Beyond Binary

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."

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.

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.

Microsoft is continuing its one-employee-at-a-time acquisition of Yahoo.

The software maker confirmed late Wednesday that it has hired Larry Heck, a Yahoo vice president.

Microsoft said that Heck will start in a few weeks and report to Satya Nadella, senior vice president of the online services division of Microsoft's R&D group.

"We look forward to welcoming him to the team," Microsoft said in a statement.

Heck is the latest in a string of executives to move from Yahoo to Microsoft, with the most notable being Qi Lu, who now runs Microsoft's online unit. Other high profile hires by Microsoft include Sean Suchter and Scott Moore.

Heck's early tenure at Yahoo was marked by controversy. After he joined the company from speech recognition technology maker Nuance Communications, Nuance sued Yahoo, saying Heck helped poach a dozen workers from Nuance.

Microsoft, which last year offered billions to buy Yahoo, has said it remains interested in a search partnership.

Heck's hiring was reported earlier Wednesday by Bloomberg News.

Microsoft is indeed hiring former Yahoo executive Qi Lu to run its online services business, but in the process, it is also losing one of its own top advertising executives.

Qi Lu

(Credit: Yahoo)

In its announcement of Lu as the president of Microsoft's online services group, Microsoft said that Brian McAndrews, former CEO of Aquantive, would be leaving Microsoft. McAndrews was seen as the top internal candidate for the post, which came open when Kevin Johnson left to become CEO of Juniper Networks.

Lu will start at Microsoft on January 5 and will report to Steve Ballmer, Microsoft said.

"I am genuinely excited about the opportunities ahead for Microsoft to make an enormous impact on the online industry," Lu said in a statement. "Microsoft has built a great foundation for its search and advertising technologies and put an amazing team of researchers and engineers in place to drive the next wave of innovation in online services."

Lu was at Yahoo for a decade, most recently as vice president of engineering overseeing the company's search and e-commerce efforts. Before Yahoo, Lu was a researcher at IBM's Almaden Research Center.

Reporting to Lu will be Satya Nadella, who has been heading Microsoft's search business as well as senior VP Yusuf Mehdi and two new vice presidents--divisional finance head Rik van der Kooi and Scott Howe--who will head advertiser and publisher efforts in the wake of McAndrews' departure.

Microsoft said McAndrews "has decided to transition out of Microsoft, and will do so over the next several months, serving in a consultative capacity to Steve Ballmer and Qi Lu during that time."

Ballmer praised the departing executive in the statement.

"Brian McAndrews built a world-class business for advertisers and publishers and led the successful integration of Aquantive into Microsoft, setting the foundation for our next phase of growth," Ballmer said. "While I am sorry to see Brian leave the company, I respect and understand his decision and wish him nothing but the best in the future."

Microsoft's plan to hire Lu was reported earlier by Dow Jones' AllThingsD site.

Microsoft's efforts to acquire one Yahoo employee at a time appear to be working.

As has been rumored for a while now, former Yahoo search executive Qi Lu is expected to be named head of Microsoft's online efforts, according to a report on All Things D.

All Things D's Kara Swisher says the announcement could come as early as Monday, though some details remain to be worked out, such as whether Lu, whose experience is largely on the technical side, would be paired with one of Microsoft's business executives.

Former Aquantive CEO Brian McAndrews was considered a leading internal candidate for the job.

Lu's hiring would follow that of fellow Yahoo search executive Sean Suchter. Suchter was named general manager of Microsoft's Yahoo refugee camp, or, as Microsoft calls it, the Silicon Valley Search Technology Center.

Yahoo announced Lu's departure in June, along with that of several other executives.

It is widely known that Google pulled the plug on the search advertising deal with Yahoo only because it appeared that it would face a regulatory challenge. However, it emerged on Wednesday just how close the company came to facing an antitrust suit from the U.S. Department of Justice.

Sandy Litvack, the lawyer hired by the Justice Department to look into the search advertising pact between Google and Yahoo, said in an interview with American Lawyer's AmLaw Daily that the government had a suit ready and was just three hours away from filing it.

"We were going to file the complaint at a certain time during the day," Litvack said in the interview. "We told them we were going to file the complaint at that time of day. Three hours before, they told us they were abandoning the agreement."

According to Litvack, the government would have sought an injunction to stop Google from serving up search ads for Yahoo, alleging that Google was violating two sections of the Sherman antitrust act.

At the end of the interview, Litvack said he's happy to be heading back to his law firm, but says he regretted not getting to take part in the legal battle.

"Of course I was looking forward to it," Litvack said. "We felt pretty good about it, we felt pretty confident. Yeah, I would have liked to have done it."

Updated 6:15 AM PST November 30

According to one report, Yahoo and Microsoft may once again be working on a search deal.

The Times of London reported this weekend that Microsoft is in talks to acquire Yahoo's search business for $20 billion. According to the paper, former AOL CEO Jonathan Miller and fomer Fox Interactive President Ross Levinsohn are set to head the effort.

"Senior directors at Microsoft and Yahoo are understood to have agreed the broad terms of a deal, but there is no guarantee that it will succeed," The Times said in its report.

Microsoft declined to comment on the report. It is worth noting that as of Friday, the market capitalization of Yahoo in its entirety was just shy of $16 billion. Microsoft was once willing to pay far more to get Yahoo, but a lot has changed since the early part of the year.

Since Microsoft made its last offer for Yahoo, Yahoo and Google have announced and abandoned a search deal, Yahoo's shares have plummeted to single digits, and the company has said it would replace Jerry Yang as CEO.

In the days following the Yang announcement, Microsoft CEO Steve Ballmer indicated that the company was decidedly not interested in a full acquisition of Yahoo but said that some sort of search partnership remained "an interesting possibility." CNET had earlier reported Microsoft's continuing interest in such a deal.

Update:Kara Swisher of D: All Things Digital talked to Ross Levinsohn, who the Times of London said would be involved in the $20 billion deal. He told her the report was "total fiction," and sources from Yahoo and Microsoft denied such a deal was in the works. Of course, this series of denials doesn't mean that a search deal between Yahoo and Microsoft isn't a real possibility in the near future.

Microsoft confirmed Thursday that it has indeed hired Yahoo search executive Sean Suchter, following speculation this week that he would be joining the software maker after his departure from Yahoo was announced.

"We are very pleased to confirm that Sean Suchter will be joining Microsoft as the GM of our Silicon Valley Search Technology Center, working on Live Search," Microsoft search head Satya Nadella said in a statement. Suchter, who starts work December 22, will report to Harry Shum, corporate vice president of Search Product Development.

The poaching comes as CEO Steve Ballmer reiterated at Microsoft's shareholder meeting Wednesday that it has no interest in buying all of Yahoo, though it remains open to a search partnership.

Microsoft would not comment on a report that another former Yahoo search executive, Qi Lu, is under consideration to head Microsoft's online efforts.