After years of courting, Microsoft Corp. has reached a deal with Yahoo Inc. to pool their resources on internet search, the lucrative business technology rival Google Inc. dominates.
Under terms of the agreement announced Wednesday, the two companies will pool their relative strengths in the search business, with Microsoft using its technology to power Yahoo searches while Yahoo puts its sales force to work to attract premium search advertisers.
The two companies said in a joint news release they hope the deal will help lead to faster, better and more relevant results for web users and advertisers when conducting online searches.
The 10-year deal will allow Microsoft to introduce its new search engine, called Bing, to more customers. In return, Yahoo will get to keep 88 per cent of the revenue from all search ad sales on its site for the first five years of the deal and gain the right to sell ads on some Microsoft sites.
Google had 65 per cent of the internet search traffic in the United States in June, according to the latest report from online tracker comScore. Yahoo and Microsoft sites were in second and third place in the search market, but trailed far behind with 19.6 per cent and 8.4 per cent in market share.
Microsoft had gained 0.4 per cent of the U.S. online search market share in the last month, however, while Yahoo's share dropped by 0.5 per cent.
Gartner Inc. analyst Neil MacDonald said the recent success of Bing helped make the deal happen.
"I think it put pressure on Yahoo, as well as Yahoo not being able to turn it around on its own," said MacDonald.
Yahoo CEO Carol Bartz said the deal is the beginning of a new era of innovation and development for the internet and will bring value to Yahoo.
"This deal will help us increase our investments in priority areas in winning audience properties, display advertising capabilities and mobile experiences," she said.
Yahoo estimates the deal will boost annual profit by $500 million and save the company about $275 million on capital expenditures as it turns over some of the search technology costs to Microsoft.
Microsoft made a bid to buy Yahoo in the spring of 2008 for $47.5 billion U.S., but Yahoo's board of directors had insisted on a higher price and Microsoft refused. Yahoo then lost much of its bargaining power when Google backed out of an internet advertising partnership to avoid a challenge from the U.S. Justice Department, which had concerns about competition in advertising if the partnership was made.
Yahoo's chief executive at the time, Jerry Yang, then invited Microsoft to make another offer on his company, but Microsoft said it was no longer interested.
Bartz replaced Yang after he stepped down in December.
Google's response:
Steve Ballmer, the Microsoft chief executive, believes Google will try to get the software giant's search advertising deal with Yahoo blocked – while workers have been warned of redundancies as the two companies integrate operations.
Microsoft and Yahoo have their sights set on catching the runaway search-advertising market leader Google with their 10-year global deal.
In the tie-up, Microsoft's Bing search service will be integrated across both companies' websites, while Yahoo will handle global search ad sales.
Ballmer, who failed to push through a deal to buy Yahoo's search business for $1bn (£610m) last year, said he expected "aggressive" lobbying by Google when the deal was scrutinised by regulators across the globe.
"We suspect we will face opposition from the competitor [Google]," he said on a conference call alongside the Yahoo chief executive, Carol Bartz. "The case of us coming together will provide more competition, not less. [However] we expect our competitor to be aggressive."
Microsoft and Yahoo intend to file the deal document, of more than 100 pages, to anti-trust authorities in the US and Brussels, as well as other markets, next week. The companies hope to close the deal early next year.
Ballmer indicated that the deal might find regulatory clearance easier with the European Union because, he claimed, Google had as much as 92% ad-search market share across the continent – compared with about 70% in the US. In Europe Microsoft and Yahoo's combined search-ad market share fell well short of their 25% to 30% figure in the US, he said.
Bartz said, for Yahoo, the deal was attractive because it included a high-level payment of "traffic acquisition costs" (Tac), amounting to 88% of search revenue generated on sites owned or operated by Yahoo over the deal's first five years, although without an up-front cash payment.
"A big cash payment upfront doesn't help from an operating standpoint," she added. "What we wanted was a significant Tac rate so we would have the revenue to support our expenses line to invest in the business."
Ballmer, admitting there was "no question" the deal was at a much higher Tac rate than last summer's negotiations over the acquisition of Yahoo's search business, said that establishing the joint operation across the two companies over the next few years would cost Microsoft "a couple of hundreds of millions".
One of the pay-offs, he added, was that the partnership would enable Microsoft and Yahoo to develop a superior search algorithm to Google.
Bartz said Bing would be integrated across Yahoo in three to six months after the deal was closed – on Yahoo the search function would appear as "powered by Bing". Complete global integration with the resulting financial benefits were not expected for up to two years, she added.
Some Yahoo search employees would move to Microsoft, some would move to the company's display ad division, but there would also be cuts, according to Bartz.
"Unfortunately there will be some redundancies at Yahoo," she said, adding that the process of laying off workers would happen over the next two and a half years.
She said that once the partnership was up and running it would generate an operating income of $500m a year. With Microsoft focusing on developing search technology, Yahoo estimates it would save $200m a year in capital expenditure.
"The deal won't happen overnight. We will work with regulators and broadly anticipate closing the deal in early 2010," said Bartz.
"This deal will create a significant competitive alternative in search. A combination of Microsoft and Yahoo ... puts the choice back into the hands of consumers, advertisers and publishers who are increasingly anxious about the influence of a single player," she added.
A spokesman for 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."
Bilibala comments:
Not sure whether the deal can pass through different countries' regulation or not.
Also, joint force will not help unless the techology improve and offer better services & search result to customers.
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