Microsoft's search deal with Yahoo is the culmination of months of well documented negotiations, but in many ways, it is just the beginning of the long road ahead.
In the coming months, Microsoft and Yahoo will not only have to win regulatory approval for the deal, but also figure out how to bring together disparate approaches to the search market.
Microsoft has spent much of its energy in the last couple years refining its core technology, improving in vertical categories, and rebranding its Web search under the Bing moniker. Yahoo, meanwhile has put a lot of energy into tools that allow others to build on its technology, including the BOSS (Build your Own Search Service) and SearchMonkey efforts.
Mehdi
As part of the deal announced on Wednesday, Microsoft will now be responsible for trying to merge those efforts. In an interview, Microsoft Senior Vice president Yusuf Mehdi said Microsoft hasn't looked at the specific lines of code in that area, but is open to trying to take Yahoo's best ideas and integrate them into Bing.
"We like the approach that Yahoo has done," he said, referring to SearchMonkey and BOSS.
Both Mehdi and Yahoo Executive VP Schneider acknowledged that there are integration challenges, but Schneider said there is a clear delineation of who is responsible for what.
"At the same time we are integrating, we are really divide-and-conquering," Schneider said in the joint interview with Mehdi. "The reality is in the way we structured (the deal), it allows each of us to innovate in the areas that will jointly bring advantage."
The fact that the companies have already spent time thinking about these issues reflects the different nature of the discussions this time around.
Whereas last year's negotiations were done with Yahoo's board and a keen eye on Wall Street, the deal announced on Wednesday is much more focused on how to build a search business for the long term.
CEO Steve Ballmer noted on the conference call earlier Wednesday that the two sides have a 100-page playbook as opposed to a two-page term sheet and also noted that the negotiations were handled by management as opposed to representatives of the company's boards.
Schneider
In addition to being run by the top management from Microsoft's online group, including Mehdi, Senior Vice President Satya Nadella, and online unit President Qi Lu (a former Yahoo executive), Mehdi and Schneider said the negotiating teams routinely called on the companies' engineering and sales ranks to make sure the deal they were structuring made operational sense.
It wasn't just the typical few business development executives in a room hashing out financial details, the pair said. "We really have got a great vibe with Yahoo's operating team," Mehdi said.
The two companies will be able to do some work on their joint plans while the deal is pending, but there are limits as to how much collaboration can take place.
"We will do all of the pre-work that we are allowed to do in terms of preparing," Mehdi said. "We feel like we can make a lot of progress."
Ultimately, though, the two companies said they expect just integrating Bing's results into Yahoo in the U.S. will take several months, while moving from Yahoo's Panama ad-serving technology to Microsoft's AdCenter could take a year. It could be two years from the deal close before the two companies can fully implement the deal across the globe.
Microsoft's Mehdi didn't close the door on an eventual expansion of the deal into some of the areas the two companies had at one point considered, such as joint work on display advertising.
"Today is a start on a fantastic partnership which we are very excited about," Mehdi said. "By starting this partnership it allows us to over time build greater and deeper relationships. Right now the focus is on getting to a credible No. 2 player in search and paid search."
One of the open questions is what will happen to each company's business and workforce during the time that the deal is pending. Schneider said the companies have a communications plan for employees as well as the sorts of retention bonuses planned to keep key employees in place.
"We believe this is a winning plan," she said. "People want to be part of a winning vision."
Ultimately, Yahoo CEO Carol Bartz said some of Yahoo search employees will move to other parts of the company, some will be offered jobs at Microsoft, while others will eventually lose their jobs.
For his part, Mehdi said the company will continue to beef up its search staff while the deal is pending. "We are continuing to hire and invest in search."
Roughly 18 months after the word Microhoo entered the technology lexicon, the two companies finally have a partnership to speak of.
As part of a 10-year pact announced early Wednesday, Microsoft's technology will power the two companies' search sites, while Yahoo will handle ad-selling duties.
