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."

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."

Microsoft and Yahoo may well reach some sort of search partnership, but any deal is unlikely to come this week, a source told CNET News.

The on-again, off-again talks reportedly heated up last week, with Microsoft executives said to have traveled to Yahoo. The All Things Digital Web site reported that things were "down to the short strokes."

Among those said to have made the Silicon Valley trip were three of Microsoft's top online executives: Yusuf Mehdi, Satya Nadella, and Qi Lu.

However, a deal has yet to materialize, and a source said on Thursday that none is likely this week.

The Wall Street Journal reported on Thursday that Yahoo's board plans to meet on Thursday for an "update" on the talks.

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 "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 his company offered to do in February 2008.

Yahoo declined to comment on board meetings or matters. A Microsoft representative declined to comment

There's a funny video making the rounds that mocks Microsoft's huge Bing ad campaign.

In the video, embedded below, CollegeHumor.com suggests that folks start "googling with Bing."

It's a funny parody of the Bing ads, but it also shows how big Microsoft's challenge is in search.

Bing, it says, lets you Google photos, Google maps, and more. After months of development and testing, Microsoft's revamped search engine made its public debut about one month ago.

On the one hand, typing in Bing.com is just as easy as typing in Google.com (it's actually two characters shorter). In that sense, the bar for changing search engines is low.

At the same time, Google has become synonymous with search. I have been making a concerted effort to try Bing for some of my searches and even made it the default in my search bar in Firefox. I still find myself performing more than half my searches in Google--just because I type Google.com by habit.

On the plus side, Bing has made modest gains in its first couple of weeks. But the real question is whether people will keep googling with Bing. (and of course, maybe some day just Bing with Bing.)

Microsoft has grabbed another Yahoo executive.

Operations Vice President Kevin Timmons becomes the latest to swap Yahoo purple for Microsoft blue. In his new role, Timmons will lead a data center services team, Microsoft infrastructure services general manager Arne Josefsberg said in a blog posting.

In February, Microsoft announced it was hiring Larry Heck, another VP from Yahoo. Other defectors include Microsoft online unit chief Qi Lu, along with Sean Suchter and Scott Moore (who was actually a former Microsoft worker who went to Yahoo and is now back at Microsoft).

Microsoft has said it no longer wants to acquire all of Yahoo, though clearly the company is happy to continue hiring talent from the online company. CEO Steve Ballmer has also continued to press for some sort of search partnership between the two companies.

At last month's D: All Things Digital conference, Yahoo CEO Carol Bartz confirmed the two companies continue to talk, but analysts say a deal is looking less likely.

Microsoft has been testing different search bars to see which ones drive the most traffic to Bing. Shown here is the one that appeared on the MSN site on Friday.

(Credit: CNET)

The planned fall revamp of MSN isn't just about giving the butterfly a fresh coat of paint. Microsoft also hopes to drive more people to its search engine.

The company has been toying with different search box designs to see which ones lead to the most queries. As it stands, the MSN portal already accounts for half of Microsoft's search engine traffic. Comparatively few people typed in queries straight from Microsoft's Live.com address (now Bing.com)

"A big part of my job is figuring out how I pull the Bing experience into MSN in a way that makes sense," Microsoft vice president Erik Jorgensen said in an interview this week.

One way of banking on MSN, he said, is by posting features on the site that tie in to the company's search engine. The company has talked about ways it can write features that push folks to Microsoft's local, shopping, and travel search engines--each among the most profitable parts of the search business and the areas in which Microsoft has focused.

The software maker is also looking at ways it can tie MSN features to the strongest areas of Bing--local, shopping, and travel search.

(Credit: Microsoft)

To make that work, Microsoft needs to ensure that it is less visually jarring when one moves back and forth between MSN and Bing.

"Frankly, that's one I think we haven't done well," Jorgensen said. "I think in the fall that's something we've got to tackle."

In its first two weeks, Bing has managed to pick up some market share, but the key will be sustaining those gains in the coming weeks and months.

