Microsoft and Yahoo announced their search partnership this morning. In a nutshell, Microsoft will power search technology for both companies, while Yahoo will take over ad sales. Here are my notes from this morning’s Yahoo-Microsoft conference call (I’ve bolded parts for emphasis):
Carol Bartz: This is a great day for Yahoo. A game changer. benefits for Yahoo. half of all Internet users come to us, but face a formidable competitor in search. share investment expense to scale the market. Our vision is to be center of people’s lives online. We must do that by working on our own properties or working with others like Microsoft.
Only covers search and search advertising business. Self-serve advertising will go through Ad Center. Yahoo will continue to integrate search in its properties but back-end technologies will be powered by Bing.
What this deal is really about is scale. Advertisers want an alternative that has scale. Everyone wants a real alternative and advertisers are no different.
Ballmer: About creating efficiencies. The search scale we will get for Bing will allow us to create greater innovation for searchers and advertisers.
Win-win agreement for MSFT and YHOO. Both get more scale, advertisers get more scale, the whole industry will benefit.
Carol Bartz: Terms of the agreement. Gives MSFT a 10-year license to Yahoo’s core search technologies. will integrate into AdCenter, which will power both our search and theirs. Display is separate.
MSFT pays 88% TAC on Yahoo’s owned and operated sites for 5 years.
Revenue will come down a bit because of revenue share, operating income will be $500M higher, costs $200M lower, operating cash flow $275M higher at full implementation.
This deal won’t happen over night. We will work with regulators. Anticipate closing the deal by early 2010. Will begin with major markets including the U.S., transition to Bing in 3 to 6 months, transition from Panama to Ad Center will take 12 months.
Q&A
Q: Why not add a display advertising component to the deal? How big is the RPS [revenue per search] gap?
Bartz: On the display side we wanted to keep this as simple and straightforward as possible.
Ballmer: We are taking a big bite here. Search is more well-known when it comes to automation on the selling side. On RPS, I don’t expect a negative consequence on our P&L, but a risk we are willing to take. [Also antitrust concerns, which he doesn't mention]
Bartz: This is more about making the outside world feel comfortable because we are very comfortable with [the RPS the deal will generate]
Q: You moved from a deal that would generate a boatload of cash to a deal with a boatload of value. Why no upfront fee?
Bartz: What was really important to Yahoo was that we had a deal that flowed successfully through our P&L. What we really wanted was a significant TAC rate. As far as we are concerned the boatload of cash is preserving our revenue line
Ballmer: You take the current revenue mix Yahoo has, a certain RPS, we are guaranteeing that. If it is the same query mix and same market it ensures revenue only varies by the TAC amount and nothing else, that is a floor, not a ceiling..
Q: Transition costs?
Ballmer: There will be two years of transition costs. Upside really comes as we improve the relevance of search ads. As we improve monetization on both Yahoo sites and MSFT sites, there is clearly upside in that. Our upside comes as execution builds. For us the investment will be a few hundred million over the next two years to get this to work.
Q: How does this affect total CapEx?
Ballmer: Some additional CapEx, nothing that affects FY10 for us. We have a plan where some Yahoo engineers over time may move over to Microsoft.
Q: What if any opposition will you face in Washington to make this all happen?
Ballmer: We will face some opposition from a competitor who may not want more competition. Certainly we would expect the competitor to be aggressive. I think we have a good case for how this improves competition for consumers and the advertiser. We will be called on to present that case in Washington and Brussels.
?: Will start filing process next week. Google has 78% of paid search. Don’t know of any instance where a company so dominant made antitrust objections to a deal.
Q: Any impact on jobs?
Bartz: Yes, there are certainly many Yahoo search employees who will be asked to take jobs at MSFT. There will also be search employees [who get redeployed]. Unfortunately there will be some redundancies in Yahoo. This is a transition over the next 2 and half years. Nothing will change until we get regulatory approval, but yes, there will be redundancies, but in the future.
Q: Do you have a number?
Bartz: That is in the planning. We have no numbers to announce at this time.
Q: How much does this affect the place search takes in Yahoo’s services?
Ballmer: The way the deal was constructed, most complex part of the discussion, was to ensure that engineers on both sides could innovate around and about search around other things as much as the other company can, and to protect the privacy of the consumer that they deserve. During the last many months, the challenge was not just to work through the high-level financials but to work through these details.
Q: How can Yahoo be innovative if MSFT takes over search technology?
Bartz: There is a lot of innovation that happens above the search result.
Q: What does this mean for mobile?
Bartz: What we are very interested in is doubling down on the mobile experience to integrate search into that, to integrate our content. Being able to have integrated search is important and also frees us up to innovate on the other areas. Allows Yahoo to do want we do well, be the center of information, entertainment, friends and family.