Executives from both companies will discuss the deal in a conference call from Yahoo's headquarters in Sunnyvale, Calif., at 5:30 a.m. PDT. Follow the live coverage here.
5:32 a.m.: Still listening to meditative hold music. They really could use something more upbeat.
5:33 a.m.: Getting the details on how conference calls work. Apparently we'll be in some sort of "listen-only mode."
5:34 a.m.: There will be some forward-looking statements. (Stuff they predict may or may not happen.)
5:35 a.m.: Yahoo CEO Carol Bartz says deal is a game changer "and I'm glad to finally be able to talk about it." She added: "We face a formidable competitor in one area and that area is search."
5:37 a.m.: Yahoo's sales force will handle sales of both sites' search. Self-serve ads will be fulfilled via Microsoft's AdCenter.
"What this deal is really about for everyone is scale," Bartz said. By combining, they can deliver a viable alternative.
Funny how it's all about Google, but she's not naming Google.
"Everyone wants a real alternative and advertisers are no different," Bartz said.
"Powered by Bing" will appear at the bottom of the Yahoo search results.
5:40 a.m.: "This agreement has been a longtime coming," CEO Steve Ballmer said. Um, yeah.
Ballmer continues: the bottom line is the agreement will enable us to create more innovation in search, better value, and world peace. (Maybe not the latter. Remember, these are forward-looking statements.)
It's apparently a win-win.
"Both companies benefit from scale and better economics. Consumers really will get better products," Ballmer said.
5:42 a.m.: Bartz talking nitty-gritty details. Both companies will have separate display-ad sales forces. Microsoft will pay Yahoo 88 percent of revenue for search ads on Yahoo sites.
"Our revenue will come down a bit due to revenue sharing," Bartz said, but added that operating income should rise, expenses drop, etc.
"This deal won't happen overnight," Bartz said. First, the companies will have to convince regulators it's a good thing.
Assuming they get the OK, the companies will start with major markets, including the U.S., which will transition to using Bing results in 3 to 6 months. Shifting from Yahoo's Panama paid search tool to Microsoft's AdCenter will take 12 months. Full global roll-out should take 24 months.
5:46 a.m.: On to the Q&A.
So why not display advertising? "We wanted to keep this as simple and straightforward as possible," Bartz said.
"We're taking a big bite here," Ballmer said. "Search is a more well-known thing" when it comes to automating the ad-selling.
How big is the revenue-per-search gap? (Microsoft is guaranteeing a certain amount of revenue for each search query to Yahoo.
"We and Yahoo are sort of close and we both lag Google," Ballmer said. Some of that is scale, he said which will be helped by deal.
5:49 a.m.:
Why no "boatloads of cash" from Microsoft. Why wasn't there an up-front payment?
"Having a big cash payment up front doesn't really help us from an operating standpoint," Bartz said. As far as we're concerned, she said, the "boatloads of cash" is preserving our revenue line.
5:51 a.m.: The two companies have talked about the financial impact to Yahoo, but what about Microsoft?
Ballmer acknowledges that most of the revenue from Yahoo's search results will go back to Yahoo. "We paid a high TAC rate," he said, referring to traffic acquisition costs and the 88 percent of revenue that Yahoo will get.
Microsoft will spend "a couple of hundreds of millions" of dollars for implementation and transition costs "We're sort of betting into the future," Ballmer said. The upside, he said, is better relevance. "Ads are part of being relevant and we have a better chance of being relevant." Ballmer said it should improve relevance on both sites. The upside comes as execution really builds.
"There's a lot of work involved in this transition to our platform," Ballmer said.
5:56 a.m.: Any opposition in Washington?
"We expect we will face some opposition from...the competitor," Ballmer said. (Assuming he is talking about Google and not Ask.com)
Ballmer said that the deal benefits advertisers, publishers, and consumers.
"Obviously, we will be called to present that case in D.C. and Brussels and other places," Ballmer said.
5:58 a.m.: What about impact on jobs?
