Microsoft search deal with Yahoo is finally done

Wednesday 29 July 2009 | By Heidi Scott, Gosh! Media Copywriter

Yahoo and Microsoft have clinched a deal under which Microsoft's technology will power Yahoo's search results, while Yahoo will sell advertising for both companies' search sites.

The giant purple pen they used might have been a bit of a joke, but the deal signed by Microsoft's CEO Steve Ballmer and Yahoo's CEO Carol Bartz yesterday means serious business. The agreement – dubbed 'Microhoo' – makes Microsoft the second largest search company in the world, while rendering Yahoo a mere media company.

The long-awaited deal gives Microsoft the right to conduct searches on Yahoo's huge network of websites in return for 88 percent of the revenue generated by Microsoft's search engine, Bing. This means that Yahoo is now something of an advertising broker, trying to attract as many people to its properties as possible, in the hope of selling lucrative advertising space on them.

The 'will-they-won't-they' Microhoo saga was getting tiresome for everyone involved but simple realities drove the deal to its conclusion: Microsoft has cash and needs scale, while Yahoo has scale but needs cash – a match made in heaven!
Yahoo boss Bartz seemed to decide some time ago that Yahoo should not take Google on directly. Back in June she was quoted as saying, "We're not a search company." In the wake of the Microsoft deal, many pundits are asking: just what is Yahoo now? After news of the deal spread, some speculated that Yahoo had turned itself into a bigger, purpler AOL…ouch!

Yahoo's chosen strategy seems a risky one. Investors certainly saw it that way, as the deal's announcement sent Yahoo's shares tumbling 12 percent. It is search advertising that has been by far the most effective way for advertisers to reach their targets, hence the success of the company most committed to combining relevant search results with efficient advertising – Google. Yahoo, however, has put much of its energy in recent years into tools that allow others to build on its technology, including BOSS (Build your Own Search Service) and SearchMonkey.

Yahoo is, however, paying below market rate for an outsourced search engine – the 88 percent was a better deal than had been expected. Yahoo gets a guaranteed stream of search revenue and can sell all the search ads on both Yahoo and Microsoft sites. What Yahoo loses, though, is control over its own future when it comes to search. Yahoo's search revenue is tied to the performance of Bing for an incredibly long 10 years.

So, where can Yahoo shine? It is likely to concentrate on services such as Yahoo Mail, Flickr and Messenger, as well as its mobile strategy – an area which is still very much up for grabs.

In a press release, Bartz said, "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. Under this agreement," she continued, "Yahoo! will focus on its core business of providing consumers with great experiences with the world's favorite online destinations and Web products."

As for Microsoft, it benefits from more search market share overnight than it could have waved a stick at by organic growth of Bing over the next few years. Microsoft can pick through the best of Yahoo's search technology to exploit on Bing as it gears up for head-to-head competition with Google. It's worth remembering, though, that the combined market share of Yahoo and Microsoft for search is still only half of what Google has.

Microsoft Senior Vice President, Yusuf Mehdi, said of the deal, "Today is a start on a fantastic partnership which we are very excited about. By starting this partnership it allows us to over time build greater and deeper relationships. Right now the focus is on getting to a credible No. 2 player in search and paid search."

Microsoft CEO Steve Ballmer & Yahoo CEO Carol Bartz

Image courtesy of Yahoo & Microsoft

Steve Ballmer, Microsoft's Chief Executive Officer, added, "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. 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."

Mountain View, meanwhile, may be breathing a sigh of relief – at least in the short term – as the deal helps Google to counter some of the anti-trust scrutiny it is currently being subjected to. In the longer term, however, Google knows that the deal could make Bing a force to be reckoned with. And, after eighteen months of flirting, tiffs and press leaks, Microsoft and Yahoo can both now get back to business, which is not good news for Google.

The deal will be subject to the usual regulatory inspections, however, and probably won't be approved until early next year at best.

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