Beyond driving traffic from MSN, Microsoft is also counting on deals with PC makers Hewlett-Packard and Dell to get more people to give Bing a try.

The company has said it wants to pick up at least a couple points of market share in the first year, although it will need well more than that to truly compete economically with Google. Hence the company's never-ending talks with Yahoo, which is No. 2 in the search market with about 20 percent of the business.

It's still awfully early in the game, but Microsoft's Bing had a second good week, according to market share numbers released Wednesday by ComScore.

The search engine is up about 3 percentage points from where Microsoft was at pre-Bing in terms of both number of searchers and total query share. That represents another nearly 1 percentage point of share gain in both categories compared to its first week.

(Credit: ComScore)

For the week of June 8 to 12, Microsoft's search engines were used by 16.7 percent of those doing searches and accounted for 12.1 percent of all queries, both up 3 percentage points from where Microsoft was at before Bing's launch.

"It appears that Microsoft Bing has continued to generate interest from the market for the second consecutive week," ComScore Senior VP Mike Hurt said in a statement. "These early data reflect a continued positive market reaction to Bing in the initial stages of its launch."

Microsoft launched Bing at the beginning of the month, after a lengthy development period and months of internal testing.

For its part, Microsoft seems to recognize it is still very early. The software maker has declined to comment on the market share gains.

One of the most visible features of Bing is the striking photo that adorns its home page and changes each day.

(Credit: CNET)

Microsoft is getting a bit of a Bing-related bump, according to some early figures from market researcher ComScore.

According to ComScore, Microsoft upped its search share to 11.1 percent last week, as compared to 9.1 percent the prior week. Some of that gain came from the fact that more people were using Microsoft.

Microsoft's engine had 15.5 percent daily penetration, as opposed to 13.8 percent in the prior week.

(Credit: ComScore)

Earlier data also showed Microsoft off to a solid start with its revamped search engine. Of course, the real issue is whether Microsoft can make the gains stick over time. The software maker has seen its market share tip up over time, only to again drop to single digits.

Microsoft has said it would like to pick up at least a couple points of market share over the next year. One might think that the company should expect more, given it has not only poured huge resources into the technology, but is also spending tens of millions of dollars in both a big advertising push and deals to nab the default search engine position on new PCs.

So far, Bing is off to a good start, said ComScore Senior Vice President Mike Hurt.

"These initial data suggest that Microsoft Bing has generated early interest, resulting in a spike in search engagement and an immediate term improvement to Microsoft's position in the search market," Hurt said in a statement. "So far it appears that the lifts in searcher penetration and engagement have held relatively steady throughout the five-day period."

But Hurt agreed that only time will tell whether it is a blip or a true gain. "The ultimate performance of Bing depends on the extent to which it generates more trial through its extensive launch campaign and whether it retains those trial users."

Bing went live last week after being shown off at D: All Things Digital by CEO Steve Ballmer.

Microsoft plans to continue its ad push, including the TV spots, with the current campaign eventually yielding to commercials that focus more specifically on the areas where Bing hopes to differentiate itself--tasks such as travel and product search.

Update 11:20 a.m.: Bing has managed to grab some attention inside Google. Speaking at a financial conference on Tuesday, Google CFO Patrick Pichette said the company is in the process of analyzing it. "I have a review tomorrow on it with the executive committee," Pichette said, according to Marketwatch.

Microsoft confirmed on Tuesday that it is looking into an issue in which users of Internet Explorer 6 are forced into having Bing as their default search engine.

"We are aware of the issue with Bing on machines running IE6 and are investigating a solution," Microsoft said in a statement. "This issue is not impacting IE7 and IE8 users."

Although it is only affecting its older browser, many people still use IE6 and Microsoft has faced a lot of over how default search preferences are set and changed within Internet Explorer.

The issue crops up just as Microsoft plans to formally launch Bing. Among its planned promotions is a huge ad campaign as well as an event Tuesday night at Seattle's Space Needle.

The IE6 issue was noted earlier on Tuesday by Search Engine Land.