Official – Microsoft and Yahoo Search and Advertising Deal Insights

The rumors had been living for Microsoft-Yahoo deal since a year now. Last year, Microsoft failed to impress the shareholders, and could not settle with a deal to buy Yahoo.

Since then, we have seen a bunch of news about Micro-hoo! deals. With no final news coming out, it was getting fishy. But today, the deal was finally announced: Microsoft and Yahoo! have finally Married under a Deal – strictly limited to internet search and advertising.

This move, as per the companies, is supposed to help both in their competition with Google. The deal covers a whole chunk of things, but the most important one is that Bing will become the exclusive algorithmic search and paid search platform for Yahoo! web sites. OMG!

Ballmer and BartzIn addition, Yahoo! will be the “exclusive worldwide relationship sales force” for the companies’ premium search advertisers. Microsoft’s AdCenter will take care of self-serve advertising.

Also of note is that Microsoft will gain an exclusive 10 year license to all of Yahoo!’s search technologies, and they will be allowed to integrate said technologies into Microsoft search platforms. The deal will last for 10 years, and has been in the works for over 2 years.

Yahoo 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,” said Yahoo! CEO 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.”

Microsoft CEO Steve Ballmer is excited:

“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. With the deal signed and ink drying, you may be wondering about the details behind the historic Microsoft and Yahoo search agreement, which may finally begin to put some pressure on Google’s dominance in search. We break it down for you.”

Here is the summary of what this deal really means as per betanews:

Fundamentals:

  • Yahoo will use Microsoft’s Bing for it’s search.
  • Yahoo will take over premium search advertising on both Yahoo! Search and Bing.
  • Self-serve advertisers will use Microsoft’s AdCenter system on both sites.
  • The agreement duration is 10 years
  • The deal will still need regulatory approval, which Microsoft and Yahoo hope to have by early 2010.
  • Even though it will use Bing under the hood, Yahoo will have full control as to how its search looks and operates. (UI is yahoo, back-end is bing)
  • 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.

The Details

  • Yahoo is giving Microsoft a 10 year license to its search technologies, which the Redmond company may integrate into Bing or other sites.
  • The deal does not cover standard display advertising on other Microsoft and Yahoo sites, only search ads.
  • The transition to Bing will start in the US and take between 3 and 6 months. Yahoo moving from its own Panama ad system to AdCenter will take 12 months.
  • Microsoft CEO Steve Ballmer says he expects 2 years of transition costs and a few hundred million dollars in expenses.
  • Some Yahoo engineers may become Microsoft employees.
  • Microsoft and Yahoo expect Google to fight the deal, but feel the company has little ground to stand on since it controls so much of the market.
  • Some Yahoo employees will lose their jobs, but Yahoo CEO Carol Bartz had no numbers to share.
  • Advertisers buying through AdCenter will have no control whether their ad appears on Bing or Yahoo! Search. The companies will be strictly selling a combined market.
  • Yahoo will have the flexibility to integrate Bing into its other properties, such as Yahoo! News.

The Money

  • Microsoft is not paying anything up front for Yahoo to adopt Bing and AdCenter, something investors are not too happy about.
  • Microsoft will pay Yahoo 88% traffic acquisition costs (or TAC) at an initial rate of 88% of search revenue. This rate will last for 5 years.
  • Yahoo expects the deal to add up to $500 million in operating revenue annually and save the company $200 million.
  • Cash flow to Yahoo is expected to go up $275 million per year when the transition is complete.
  • The deal being discussed last year with the up-front payment was more invest oriented Bartz and Ballmer said.
  • Yahoo will continue expanding its search affiliate partnerships.
  • Microsoft will guarantee Yahoo revenue per search (RPS) in each country for the first 18 months following initial implementation in that country.

Why the deal was done

  • With both Microsoft and Yahoo sites driving Bing, the algorithms will improve and the results get even better. This is much better than if each site operated independently.
  • Google controls around 78% of paid search.
  • Advertisers will benefit from scale and working with a single platform (AdCenter) and sales team for premium advertisers (Yahoo).
  • Even with Microsoft controlling the search results, Yahoo feels it can still be innovative. For example, it can put information and links to Yahoo services above the results.
  • Yahoo didn’t want a bunch of cash up front, it wanted a sustained revenue source moving forward.
Verdict ?
This deal will surely help Microsoft and Yahoo! achieve the dreams they were never able to because of the Fatherly God Google. This clearly leads to the conclusion that Microsoft still fears Google Secrety, even after Bing, which they claimed to be superior than Google. Why would someone fear an inferior Tech? Ridiculous. No matter what Microsoft thinks about it’s search engine, at the end of the day what matter is the quality of results, and that’s where Bing sucks big time.
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