"There are certainly many Yahoo search employees that will be asked to take jobs at Microsoft as they integrate the technology," Bartz said. "There will also be search employees that we look to help us on the display side... And then unfortunately, there will be some redundancies in Yahoo."
Nothing will change until we get regulatory approval, which we hope is in early 2010, Bartz said. "There will be redundancies, but it will be in the future." Bartz didn't give an estimate of how many jobs will be lost.
6:01 a.m.: The most complex part of the deal, Ballmer said, is around protecting privacy and allowing both companies to build their products around search.
"You really have to say what data gets shared and how does it get shared," he said.
6:03 a.m.: How can Yahoo innovate if Microsoft is in charge of the technology?
"There is a lot of innovation that happens above the search results," Bartz said.
6:04 a.m.: What does this mean in terms of mobile and platforms beyond the Web?
"We spent time talking about mobile," Bartz said. "We have the option of using the Microsoft technology for the mobile Web experience. It's not exclusive as it is on the PC. The only difference is it is not exclusive. If somewhere down the road we wanted to switch, we could."
6:06 a.m.: What is the rate when Yahoo sells on Bing.com? What is the risk and impact on Yahoo's affiliates? What about all of the 800,000 advertisers that are running their campaigns only on Google.
Yahoo actually doesn't get split of Bing revenue.
"When the Yahoo sales people sell (they) don't know whether will sell on Yahoo or Bing," Ballmer said. "You are buying the keyword in both environments."
As for Google-only advertisers, Bartz said that combining Panama and AdCenter will help. "Smaller advertisers want to make sure there's a meaningful market, and they don't want to learn three platforms."
Ballmer said that the bulk of Google-only advertisers are outside the U.S. where the companies have even less share. Google has 78 percent of the paid search market here, but in Western Europe, Ballmer said, it is more like 92 percent.
6:12 a.m.: How much code will come from Yahoo vs. Microsoft's Bing.
Our engineers know Bing, Ballmer said, but he added that Microsoft will be getting access to any technology from Yahoo. "We have a license to code."
Ultimately, though, Ballmer said, Microsoft will have to make those choices and build a product that is financially more successful than its current search effort. "The burden is on us to deliver the goods."
6:17 a.m.: Why is this deal better than one on the table last year.
"I've done some exploring of that," Bartz said. "There's actually more fiction in the market than there is fact."
The search partnership discussed last year would have had a big up-front payment, but would have generated less revenue over the long term for Yahoo.
"We really are trying to run a long-term business here," Bartz said.
Ballmer noted that last year's deal was negotiated more by the boards than by the operating management.
"The deal is different...For Microsoft, this deal is not better, but this deal is different," Ballmer said.
6:21 a.m.: Who will be in charge of execution?
There will be a team from both sides, Bartz said.
"This is not a minor project," Ballmer agreed. "This is a major execution (challenge)," he said, noting that for Microsoft, the team will include the top leadership of the online business, including former Yahoo executive Qi Lu.
"It's not like we come here with a two-page term sheet," Ballmer said. "I think we have well over 100 pages written to describe what we are doing."
Bartz acknowledged that a partnership is harder in some ways than going it alone. That's why the companies wanted to make sure they were really committed to one another.
"Dating is one thing," she said. "Having a partnership is another."
6:28 a.m.: Call ends, with a pitch for the companies' joint Web site www.choicevalueinnovation.com. (I guess ButItsNotGoogle.com was taken.)
Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer were all smiles on Wednesday morning.
(Credit: Yahoo/Microsoft )
Microsoft CEO Steve Ballmer uses a giant pen to sign the 10-year deal, alongside Yahoo CEO Carol Bartz, on Wednesday at Yahoo's headquarters in Sunnyvale, Calif.
(Credit: Yahoo/Microsoft )After months of fits and starts, Microsoft and Yahoo on Wednesday announced a 10-year search deal that will see the two companies join forces to take on Google.
