Microsoft, Yahoo now free to focus on new selves

Investors panned Yahoo's search and advertising deal with Microsoft on Wednesday, sending Yahoo's stock down 12 percent. IDC's analysts called it a "strategic mistake."

But here's what's good about it: After a year and a half of public scrapping, behind-the-scenes drama, and dysfunctional communications through leaks to the press, Microsoft and Yahoo now can get back to business.

The Microhoo concept has been reduced from a giant cloud of uncertainty hanging over both companies to merely a complicated partnership between two rivals with Google as a common foe. The range of possibilities for Microsoft and Yahoo, which ran all the way from nothing to Yahoo disappearing altogether, has been pruned back to a much more manageable scope.

Nobody will notice any difference immediately from the outside. First comes regulatory scrutiny, with the companies hoping for approval in early 2010. But already, the deal provides a framework that should make it easier for the companies to establish their new identities.

With Microsoft acquiring license to Yahoo's search technology, applying its search-ad auction process to both companies' searches, and offering jobs to many Yahoo employees, it appears Redmond is carrying more of the Ph.D.-intensive fight to Google. Yahoo, keeping its display advertising business and focusing on its home page redesign, becomes more of a hub for people's online activity and platform for outside Web sites' developers.

Some awkwardness remains where those two visions overlap. One is the work Yahoo has done to augment search results through a program called SearchMonkey, which can interpret tags on others' Web sites so they can be spruced up with new information when those pages appear in search results. To work, it requires the cooperation of the Web crawlers that index the contents of Web pages and the servers that present the search results.

To me, that looks like the sort of chore that will require Microsoft and Yahoo to work together in search. Fortunately, Microsoft and Yahoo have a 100-page playbook that had better address such aspects, and Microsoft Senior Vice President Yusuf Mehdi declared Wednesday he likes the SearchMonkey approach.

The companies also gave themselves two full years to fully implement the deal, too, so there's time to work out such details. In the meantime, Yahoo can't afford to stand still. SearchMonkey is one element of a new hybrid search page that Yahoo said it will start testing with its users starting in August.

There's some important context for these changes and for the Microsoft-Yahoo deal: search results are growing beyond the plain list of 10 hyperlinks with accompanying snippets of text. Google, for example, blends in ever larger quantities of "universal" search results such as maps, YouTube videos, photos, and news.

Yahoo plans to make its search pages more like its main page.

(Credit: Screenshot by Stephen Shankland/CNET)

Yahoo's new search results page include not only SearchMonkey, but also display advertising and the key element of its new home page, a customizable list of applications down the left side. The search results themselves become just part of a broader package, so Yahoo outsourcing the actual search engine duties to Microsoft isn't giving away as much of the core business.

Outsourcing search has a cost, of course. The partnership means Yahoo will get only 88 percent of search-ad revenue on its sites for the first five years, down from 100 percent today. Yahoo, though, also gets lower operational expenses and thus, it expects, greater profitability over the long term. Yahoo expects $275 million more each year in operating cash flow.

Carol Bartz, Yahoo's new chief executive, has shown herself to be a pragmatist who prefers picking her battles. With the Microsoft deal, she's chosen to sit a big one out, freeing the company from having to out-Google Google. What the company sacrifices in ambition it gets back in goals that are actually attainable.

For Microsoft, though, the struggle against Google becomes more intense. The combined search market share of Yahoo and Microsoft still is half what Google has, and the fact that Wednesday's Yahoo pact is smaller in scope than some earlier possible incarnations means Microsoft has that much more hard work before it.

The company clearly wants to make a third big business out of its online operations to complement its Windows and Office cash cows. Getting Yahoo's search technology and Web site traffic gives it a better stronghold but by no means a victory.

[Zer0Wolf]

Just taking a few seconds to type out an appreciation for such excellent analysis. Great work Mr.Shankland!

[empirestatebuddy]

I agree. One of the best articles I've read on the subject so far today.

[Renegade Knight]

Simple analysis. MicroSoft just won the war with Yahoo. Yahoo doesn't even know it lost yet. Sun Tzu's strategy at it's finest.

[empirestatebuddy]

Did Yahoo have much of a choice though? Its profits have been weak for years and it's been increasingly squeezed between behemoths, Microsoft and Google. Yahoo is probably just trying to survive a little longer, or to buy some time until it figures out how to compete. Even though, Yahoo will probably be absorbed by Microsoft or someone else. It's starting to seem more and more like AOL...

[empirestatebuddy]

Both, Google and Microsoft are invading the other's turf, but Microsoft probably has a better shot at coming out on top. For starters, Google only dominates one area (search), and it's easy to change search engines--there's no money, time or IT manpower involved. It's merely a click or two. Google's challenge is much more daunting. Not only does Microsoft dominate the OS and productivity software markets, but... it's entrenched. It's not very easy for consumers or businesses to suddenly abandon Windows or Office. There's a lot of money invested, not to mention third party software compatibility. The reality is that Windows works with everything, even Macs. That just goes to show how ubiquitous it is, how necessary.

In my opinion, of these four (Microsoft, Apple, Google and Yahoo), Google is the most likely to be extinct ten years from now. Not because it's products aren't competitive, but... for the time being, it's just so easy to leave.

