News Analysis

Microsoft Yahoo deal - the implications

Cliff Saran

Microsoft has finally struck a search advertising deal with 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.

 

 

 

 

 


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