"In simple terms, Microsoft will now power Yahoo search while Yahoo will become the exclusive worldwide relationship sales force for both companies' premium search advertisers," the companies said in a joint statement. The deal is expected to go into effect in 2010 and improve Yahoo's profitability, though not its revenue, the companies said.
Less expansive than the all-out, $44 billion acquisition Microsoft proposed last year--and even than some of the search partnerships once discussed--the deal does allow the companies to share resources and combine their engineering efforts. Even together, however, the two companies have only about 30 percent of the search market compared to Google, which has more than twice that amount.
"This agreement gives us the scale and resources to create the future of search," Microsoft CEO Steve Ballmer said in a statement. "Success in search requires both innovation and scale. With our new Bing search platform, we've created breakthrough innovation and features. This agreement with Yahoo will provide the scale we need to deliver even more rapid advances in relevancy and usefulness."
Yahoo CEO Carol Bartz, meanwhile, said that the move will help Yahoo focus on other areas, also adding that the deal has the full support of the company's board (lest anyone wonder what Carl Icahn thinks about the more limited deal).
"This is a significant opportunity for us," Bartz said. "Microsoft is an industry innovator in search and it is a great opportunity for us to focus our investments in other areas critical to our future."
Editors' note: The two companies had a conference call Wednesday morning to discuss the deal. Click here for our live-blog coverage of that event.
The dollar value
As for the financial terms, there is not the large upfront payment once discussed. However, Microsoft will offer both revenue guarantees to Yahoo as well as the lion's share of the search-advertising revenue generated on Yahoo's site.
That apparently wasn't enough to satisfy investors. In trading before the market opened, Yahoo's stock dropped more than 7 percent, or $1.28, to $15.94. Microsoft rose 1 percent, or 24 cents, to $23.71.
Yahoo will get 88 percent of search revenue created by its sites during the first five years, while Microsoft will guarantee a certain level of search revenue for 18 months in each country. The companies expect it will take about two years after the deal is approved to fully get the partnership up and running.
Once fully in place, Yahoo said it expects the deal will boost its annual operating income by about $500 million, while reducing capital expenditure by $200 million and increasing operating cash flow by about $275 million per year.
Microsoft will be able to incorporate Yahoo's search technology, including its Panama ad-selling tool, but the companies will use Microsoft's AdCenter sales tool and Bing search engine to power both sites.
Aiming to head off privacy concerns, the two companies noted that "the agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies."
The deal must still pass regulatory muster and the two companies anticipate it will take several months to finalize. "Microsoft and Yahoo expect the agreement to be closely reviewed by the industry and government regulators, and welcome questions," the companies said. "The companies are hopeful that closing can occur in early 2010."
Microsoft and Yahoo are joining forces in search, but in a line clearly aimed at regulators, the companies take pains to note that their collaboration is limited to that arena.
"The agreement does not cover each company's Web properties and products, e-mail, instant messaging, display advertising, or any other aspect of the companies' businesses," they said. "In those areas, the companies will continue to compete vigorously."
It's unclear whether they brought the requested "boatloads of money," but several top Microsoft executives are in Silicon Valley to try to finalize a search deal with Yahoo, according to an All Things Digital report late on Thursday.
According to the report, the two sides are "down to the short strokes" after years of excruciatingly well publicized on-again, off-again talks. A deal could come within a week, All Things Digital said.
Included in the Microsoft entourage, according to the report, are three of its top online executives: Yusuf Mehdi, Satya Nadella, and Qi Lu.
Yahoo CEO Carol Bartz said in May that she was open to a search deal if she believed in the partner's technology and they provided said boatloads of money. Microsoft CEO Steve Ballmer has indicated for more than a year now that he would like to strike some sort of search deal, although he no longer wants to acquire all of Yahoo as the company offered to do in February 2008.
With Microsoft's Bing getting some good reviews and Microsoft having billions in cash on hand, the ingredients would seem to be in place, if both sides have the will to make it happen.
CARLSBAD, Calif.--Yahoo CEO Carol Bartz said Wednesday that her company continues to have talks with Microsoft on a search deal and indicated a willingness to sell.
