Updated: Microsoft (s msft) and Yahoo (s yhoo) have reached an agreement on a 10-year search deal, AdAge is reporting. The agreement , which they plan to announce tomorrow, will allow both companies to focus on their core strengths: Microsoft’s Bing will become the default search engine on Yahoo.com, and Yahoo will eventually take over the ad inventory on all Bing search results, eliminating complexity for advertisers (and internal overhead).
The Department of Justice still needs to sign off on the deal, but executives of Microsoft and Yahoo are reportedly confident that will ultimately happen. The agreement will probably take months to finalize, but since Google currently claims 65 percent of U.S. searches, and Yahoo and Microsoft 19.6 and 8.4 percent, respectively, the sooner they can start to catch up, the better.
| What the web is saying: |
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| The New York Times: For Microsoft, the combination with Yahoo is the quickest way to increase use of its newly revamped and rechristened search engine, Bing. While the new service has received good reviews, and advertisers have long said that Microsoft’s search advertising system is effective, many do not bother to advertise on it because the traffic they receive from that effort is too small.
By tripling its usage through the alliance with Yahoo, Microsoft has a better shot at luring more advertisers, which, in turn, helps the company increase the revenue it earns from searches. |
| The Wall Street Journal: A deal between the two companies immediately narrows the gap with Google. According to research firm Comscore, Microsoft and Yahoo combined accounted for less than half of Google’s 65% share of searches in the U.S. market in June. Microsoft handled 8.4% of searches last month and Yahoo accounted for just under 20%. |
| Lifehacker: [I]f you’re an advocate for web anonymity, or you happen to work in the U.S. Department of Justice’s anti-trust division, you’ll likely be keeping an eye out to see what happens. Bing and Yahoo trading search and advertising targeting information might not sit right with many web wanderers, and, in some ways, it decreases the value of Yahoo as an alternative to Google’s data monopoly. |
| Search Engine Journal: Microsoft is actually using Yahoo’s search market share to become the no.2 search engine. Being no. 2 is certainly better than always being on the third spot of the search engine ranking. |
| The Register: The release obviously doesn’t mention Google. But it does bizarrely include a line which shows both the strength and the weakness of the deal. The statement says: “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.” |
| ZDNet: The biggest risk to Yahoo is that it becomes AOL, a company that’s a gateway to the Web yet a step behind. A company that owns vertical categories such as finance, news and sports, but little else. A company that doesn’t own any content. And a company too dependent on third party technology for a big chunk of revenue. AOL’s search fortunes are hitched to Google. Yahoo’s search bounty will be tied to Bing. |
From Microsoft’s press release, the key terms of the agreement:
- 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.
And from the conference call:
Neither Yahoo CEO Carol Bartz nor Microsoft CEO Steve Ballmer mentioned Google by name. Instead, Bartz explained, with this deal, the two companies can offer a “viable alternative,” with better searches and more relevant ads for users, and better reach for publishers.
The word “choice” was used a lot. The companies have launched a web site, ChoiceValueInnovation.com, to showcase for investors the benefits of the deal. Its tagline reads: “Real Choice. Better Value. More Innovation.”
Layoffs are indeed on the horizon, Bartz said, but most employees — especially in search — will simply move to Microsoft.
When asked about the differences between this deal and the one proposed last year, Bartz cited the lack of an upfront payment this time around, but the inclusion of ongoing payments. “We’re trying to run a long-term business here,” she said.
Microsoft general counsel Brad Smith says the filing process with U.S. and EU antitrust organizations will get under way next week.
