Over the past 18 months, Yahoo has played a poor hand badly. First the opportunity to sell out to Microsoft for $48bn was squandered. Then, on Wednesday, new chief executive Carol Bartz announced a partnership with the Seattle-based software group in which Yahoo appears to benefit the least among all the search market’s participants.
Yahoo receives no cash upfront for ceding control of search to Microsoft, a surprise that pushed Yahoo’s shares down by more than a 10th just after the announcement. Instead, Yahoo has been guaranteed revenues per search for the first 18 months of the 10-year deal. It will also take over sales of premium search advertising. Yahoo says that it expects the deal to contribute $500m to operating profit in three years’ time.
But making such a complex deal work will be a slow and painful process. Microsoft will be handling the technology and automated sales but Yahoo will be speaking to the clients. All the while, the two companies will apparently continue to compete in display advertising. Finally, although a decade is an age in internet terms, what happens when the partnership ends and Microsoft’s Bing engine powers all of Yahoo’s search queries?
Microsoft at least gets the scale that helps its Bing become more competitive against Google, giving it a chance to improve the online business that has been a 10-year money pit (but still only represents 5 per cent of group revenues). Advertisers have so far welcomed the possibility of a feasible alternative to Google, making it likely that competition authorities on both sides of the Atlantic will – as they should – approve the deal.
Google, meanwhile, will benefit from wearing a petticoat of competition while it continues to rake in cash. With two-thirds of the US search market, and more worldwide and in paid search, its dominance will remain untouched for years, if at all.
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