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The online-partnership deal between Microsoft and Yahoo is far more collaborative than the one attempted by Microsoft in the summer of 2008, suggesting that both companies have reached a tipping point with regard to their mutual competition with Google.
The search ad deal, jointly announced by both companies on July 29, centers on Microsoft powering Yahoo’s search engine, while Yahoo assumes exclusive worldwide sales duties for the companies’ search advertisers. The deal will extend for 10 years; for the first five years of the agreement, Microsoft will pay traffic acquisition costs (TACs) to Yahoo at an initial rate of 88 percent of search revenue generated on Yahoo’s O&O sites. The companies hope that the deal will be approved and closed by early 2010.
Microsoft’s public statement about the deal suggests there was a mutual recognition, on the part of both it and Yahoo, that Google’s lock on the search and online advertising market would not be overcome by rivals working separately.
“This deal will combine Yahoo and Microsoft search marketplaces so that advertisers no longer have to rely on one company that dominates more than 70 percent of all search,” the statement read. “With the addition of Yahoo’s search volume, Microsoft will achieve the size and scale required to unleash competition and innovation in the market, for consumers as well as advertisers.”
Despite the more collaborative nature of the new deal, Microsoft CEO Steve Ballmer hinted during a July 29 conference call that he had few regrets about Microsoft’s attempted takeover of Yahoo last summer.
That failed bid had Microsoft offering $44.6 billion to purchase Yahoo. Ballmer said that agreement had been tailored from the perspective of “an investor as opposed to an operator.”
“This deal is not better than that last deal; it is different than that last deal,” Ballmer told the assembled analysts and reporters. He seemed to implicitly defend Microsoft’s previous tactics, saying that, no matter which deal structure eventually brought the two companies together, “you can create long-term shareholder value either way.”
The current deal, he added, actually has downside for Microsoft with regard to a “higher tax rate and less money up front.”
Carol Bartz, CEO of Yahoo, had her own commentary on the difference between the current bid and Microsoft’s attempted 2008 buyout.
“The difference in that deal-or perceived deal-was that there was more of an upfront payment and a low TAC,” Bartz said during the conference call. “That was not interesting to us because we’re trying to run a long-term business here where we can invest.”
How the New Deal Benefits Yahoo
This new deal, Bartz suggested, is beneficial for Yahoo in that it lets the company keep its user interface, while simultaneously giving it access to Microsoft’s technology.
The deal also marks something of a sea change in Yahoo’s position. At May’s seventh annual D: All Things Digital conference in Carlsbad, Calif., Bartz told an audience that Yahoo would only sell its search apparatus to Microsoft in exchange for “boatloads of money” up front.
Then in June, Bartz suggested at the Bank of America and Merrill Lynch U.S. Technology Conference in New York that any sort of deal between Microsoft and Yahoo would save the latter between $500 million and $700 million, mostly through staff reductions and data center cutbacks. At that same event, she suggested that the initial interest in Bing was “temporary” and that Yahoo would “be better off if we never heard the word ‘Microsoft.'”
But in July, rumors had started circulating that Microsoft and Yahoo had returned to the bargaining table to hash out details of a potential search and online advertising partnership. Although both companies refused to comment, rumors suggested that Microsoft would pay Yahoo several billion dollars in exchange for the latter’s search advertising business and revenue guarantees.
Debate erupted among analysts over whether Microsoft’s newly launched search engine, Bing, would have an effect on whether the Redmond, Wash., company would decide to actually pursue Yahoo with renewed vigor, and what shape a potential deal would take. Some analysts argued that the signs of potential success in Bing’s first few weeks of life would scuttle any potential Microsoft-Yahoo collaboration, as Microsoft would feel an increased confidence in its ability to navigate the online search arena on its own.
However, BroadPoint AmTech’s Benjamin Schachter argued the opposite, saying that a strengthened Bing could put Microsoft in a position to approach Yahoo with deal terms. “We believe any continued success of Bing may actually increase the odds of a Microsoft/Yahoo tie-up,” he wrote in a July 15 research note.
Microsoft and Yahoo currently hold 8.4 and 19.6 percent of the U.S. search engine market, respectively, versus Google with around 65 percent. By combining forces, Microsoft and Yahoo can jointly control nearly a third of the market, giving them more of a competitive advantage versus their mutual archrival. The deal could also potentially slow the erosion in Yahoo’s paid search spend, which according to a July report by research company SearchIgnite had declined year-over-year by 26 percent, with most of that share being lost to Google.
Indeed, a combined Microhoo will offer both companies a potential advantage not just in increased market share, but also advertising revenue. “It’s about the implications of that market share,” David Smith, an analyst with Gartner, said in an interview with eWEEK. “With advertising, it’s a feedback loop: The more you have, the better you get. Yahoo and Microsoft will be able to compete on more of a price basis with Google.”
The partnership benefits Microsoft in more ways than if it had chosen to simply forge ahead with Bing. “It’s a much more focused effort now,” said Smith. “[Yahoo and Microsoft] could both benefit from the economies of scale, and avoiding a duplication of effort.”