
| Microsoft will compensate Yahoo through a revenue sharing
agreement based on traffic generated on Yahoo's network of
sites. |
| Microsoft will pay traffic acquisition costs to Yahoo at an
initial rate of 88% of search revenue generated on Yahoo's sites
during the first five years of the agreement. |
| Microsoft will guarantee Yahoo's revenue per search in each
country for the first 18 months following initial implementation in
that country. |
| Yahoo will provide the sales force for both companies' premium
search advertisers. |
|
| Microsoft's AdCenter platform will provide self-service
advertising for both companies. Prices for all search adverts will
be set by AdCenter's automated auction
process. |
However, the benefits of the deal to Yahoo are less clear,
according to some industry analysts. Vincent Fernando, writing on
the
Seeking Alpha financial blogging site, questioned whether Yahoo
would gain any competitive advantage by tying up with
Microsoft.
"What is left of Yahoo?" he asked. "They become a portal site
with e-mail, and a nice finance site. But to me, they are slowly
moving down the value chain if indeed they decide to use Bing
instead of their own search. If this happens, to me it proves the
failure of Yahoo's strategy over the last years. All the money they
wasted on sideline portal ideas they should have been plowing into
search innovation."
The agreement will take two years before it is fully rolled out.
This is a long time on the internet and the landscape will
inevitably change. Google is not standing still, and no doubt it
will react. The good news is that this competition should improve
internet search technology and provide a better market for online
search engine advertising.