Microsoft, Yahoo finally announce search deal

It's not a merger and it won't dethrone Google, but it could help improve search technology.

The much-anticipated deal between Microsoft and Yahoo was announced this morning. While the partnership falls short of the merger that nearly every tech blogger on the planet was pushing after Microsoft’s $47.5 billion bid last year, it does establish a formidable alliance that could help bring at least some competition to the search advertising market.

The 10-year partnership makes Microsoft’s Bing the power behind Yahoo Search, and Yahoo becomes the relationship sales force for both companies’ advertisers.

A jointly-issued press release places Google squarely in the crosshairs “Providing a viable alternative to advertisers, 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.” But there’s plenty of doubt about how much market-share Microsoft and Yahoo can steal. Bryan Weiner, chief exec of digital ad agency 3601 noted in the WSJ that the only thing that increase the current market share is “product development and smart marketing and there is nothing in this deal per se that changes that landscape.”  Putting Bing on Yahoo doesn’t increase the eyeball count.

However, the companies claim this will bring added innovation to search, which is probably true. Bing has done well since its glitzy birth and incorporates the best of discovery technology, while Yahoo has had a long time to mature its algorithm. The combination creates a more viable ad dollar attraction, which means more resources to refine the product over time.

Microsoft will pay Yahoo 88% of search revenue generated on Yahoo’s sites—a huge chunk that reflects Yahoo’s dominating web presence vis-à-vis Microsoft.

Even in the long run, there’s no reason to think Google has much to worry about. Bing now has decent presence in desktop search, where Microsoft has flexed its dictatorial arm, and on Yahoo's current sites, but it's not clear that growth will come from anywhere.  Of course there's the marketing budget, which Microsoft has already used liberally, but billboards can only do so much to make a search engine destination sexy. Google remains synonymous with web search and the only thing that could dethrone it would be Google’s own laziness in refining its product--an unlikely prospect.

Full press release below:

Global Deal Creates Better Choice for Consumers and Advertisers
SUNNYVALE, Calif. & REDMOND, Wash.– July 29, 2009–

Yahoo! and Microsoft announced an agreement that will improve the Web search experience for users and advertisers, and deliver sustained innovation to the industry. In simple terms, Microsoft will now power Yahoo! search while Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers.

For Web users and advertisers, this deal will accelerate the pace and breadth of innovation by combining both companies’ complementary strengths and search platforms into a market competitor with the scale to fuel sustained development in search and search advertising. Users will find what they care about faster and with more personal relevance. Microsoft’s competitive search platforms will lead to more value for advertisers, better results for Web publishers, and
increased innovation and efficiency across the Internet.

Under this agreement, Yahoo! will focus on its core business of providing consumers with great experiences with the world’s favorite online destinations and Web products.

“This agreement comes with boatloads of value for Yahoo!, our users, and the industry, and I believe it establishes the foundation for a new era of Internet innovation and development,” said Yahoo! Chief Executive Officer Carol Bartz.

“Users will continue to experience search as a vital part of their Yahoo! experiences and will enjoy increased innovation thanks to the scale and resources this deal provides. Advertisers will also benefit from scale and enjoy greater ease of use and efficiencies working with a single platform and sales team for premium advertisers. Finally, this deal will help us increase our investments in priority areas in winning audience properties, display advertising capabilities and mobile experiences.”

Providing a viable alternative to advertisers, 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. 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.

Microsoft Chief Executive Officer Steve Ballmer said the agreement will provide Microsoft’s search engine, Bing, the scale necessary to more effectively compete, attracting more users and advertisers, which in turn will lead to more relevant ads and search results.

“Through this agreement with Yahoo!, we will create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company,” said Ballmer. “Success in search requires both innovation and scale. With our new Bing search platform, we’ve created breakthrough innovation and features. This agreement with Yahoo! will provide the scale we need to deliver even more rapid advances in relevancy and usefulness. Microsoft and Yahoo! know there’s so much more that search could be. This agreement gives us the scale and resources to create the future of search.”

“This deal fits the long-term strategic direction of Yahoo! to remain the world’s leading online media company and Carol Bartz has the full and unanimous support of the Yahoo! Board behind this deal,” said Roy Bostock, chairman, Yahoo! Inc. “This is a significant opportunity for us. Microsoft is an industry innovator in search and it is a great opportunity for us to focus our
investments in other areas critical to our future.”

The key terms of the agreement are as follows:

– 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 percent of search revenue generated on Yahoo!’s O&O sites during the first five years of the agreement; and

– 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

– The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies. The agreement maintains the
industry-leading privacy practices that each company follows today.

The agreement does not cover each company’s Web properties and products, email, instant messaging, display advertising, or any other aspect of the companies’ businesses. In those areas, the companies will continue to compete vigorously.

The transaction will be subject to regulatory review. The agreement entered into today anticipates that the parties will enter into more detailed definitive agreements prior to closing. Microsoft and Yahoo! expect the agreement to be closely reviewed by the industry and government regulators, and welcome questions. The companies are hopeful that closing can occur in early 2010.

The companies have established a website at https://www.choicevalueinnovation.com to provide consumers, advertisers and publishers with additional information about the benefits of the agreement.