The prerequisites, she said, are the right price, a technology she believes in, and access to the data her company needs.
When asked whether her company is talking with Microsoft, Yahoo's Carol Bartz said: 'Yeah, a little bit.'
(Credit: Ina Fried/CNET)"There's two parties in all this," she said in a speech at the D: All Things Digital conference here. "The other party has to have boatloads of money and the right technology."
Asked whether Microsoft and Yahoo are actively talking, Bartz said. "Yeah, a little bit."
Microsoft would appear to fit her bill on the money front, and the company plans to debut a new search technology on Thursday. However, a deal does not appear imminent.
She rejected the notion put forth by folks like the Twitter co-founders did on Tuesday by saying they would never sell. "Never is a long time."
Asked whether she would sell the whole company. "They'd have to have big boatloads of money."
She said it's not really about whether a CEO imagines selling. Executives have a responsibility to consider any offer and whether it is in the best interest of shareholders. She wouldn't say whether Yahoo lived up to its duty in evaluating Microsoft's initial offer.
"I don't know what happened last year and, frankly, I don't care," Bartz said.
Earlier in her chat, Bartz talked about the need for improving Yahoo's internal organization. However, Bartz said one thing she doesn't need is a single chief deputy.
"I don't need a No. 2 because I don't want to be removed from the business," she said.
Bartz was asked how long she is going to be at Yahoo. She noted that it's public that she has a four-year contract, but said that's just the popular term for employment deals.
"I'm going to get the job done, so it's going to be at least that long if not longer," she said.
Bartz was also asked about the now-famous "Peanut Butter Manifesto" that suggested the company was spread too thin.
"I do agree with that," she said. "Yahoo might have been a little ADD for a while."
As for Google, Bartz said it is a "fierce" competitor.
"They don't have the positioning we have," she said. "They don't have the brand we have." She noted that the company doesn't match one to one in every area, but said there are still opportunities. "The game for search in mobile is not over."
CARLSBAD, Calif.--Yahoo CEO Carol Bartz tried to paint Yahoo in a new light on Wednesday, saying it should be more than merely a starting point to the Internet.
"It's not just starting points," she said at the D: All Things Digital conference here. "People go wherever they want. They don't need to be quite as spoon-fed as they were in the beginning."
Yahoo CEO Carol Bartz.
(Credit: Yahoo)But, she added, users don't have time to wander around--although they go to many sites, they spend a lot of time on only a couple. She noted that Yahoo's sites get 12 percent of all online minutes.
"It's where people find relevant and contextual information," she said. "It's news, it's sports...homepage, mail. It's a fabulous place."
Her answer was in contrast to the one that her predecessor as CEO, Jerry Yang, gave at last year's D, when asked "What is Yahoo?"
"I think of Yahoo as we have to be incredibly relevant and useful to users. You have to start your day at Yahoo," Yang said in May 2008. "We want people to come to Yahoo first thing in the day and multiple times a day. That is an incredibly powerful position, consistent with our roots and ripe for innovation."
Eventually Yang settled on the starting-point notion.
One of the directions the company needs to go, Bartz said, is offering content that is localized to the user. "As time goes we should get more local," she said. "People should see their high school Flip videos on Yahoo Sports."
The presentation started out with some good lines. Host Kara Swisher introduced Bartz's appearance as the presentation she was most looking forward to.
"As everyone knows I am obsessed with Yahoo and the telenovela that it is," Swisher said.
Bartz, an outsider who became Yahoo's chief executive in January, was ready for the match-up. "Do you want me to say something naughty now?," Bartz said, immediately after she sat down, a reference to her now infamous salty tongue.
Among the tales Swisher elicited was how Bartz first heard about the CEO job (Jerry Yang approached her after a Cisco board meeting), whether she was interested (she wasn't), and how he wooed her (dinner at his house).
Bartz also talked about the organizational problems.
