Microsoft-Yahoo talks intensify

Negotiations between Microsoft and Yahoo over an alliance that could reshape the internet search business have intensified in recent days.

However, it is not yet clear if the latest talks will get any closer to a deal than discussions that failed earlier this year, according to people familiar with the talks.

In particular, financial terms are still under negotiation and differing expectations about the amount of cash Microsoft would have to pay up-front to seal an agreement have yet to be resolved.

The talks between the two have been continuing off and on since earlier this year, after Carol Bartz, Yahoo’s new chief executive, responded to Microsoft’s repeated overtures for discussions.

The discussions have explored a number of structures for a partnership, but the one that has been most frequently talked about would involve Yahoo handing both its search advertising business and algorithmic search to Microsoft.

In return, it would receive a share of future advertising revenue and, potentially, a large up-front cash payment.

Yahoo would also benefit from substantial cost savings, since it would no longer need to compete in an increasingly costly technological “arms race” against Google.

According to one person familiar with the talks, one of Yahoo’s main requirements from a deal has been some assurance that Microsoft will be able to become more competitive with Google in the search business in the long-run.

That concern appears to have been eased by the positive reviews for Bing, Microsoft’s new search service.

At the same time, the relatively small market share gains that Bing has achieved so far, in spite of a $100m advertising campaign, suggest that Microsoft still sees a strong need to gain access to Yahoo’s larger share of internet searches.

Another Yahoo requirement has been continued access to data about the online search behaviour of its users, since this is important to developing its broader advertising products. Microsoft is believed to have been willing to grant this.

But a potential sticking point is whether the deal will involve Microsoft making a large advance cash payment to Yahoo.

That was one of the terms Microsoft offered last summer when it first pitched a search partnership, and it is still seen by some Yahoo shareholders as an important part of any alliance.

One person familiar with the discussions played down the prospects for a large payment.

That could make the deal harder for Ms Bartz to sell to her own shareholders, particularly given the strong public stance she has taken over driving a hard bargain with Microsoft in return for any deal.