After years of foreplay, Microsoft and Yahoo have made it official: They're cozying up in bed together. The major beneficiary will be Bing--it'll usurp Yahoo search, boosting its Google rivalry power.
We've been hearing dribs  and drabs  about the negotiations for months now--they were an ongoing event after Yahoo rebuffed Microsoft's $47.5 billion purchase offer last year. The new deal won't see any cash changing hands today...instead it's all about revenue sharing and boosting the money-earning prospects of both companies. In fact, Yahoo predicts that by the time the deal is fully implemented, it'll result in a $500 million boost to annual operating income, and a $200 million saving in capital expenditure. Yahoo will also get to handle the advertising sales of the venture in the future, using MS Adcenter software and the company's own programming experts.
But Microsoft arguably gets the better half of the deal--its Bing search engine will now power Yahoo's search function, albeit largely behind the scenes, since Yahoo is insisting it will "innovate and 'own' the user experience on Yahoo! properties, including search." That effectively consigns Yahoo's own Search, once trumpeted as a Google-beater but now ranking low in the search engine game, to history. And it places Bing right in the spotlight, since it will be the vehicle supply Yahoo's millions of users with their search results. Like no other deal before, and possibly unlike any other search engine that's surfaced over the years, this positions Bing as a serious competitor to Google--still the number one search engine by an enormous margin. As Microsoft's Steve Ballmer puts it: "This agreement gives us the scale and resources to create the future of search."
The deal will last ten years, and in that interval MS gets a license to use whatever elements of Yahoo's search technology it thinks can boost Bing's search powers. And it exclusively covers the search and ad powers of both companies--in all other areas, "the companies will continue to compete vigorously."
The one potential barricade to Yahoosoft's search future is a troubling legal one--it's just possible that international privacy regulations may limit how much info Yahoo can collect about what its users are searching for and then share with its business partner. That would effectively snuff out one of the more lucrative benefits of the partnership, since it feeds right into tailored advertising opportunities. Both companies are aware of the issue, and the terms of the deal mean both companies are "limiting the data shared between the companies to the minimum necessary."
But, make no mistake, this deal really is as much about the search engines as it is about advertising--strong personalized search engines boost the reach and relevance of ads, so the two businesses are effectively married. Even Twitter  knows the power of search in today's Internet, as it begins to try to turn its successes into revenue, and has just revamped its Web site landing page so it appears as a real-time search engine, displaying a search box and a dynamic trending topics word cloud.
Update: Some more details about why the deal happened at all were revealed during a joint MS/Yahoo press call that's just ended. It turns out that both companies have been working together on the issue for ages, and "there was no one certain thing" that resulted in the final closure, "the comfort level was finally there," according to Yahoo's Carol Bartz. Steve Ballmer's take on this matter was that the deal every one heard about last summer was brokered without "operating management" input from Yahoo or Microsoft, whereas this new deal is less for investors.
It also seems that both MS and Yahoo expect to gain most leverage from pairing in the U.S. Of the 800,000 or so advertisers who pay for online adverts, the deal positions Yahoo as the number two--"the other place to work" in the U.S. after Google, as Ballmer described it. It'll give Yahoo access to about 30% of those advertisers. However in Western Europe, around 92% of the business is owned by Google, so it's harder to make inroads there.
Ballmer also described pretty much how the deal works in terms of innovation. "There's a feedback loop in the search business," he noted, "the more paid ads you serve, the more you learn what's relevant" to your customers. This is, of course, where the real money lies going forward--tailored adverts to specific users, and the Yahoo-MS tie-up simply multiplies up how many people the two companies can reach in this way.
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Here's the full press release from Yahoo:
Microsoft, Yahoo! Change Search Landscape
Global Deal Creates Better Choice for Consumers and Advertisers
SUNNYVALE, Calif. & REDMOND, Wash., Jul 29, 2009 (BUSINESS WIRE)--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 Web site at http://www.choicevalueinnovation.com to provide consumers, advertisers and publishers with additional information about the benefits of the agreement.