"We had bigger silos inside the company than outside," she said, noting for example that the Yahoo home page people didn't want to drive traffic to other areas.
She rejected the notion that company needs to shed products, but said that its products need to be more social.
"We have 76 percent reach in the United States," she said. "We have to keep those people engaged and happy."
Discussions between Microsoft and Yahoo about a search partnership, while still preliminary, have taken place in recent weeks, according to a report on the All Things Digital Web site.
The talks have included a face-to-face meeting between Microsoft CEO Steve Ballmer and Yahoo CEO Carol Bartz, the report said. AllThingsD stressed that the talks are centered on what sort of search and advertising partnership might be possible, rather than an all-out acquisition.
Ballmer has been saying for months he would be open to a search deal, while Bartz has appeared less than eager for such an arrangement, in her far more limited comments on the subject.
Microsoft's position has strengthened somewhat in the past few months, with Redmond having hired a number of Yahoo's top search folks, including Qi Lu. The company has also grabbed a few business deals aimed at boosting its query share and begun testing of its next-generation search product, code-named Kumo.
But the software maker also needs the share boost that Yahoo could give it. Microsoft is preparing to back Kumo's launch with a big ad push and would benefit from spreading those costs over more than its current single-digit share of the market.
Yahoo, meanwhile, has held more than double Microsoft's share, but could be headed for a decline after losing several toolbar deals to Microsoft and Google. A report Thursday said the lost deals could cost the company as much as three percentage points of share, or 15 percent of its search volume.
Well, it's official, Microsoft and Yahoo have come to an agreement.
On lunch.
As first noted by Valleywag, Microsoft CEO Steve Ballmer and Yahoo Chairman Roy Bostock had lunch together this week in New York. The New York Times has a lengthy piece up now as well, confirming the meeting, but offering no clue as to what happened beyond, presumably, caloric consumption.
In any case, it's the second high-level contact this week, given that incoming Yahoo CEO Carol Bartz told employees that she, too, had talked with Ballmer.
Microsoft has made it clear in every way imaginable that it would like to do a search deal, but it remains less clear whether Yahoo is willing to take the relationship beyond the "lunch date" stage.
Updated 10:10 p.m., with additional comments from a source.
While it's not certain that the appointment of Carol Bartz will ensure a Yahoo-Microsoft deal happens, one thing is clear: nothing was going to happen until Yahoo picked its new chief executive.
With reports that Yahoo is going to name the former Autodesk chief to fill Jerry Yang's spot, discussion logically shifts to whether the long-anticipated Microsoft-Yahoo search deal will now come to fruition.
Microsoft CEO Steve Ballmer has repeatedly said that he remains interested in a search partnership, but noted in an interview last week that it was hard to gauge where things were at with Yahoo amid its CEO search.
"No way to handicap it," he said, when asked how likely a search deal was. "I think at this stage, it's probably fair to say I'm not even sure Yahoo would handicap it."
Although it is always tough to gauge where Yahoo's board is, clearly in Bartz, Yahoo would be getting someone who knows what it is like to partner with Microsoft. (To see Bartz talking about Microsoft and other topics, check out this CNET video package.)
Some analysts have suggested that perhaps the biggest upside to Bartz's appointment would be that it makes a Microsoft deal more likely.
"Yahoo needed a CEO who buys a likely search deal with Microsoft at a philosophical level," Collins Stewart analyst Sandeep Aggarwal said in an interview with CNET News. "Carol likely fits that requirement."
All Things D's Kara Swisher reports that Microsoft has a search deal proposal practically ready to hand over to Yahoo. Swisher said a deal could even be ready in time for Yahoo's earnings report on January 27.
I'm still trying to get confirmation on that front.
Update: No word from Microsoft, but Yahoo's board is apparently aiming to keep its door open.
"It depends on their offer," said a source familiar with the board's thinking. "If they were to come to (Yahoo) with an offer of $33 a share, (the company) would be stupid if to say 'no' now."
CNET News' Dawn Kawamoto contributed to this report.
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