One of the world’s largest search engines has agreed on a deal to have a search partnership. In a bid to tackle the giant search engine Google, Microsoft started acquiring yahoo for about 50 billion last year and failed/ Now they merge together to do the job. Let’s see if they can win the battle.
Microsoft and Yahoo announced a partnership in Internet search and advertising on Wednesday that is intended to create a stronger rival to the industry powerhouse Google.
The Microsoft-Yahoo pact is a measured step that represents a pragmatic division of duties between the two companies, instead of the blockbuster deal Microsoft initiated last year when it bid $47.5 billion to buy Yahoo. That hostile offer was ultimately withdrawn by Microsoft, and its collapse led to a management change at Yahoo and the replacement of its co-founder Jerry Yang with an outsider, Carol Bartz, in the chief executive role.
Under the pact, Microsoft will provide the underlying search technology on Yahoo’s popular Web sites. The deal will give a lift to Microsoft’s search engine, which it recently overhauled and renamed Bing.
Bing, which tries to put search results in better context than rivals, has won praise and favorable reviews after Microsoft spent years falling further and further behind Google in search.
With the addition of Yahoo’s users, Microsoft will be able to run more searches through the Bing technology infrastructure. It expects to deliver better answers to search queries over time as well, by learning from more peoples’ queries.
For Yahoo, the move furthers the strategy under Ms. Bartz to focus the company on its strengths as a producer of Web media sites, from finance to sports, as a marketer, and as a leader in online display advertising.
“This deal allows Yahoo to invest in what we should be investing in for the future — audience properties, display advertising, and the mobile Internet experience,” Ms. Bartz said in an interview on Wednesday. “Our vision is to be the center of people’s lives online.”
The terms of the 10-year agreement call for Microsoft to license some of Yahoo’s search technologies. Yahoo will receive a lucrative 88 percent of the search-generated ad revenue from its own sites for the first five years of the deal. That is a very high rate for what is known in the Internet ad industry as traffic acquisition costs. Rates vary, but percentages in the 60s are more typical.
After the takeover bid failed last year, the companies renewed talks about a search and search advertising pact with a very different structure from the one announced Wednesday. The talks last summer included a large up-front payment from Microsoft and a lower percentage of ad revenue for Yahoo.
But when Ms. Bartz joined Yahoo at the start of this year, and talks picked up again, the interest on the Yahoo side shifted. Ms. Bartz was more interested in steady revenue to ensure the longer-term financial health of Yahoo instead of a big lump-sum payment, she said on a conference call Wednesday.
Yahoo shares were down 11.9 percent, apparently reflecting investors’ disappointment in the lack of a big payment. Shares of Microsoft were up slightly in afternoon trading.
“It feels kind of like a stab in the chest,” said Darren Chervitz, the co-manager of the Jacob Internet Fund, which owns about 100,000 shares of Yahoo. “It certainly feels like Yahoo is giving away their strong and hard-fought share of the search market for really a modest price.”
Mr. Chervitz said parts of the deal appeared to make sense for Yahoo. The company would have struggled to match Google and Microsoft’s infrastructure spending. Still, Mr. Chervitz said he feared the deal could come back to haunt Yahoo depending on how the search market evolves, particularly with regard to searches performed on mobile devices.
Without working on its own infrastructure, Yahoo would have trouble changing course when the deal expires in ten years.
“My sense is that Yahoo will regret making this move,” Mr. Chervitz said. “Ten years is a lifetime when it comes to the Internet.”
If the deal is completed next year as planned, and after the partnership is fully in place in three years, Yahoo estimates that its operating income will increase by $500 million a year, based on the anticipated higher search traffic and ad revenue generated. And by handing over the costly technical chores of maintaining and improving search technology to Microsoft, Yahoo estimates it will save about $200 million a year in expenses.
“For us,” Ms. Bartz explained in a conference call, “the boatload of cash was in preserving our revenue line.”
Steven A. Ballmer, Microsoft’s chief executive, said in an interview that Ms. Bartz had driven a hard bargain. “Look,” he said, “she got 88 percent of the revenue and none of the cost.”
Still, Mr. Ballmer added that his team at Microsoft got something it badly wanted as well: “I got an opportunity to swing for the fences in search.”
Under the deal’s terms, the advertising work will be split. Yahoo will be the exclusive ad force for premium search advertisers who bargain to negotiate deals. But the Microsoft Ad Center automated search market will be used for smaller customers, whose prices for search advertising are set by an automated auction process.
Together, Microsoft, the No. 3 provider of search, and Yahoo, No. 2, will have about 28 percent of search traffic in the United States. Even so, the partnership will still trail well behind Google, which holds about two-thirds of the market. And Google holds an even higher share of search advertising revenue, estimated at more than 75 percent worldwide.
By mid-June, Microsoft and Yahoo had the basic framework for a deal — an initial agreement outlined and approved during a telephone call between Ms. Bartz and Mr. Ballmer. The remaining six weeks, Ms. Bartz and Mr. Ballmer said, focused on the painstaking discussion of crucial details, down to agreements on how many milliseconds of latency, or delay, would be acceptable in presenting ad and search results on Yahoo sites.
Branding was another consideration. Yahoo will still control the look of the search features on its sites and will determine how search technology might be tailored differently for, say, entertainment and finance sites. But Yahoo’s search will include a logo saying “Powered by Bing.”
And Yahoo will be able to tap the resulting search data for its own purposes, like monitoring the online behavior of anonymous users to more efficiently target online display advertisements.
Throughout a morning conference call and the later interviews, Ms. Bartz and Mr. Ballmer emphasized that combining the No. 2 and No. 3 companies would not harm competition but enhance it. Google was rarely mentioned by name, but it was the subtext of the conversation and the deal itself. The partnership, Mr. Ballmer said, would create “a really strong No. 2 player in search and search advertising.” He added, “Advertisers and publishers will get a competitive alternative.”
Ms. Bartz pointedly said the partnership would “put choice back in the hands of consumers, advertisers, and publishers,” all of whom, she said, are “increasingly concerned” by the rising power of Google.
Microsoft and Yahoo said they expected resistance to the deal from Google. But Microsoft’s general counsel, Brad Smith, said he looked forward to explaining the details of the planned partnership to antitrust officials in Washington and Brussels.
“There is a compelling case that this is going to increase competition,” Mr. Smith said.
The Microsoft stance, analysts noted, amounts to the assertion that its deal with Yahoo in Internet search could accomplish what antitrust regulators, for all their efforts, failed to do in confronting Microsoft in the personal computer operating-system market — nurture genuine competition.
Microsoft and Yahoo have even published a joint Web site to explain the benefits of the partnership, which they claim will enhance choice in the marketplace and spur innovation. And Ms. Bartz wrote a blog post discussing the deal’s benefits for Yahoo users.
In a brief statement, Google said, “There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. We’re interested to learn more about the deal.”
For the most part, industry analysts welcomed the planned Microsoft-Yahoo deal as a calibrated step that would strengthen both companies. “The deal allows each of the parties to focus on their core ambitions and areas of expertise,” said Bryan Wiener, chief executive of 360i, a digital marketing firm. “It will strengthen Yahoo’s hand as a pure Internet media company. ”
The New York Times reports