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MICROSOFT- YAHOO DEAL
The Search Ends Here
Does the tie-up leave the door open for Microsoft to acquire Yahoo! in future?
DHANYA KRISHNAKUMAR
1 Aug 2009
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| (AP) |
Microsoft has finally acquired the weapon to take on Google. After much talk, speculation and wrangling, Microsoft and Yahoo! have entered into a 10-year agreement, wherein Yahoo! will use Microsoft technology to respond to searches made on Yahoo! sites and to serve up the ads that appear alongside the results. In other words, Microsoft’s fledgling search engine Bing will become the exclusive algorithmic search and paid search platform for Yahoo! sites.
This basically means Yahoo! will licence its own search technology to Microsoft to be integrated with Bing. But Yahoo! will handle the sales of search ads for both companies using Microsoft’s search-advertising technology. The bottom line: while no cash changes hands under the terms of the deal, it will surely boost the income of both companies.
Here’s how: Microsoft will compensate Yahoo! through a revenue-sharing agreement, which pays Yahoo! of 88 per cent of search revenue generated on Yahoo! sites in the first five years. So, Yahoo! will no longer have to worry about investing in search; instead, it can concentrate on building its audience and attracting advertisers. “The deal makes search more relevant and useful to consumers,” says Ravi Venkatesan, chairman of Microsoft India. “The combination of Microsoft’s Bing platform and Yahoo!’s search technology will create an attractive and sustainable alternative in search.”
Yahoo! estimates the deal will boost its annual operating income by $500 million and yield capital expenditure savings of $200 million. Yahoo! also expects the deal to boost annual operating cashflow by $275 million. Microsoft gets the lion’s share of the benefits, by increasing its user base and building up its search engine, while revenues will flow in later.
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| Source: comScore qSearch |
But analysts say the bigger issue will be customer acceptance. For example, will Yahoo! look convincing selling something from rival-turned-partner Microsoft? Will customers see value in the combination? Such questions and their answers will be important.
But one of the consequences for consumers is that all three players involved will accelerate innovation in search, creating new features and more relevant search results. For advertisers, it means better, more targeted reach.
Most importantly, this will give them advertising opportunities across properties. Says Praveen Bhadada, engagement manager at Zinnov Management Consulting, “Users will now have a stronger alternative that will provide them scale and, if the combined search can provide users a better experience, then they may potentially eat into Google’s share in the future.”
According to Microsoft India’s Venkatesan, this agreement will ultimately deliver better search experiences for consumers and more relevant ads, while advertisers will get the benefit of a combined marketplace through a single platform. “This deal will create a significant competitive alternative in search,” he says.
But the deal is expected to come under a lot of regulatory scrutiny. Unlike the unsuccessful Google-Yahoo! deal — which was opposed last year for fear of creating a monolith with 90 per cent market share — Microsoft and Yahoo! coming together will only mean a healthy duopoly being created. Explains Ravi Shekhar Pandey, manager at Springboard Research: “The deal will help these two companies arm themselves better against Google. How much dent it will make in Google’s market share will entirely depend on what value they are able to bring to customers.
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