Q: You said what the TAC rate was for O&O, but what is TAC rate when Yahoo sells on Bing.com? What assumptions are you making for risk to affiliates (YHOO)? How do you convince Google advertisers to run a multiple campaign.
Bartz: On Bing there is no TAC, that is MSFT’s revenue . . .
Ballmer: You don’t know when you sell a campaign where the keyword will show up. You are buying the keyword on both environments.
Bartz: That is exactly right. You are really selling the combined market. On affiliates, it makes sense they would go straight to MSFT. The small advertisers don’t want to learn three platforms. What is important is that there is scale. They know how to answer into the Google ad system. We really expect we can provide a much better experience for this tail of advertisers and win them over.
Ballmer: The gap where we will be when we put our platforms together will be there, but it won’t be 800,000 [advertisers]. Google is something like 92% in Western Europe. At least there is a clear alternative choice.
Q: How will Bing use Yahoo search code?
Ballmer: Our engineers know Bing and will build to that platform, but we wanted to make sure we could put together our expertise and code with Yahoo’s expertise and code. We are very pleased it is not a rip and replace.
Bartz: On the paid search side, we are the provider for MSFT now in most of the international geographies. So there are both platforms to consider.
Q: Innovations as part of the deal?
Ballmer: We have access to two of the best sets of technology. Do we think we will have better algorithms for relevance? Yes we do. There is a feedback loop in search. the more searches you serve, the more you learn about what people click on. Scale drives knowledge. There is a return to scale from seeing that much activity [that is more] than Yahoo or MSFT see independently.
Bartz: We should talk about innovations on the ad sales side. Online advertising is in its pre-infancy. All of that is enhanced because it is a bigger marketplace.
Q: Why is this deal better than the one MSFT had on the table last year?
Bartz: I’ve done some exploring of that. there is actually more fiction in the market than fact. The big difference is that it was perceived as more of an upfront payment and a lower TAC. That is not interesting for us. We feel this is a true partnership with the technology and selling.
Ballmer: The deal last year was tailored more towards an investor than an operator. This deal is different, not better. Less upfront payment, and definitely a higher TAC rate.
Q: What pushed this through?
Bartz: Transferring paid search so people are comfortable with the platforms. Like the proverbial snowball down the hill once it gained momentum.
Ballmer: It is not like we come here with a two-page term sheets. I think we have well over 100 pages to describe what we are doing. What we were spending our time on wasn’t the high-level principles.
Q: Doing a partnership is harder
Bartz: Sure it is. Dating is one thing, but having a partnership is another. We had to make sure we were committed. It is a distraction. We will put the right team in place to make the transition. Once we got to the point we believed it would be advantageous for us, we moved ahead. That is what a partnership is.
Q: What will happen with other areas of search, Yahoo News, delicious, etc?
Bartz: When we talk about internal Yahoo search that is some of the innovation we are looking at doing. Paid inclusion we will decide on later. We have full flexibility on what to do inside our site. That is the important thing, there is a lot of value there to add search to our properties.
Ballmer: It was important to us to structure the deal to give Yahoo full flexibility [to add search to its services].
(Flickr photo via Yahoo).
Live notes are great. Press release with video statements from both Ballmer and Bartz http://www.micr...-29release.mspx They look like one happy family.
I’m expecting no comment at all from Google.
Why not? Oh right, we’re too occupied laughing our asses off.
Why not? Oh right, we’re too busy laughing at Yahoo’s dealmaking incompetence.
I love how every press outlet is reporting that this is the deal that will help the two companies take on Google.
This is as comical as hearing that Hyundai and Kia are teaming up to take on Ferrari at what they do best.
You know that Kia is a subsidiary of Hyundai right?
This is really great, we expect to see exponential growth in innovation in search after this deal. Kudos to MS & Yahoo.
As Craig said on our blog, for Yahoo “this is the Sarah Palin move of search – quit and declare victory.”
-Alex
Googl powered by Yahoo’s patent 360……..YaWho now powered by Bing?
its a good decision i think.. specially if you wanna make your mark in the search market asap
I wonder what implications there are for Yahoo ’s BOSS project allowing developers to create their own search engines with Yahoo technology.
Does this mean it will be replaced by Bing?
It will be interesting to see how Google will react to this breaking news(knowing Google they are already 10 steps ahead of MICROYAHOO). Google may not give MICROYAHOO the publicity they want.
They still have ways to go to catch up Google. Maybe they can do it together or maybe they can’t. Only time will tell. But this union will be in the headlines and might generate traffic and that is exactly what MICROYAHOO want.
I wounder what will happen when the excitement ware off as it did for Bing ?
Follow is important!
seems like a good time for Google PUTS. for the first time they will have to fight back. any other company but Microsoft would be doomed for a 6 years long complete overhaul of their products lines (VB/old VS -> .NET, XP-> windows 7, Office->web oriented Office 2010, Bing, Azure). But now it’s beyond them.