[Shankland]

Gartner sees it the way you do, too. But Google can't be laughed off. Add Chrome and Chrome OS to the list of Google incursions against Microsoft. The world isn't ready for a world only of Web apps, but Google is exerting real pressure, and Microsoft needs more than a token response. Just the distraction alone from Google Voice, Google Books, Google Maps, Gmail, Google Docs, and various other efforts are enough to derail most companies. And search may be Google's one-trick pony when it comes to making money, but it's a business model that's withstood the recession better than Office and Windows, that's probably got a lot more room for growth in the near term, and that's withstood plenty of competitive threats for years now.

[jessiethe3rd]

Google has exerted some pressure on Microsoft this I do agree. Again, Microsoft is use to these types of pressures (see Novell, see Oracle, see IBM, see Wordperfect, see Sun...) Microsoft and Google both know that if one digs into another's revenue stream there is no question that the ability to secure / grow goes down... I liken it to cutting a tree of at its legs. Microsoft in the search business is no where near the size of Google - it's a advertising powerhouse. Microsoft, however, takes a tactic of whacking you and whacking you and whacking you and they do it in a way that sucks the very core of your being. Google has less to fight with. Sure, they have a solid search business that is generating fantastic revenues but it quite honestly pales in comparison to Microsoft's overall revenues. Second thing one must think is that cash reserves... Microsoft - $31 Billion... that is a lot of money to be flexible. They are adjusting wallstreets expectations and are stating 5-10% gains in the software market. Meanwhile Google knows the trends are shifting with their fight, however, as many great little products they have they still struggle an uphill battle with even collaborating between the suite (no copy cut paste between applications? Com'on now Google - one of the highest use of MSFT Office is CCP!)

Regardless - Google is doing good to expand the delivery system to the web. It sort of plays into Microsoft's hands, however, because they have the technology already and if they can get a premium for their Office Suite (which by the way... hate to say it folks... is better then GoogleDocs) while possible reigning in new opportunities for ad revenue then Google has got to create some very cool technology to compete. Google Wave could be that thing but it's only one thing... they need a whole lot more invention and personally I see Google as more of a search company then a true technology company when I look at their stack (most of it is virtual copies of something that already exists just remarking it to the consumer realm.)

[jessiethe3rd]

This article is a product of news reporting, not mud slinging - very good job!

[Millerboy]

I've been using Yahoo as my homepage for a very long time, like in the mid-1990s even before Google was born or became popular. I've seen a lot of improvements and redesigns of the homepages, and I liked it so far. I'm sure the majority of people who use Yahoo as their web portal agree.

However, there will always be a small number of people who prefer the "old design," these people like it "retro" and don't like the new changes that come out every few years or so

Why not allow an option for users to choose older homepage designs, I'm not talking about the "My Yahoo" customizable webpage, that's already good, but I'm talking about letting people keep their favorite homepage the same way it has been forever, and how they like it. I don't know how much money it would cost to implement this feature, but looking at it from a guy who doesn't have a computer science degree, it shouldn't be a problem to route the content to a different template, and each homepage design you could just make the content plugin neatly into their new spots. I don't know the logistics of this but just a suggestion.

Anyways, if Yahoo has better content, media, and sources than iGoogle, Google would have a hard time catching up to your web portal/homepage. Yahoo Answers is the best social networking, Web 2.0, knowledge database website. I like how Yahoo provides their own exclusive and in-house media content and news as well. I don't know what the future will hold, but Yahoo is surely an Internet media powerhouse today. A homepage/web portal is supposed to be the one and only place where you can get nearly EVERYTHING on the internet and do EVERYTHING you want to do.

1) Internet services (email, instant messaging, twittering, chatting, social networking, etc.)
2) media / news (entertainment, news, music, video, advice, etc.)
3) Consumer services (shopping, ads, autos, etc.)

There are many more of these services and features and the key is probably to have them come from in-house and be exclusively available to Yahoo only. If only you have good content, more customers will come to your website.

On Microsoft and Bing search engine, I think working together with Microsoft will help Yahoo get a better search engine than Google, and word of mouth and advertisements should take away the market share. Google once said that competition is only one click away, and that's true in a sense. There are very low barriers to entry for Internet search engines. Yeah, Google is dominant today and "googling" has gone into the dictionary as a word, but Ford and GM were dominant too, and look at how many barriers to entry there are in the automobile industry, the Japanese automakers still defeated them eventually through decades of hard work and making good quality cars.

The Internet is a different beast, and it won't take decades, it can be years to topple a king. Facebook toppled MySpace in the number of users, Firefox is gaining on Internet Explorer, I can go on and on,... Microsoft is less of a threat to Yahoo because I can never see Microsoft becoming an Internet media company, they have MSN and it is a web portal that competes with Yahoo but their corporation is so diversified, it's hard for them to focus on 1 industry and do a good job. Microsoft is a potential future threat to Yahoo, but today Google is a bigger threat, their company is entirely Internet-based and was born from the Internet. Google's territory is directly related to Yahoo's territory, believe it or not, Google is trying to dethrone Yahoo and Microsoft now.

[t8]

A case of playing too hard and now too easy to get.

Also, it would have been better for Google if Microsoft bought out Yahoo because Microsoft would be 44 billion dollars down and even more bloated.

[ronpadz]

"The enemy of my enemy is my friend."