Posted by: Rob Hof on July 28, 2009
At long last, Microsoft and Yahoo appear to be very close to a long-awaited deal on Internet search. According to reports in the Wall Street Journal and the Boomtown blog, Yahoo would use Microsoft’s recently debuted Bing search engine on its large network of sites and also would sell the text ads that run next to search results on Yahoo sites. According to an Advertising Age story, Yahoo also would be the exclusive seller of search ads on Bing as well as on Yahoo sites and would use Microsoft ad technology platform, called AdCenter, that advertisers use to place the ads.
It’s not yet clear whether the final deal has been approved by both companies, and thus it could be delayed beyond the expected Wednesday announcement date. But the reports indicate that negotiations, which recently heated up after more than a year of on-again, off-again talks, are essentially complete. Yahoo and Microsoft declined to comment.
If approved as described in the reports, the deal would be quite a bit different from those described in earlier talks. Yahoo apparently would not get an upfront payment, which reports of earlier talks had pegged at up to several billion dollars. Moreover, Microsoft would not take over Yahoo’s entire search and search ad business as some had speculated.
So in essence, Microsoft appears to be taking the lead on technology—both the search engine and the ad sales system—while Yahoo will handle ad sales for search. Each of those tasks likely plays more to their respective strengths than both trying to succeed at both tasks: Yahoo is most successful as a media company, while Microsoft is a technology powerhouse. It’s a stark reversal from half a decade ago, when Microsoft used both Yahoo’s search technology and its search ad system on its sites.
In broad outline, the deal is likely to be welcomed by both advertisers, who crave a foil to Google, and Microsoft and Yahoo investors—Microsoft’s because it has been losing big bucks online for years, Yahoo’s because it should be able to cut costs on search. “It’s good for both of the companies,” says Sandeep Aggarwal, an analyst with Collins Stewart.
But this deal, which had reportedly been delayed because of the complexity of the details, indeed will take some time to implement, according to the Ad Age story:
One of the most interesting wrinkles involves who takes ownership of search sales: Yahoo is likely to take on exclusive representation of Bing inventory to eliminate channel conflict and complexity for advertisers, but not before both sides unwind the thousands of advertiser relationships and proprietary systems through which many large advertisers buy search ads. Microsoft’s AdCenter is expected to be the sales-technology platform.
It’s an incredibly complex task, and individuals close to both sides say they have no reason to rush that aspect, especially because they expect some antitrust scrutiny from the Department of Justice, which could determine how that part of the deal is ultimately structured.
The combined search market share of Yahoo and Microsoft would approach 30%, still far below Google’s 65%. But analysts say 30% may provide enough of a critical mass at least to stave off further Google gains, and perhaps even provide the foundation for the combined search service to gain on the leader. Also, more advertisers may be willing to invest in using Microsoft/Yahoo search because of that critical mass.
Two things are unclear, however. One is the financial arrangements, in particular what revenue guarantees from search ads that Microsoft is providing Yahoo for letting the software giant take over Yahoo’s search. Yahoo CEO Carol Bartz had said it would take “boatloads of money,” and if there is no upfront payment, the revenue guarantees presumably would have to be high enough to make up for that. If not, the limited savings from the deal to Yahoo, which will have to continue investing in search ad sales capabilities, may not please investors that much.
However, it’s possible that because Yahoo is retaining the right to sell search ads on its own sites, and perhaps selling search ads on Bing as well, that revenue is sufficiently high for Yahoo in itself. Then the question is what Microsoft gets out of the deal besides Bing market share, which on its own doesn’t seem to provide much monetary benefit for Microsoft except perhaps better data from its higher volume of search queries allowing it to target display ads better. And use of Microsoft’s AdCenter should strengthen the company’s overall ad efforts. Still, says Tim Cadogan, CEO of the online ad technology and services OpenX and a former Yahoo ad sales and search executive, “it’s hard to understand the huge monetary advantage to Microsoft.”
Moreover, he says, the complexity of the deal means it will take the two companies longer to integrate operations than if Yahoo simply outsourced search and search ads to Microsoft, as Microsoft originally proposed. “It’s certainly a deal with a bunch of moving pieces,” Cadogan notes.
It’s also not clear when the deal will pass muster with antitrust officials. It probably will, given the still relatively small market share next to Google’s, and advertisers generally are likely to be in favor of the deal. But Google no doubt will raise objections, which could at least slow down the approval of the deal.
If it is approved, the deal will create a two-horse race in search advertising, the largest single chunk of online advertising and one that’s expected to rebound more quickly than display and other online ads as the economy improves.