For Google, being cool and 20% creative employee time will not cut it. Unless Google reveals major announcements in the coming months, Schmidt has to go.
“Unless Google reveals major announcements in the coming months, Schmidt has to go.”
Agreed. What Google really needs at this point is a Larry Ellison, who operates under the philosophy of “Never give away anything you can charge perfectly good money for.”
Fundamentally, this deal is about Yahoo being a media company at heart and Microsoft being a technology company.
The deal permits Yahoo to focus on entertaining the audience and selling access to advertisers. Microsofts gets to focus on technology, which is where they are strong. If Microsoft is lucky they can find a way to provide the technology that runs the internet without having to learn how to balance audience, advertisers and content.
I’m sure everyone does want a real alternative…
It’s called Twitter
I hope that was a joke, otherwise I would love to hear you elaborate on that statement.
(Please excuse me if the humor flew over my head, but I am so tired of hearing about Twitter completely out of context of articles on TC)
This is a great result for us paid search marketers, and all businesses who advertise in search
Competition with Google, less platforms to manage saving time
More layoffs in the future. Great. Entire months have passed without Yahoo adding to the unemployed masses, and morale was undoubtedly getting dangerously high.
This is yahoo just farming off something they arent focused on at the moment. I know this deal is about Scale.. however, both Bing and Yahoo together doesnt provide enough scale to compete with Google.
Yahoo is Linux, Ms on windows, not easy to merge
Google OS is Linux. Microsoft needs Yahoo otherwise years to catch up to Google. Microsoft will Play Yahoo against Google.
Hi my name is Carol Bartz. I kick ass and take names.
This deal is “hot” right now…but I’m really interested to hear what Google has to say. How confident are they?
“Self-serve advertising will go through Ad Center. ” GAH, what!? Oh man, Yahoo Panama SEM interface was MUCH better than MS Ad Center. I mean Bing powering it all is interesting, but MS just wasn’t cutting the mustard in creating anywhere near a good advertising interface compared to Yahoo and no-where near as to Google AdWords.
Great news! MS is really making some waves this year!
Can you imagine the language used when Bartz & Ballmer get into a heated argument?
It would embarrass a sailor I’m sure.
This deal reminds me of the deal MSFT struck with NBC to create MSNBC.
Microsoft was hot on learning everything about the fast growing cable business. They paid NBC $100 million a year to “learn” the business and create MSNBC.
In the end, MSFT got nothing out of it. NBC made a billion dollars. None of the cable companies ever bought any of the software MSFT developed for the industry.
It was a big bust. Yahoo is giving MSFT the low margin stuff and keeping the display business that is probably the most profitable part of the biz.
MSFT has to be one of the worst managed companies in the S&P 500.
Carol Bartz is a really smart manager and she took MSFT to the cleaners.
I think it would be interesting if they leveraged their combined properties to see what is popular (most linked / clicked) like say, bookmarks on Delicious, and find a way to add that to search.
Never seen Ms. Bartz so giddy. This is a pretty remarkable shift in the space. Question is can the combo do more than be an alternative…can it grab more market share?
Ah, to deal with the devil…
Lets just hope Carol doesn’t do to Yahoo, what Rick Belluzzo did to SGI.
In New Zealand this should provide an improved alternative, as currently Adwords is about the only decent platform with MS and Yahoo both stinking for local (as in NZ only) advertising.
Either way, thank god Yahoo! are finally doing something…anything.
What a pity from Yahoo.. they gave up…
I wish the best yahoo engineers get hired by google..
I’m used to use yahoo’s search engine but I will start using Google’s now.. microsoft sucks..
Is it just me or do you see two dildos in this photo too?
Who is the MILF needs honing.
Great – sucks plus sucks will either be more suckey or suck less. Neither hits b2b very well. We have considered dropping Yahoo and MS/Bing this will make it easier to …erh manage.
So Yahoo is now an official butt buddy with AOL.
She just signed away the beating heart of the company. The core of what would keep Yahoo the last true portal. Yahoo will now have no inherent advantages over other content providers.
Now it’s death by a thousand cuts as other content publishers pick off Yahoo users for the next 5 years. Yahoo will now begin to lose traffic and users then begin to lose advertising leverage. Once it begins, the cascade will be impossible to stop.
It’s over for Yahoo. How StoOpid.
Oh glorious day!
This deal was forced by big time investors who held large positions in Microsoft and Yahoo both. Both stocks were dead money for a long time. It was forced on Yahoo so they get some move on the stock . I bet someone had the yahoo stocks shorted big time and long on the other side.
This is end of Yahoo. It will slowly bleed to death. What do you expect when you put a Sara Palin type in charge.