Microsoft

Microsoft's top lawyer said that a tentative agreement with Brussels announced earlier Wednesday could potentially allow the software maker to move out of the regulatory crosshairs, perhaps paving the way for regulators to shift their attention elsewhere.

"It's important for us to get closure in Europe on issues that have obviously been controversial for over a decade," General Counsel Brad Smith said in an interview. "Today's decision takes us an important step closer to doing that."

Microsoft initially took a much different approach to the European Commission's assertion that the inclusion of a browser in Windows violated antitrust law. The company had initially proposed just stripping out the browser from Windows 7 entirely, leaving users the prospect of trying to get a browser on their own. The software maker eventually backed down after indications that that approach was unlikely to fly.

While not final, Microsoft's moves would appear to resolve all of its outstanding regulatory issues with the Commission and were greeted warmly by regulators on Wednesday.

Although most of the early attention focused on the agreement around a browser "ballot screen," Microsoft also announced on Wednesday an agreement around product interoperability. Under that deal, a 10-year commitment by Microsoft, the software maker agrees to publish communication protocols and adopt certain standards as part of Windows, Windows Server, Office and other high market share products. Companies could also purchase for 5,000 euros a warranty that would subject Microsoft to court oversight and monetary penalties if it doesn't live up to its commitments.

Smith said that the approach Microsoft took with regard to interoperability was designed to adopt methods that Nellie Kroes, commissioner for competition, had outlined in a speech last year for how companies with high market share products should behave.

"I actually think this in effect implements the model that the Commission has been advocating," Smith said. Moreover, he said it is a model that other software companies should pay attention to, he said, noting that there are lots of companies that have high market share. He noted that Google has 78 percent of the paid search market and IBM has 100 percent of the mainframe market, while Adobe also has dominant positions in certain areas, such as Photoshop.

"It is important we believe to create a level legal and regulatory playing field," Smith said. "Everyone that has a high market share needs to respect the same set of rules. I think a number of these rules are likely to be applicable to other companies and other products."

Settling now with Brussels also could help Microsoft in its effort to win approval for its search deal with Yahoo, Smith said.

"This certainly isn't going to hurt when it comes to the Yahoo-Microsoft agreement," he said. "It's not necessarily going to make a huge difference. We didn't feel a particular step was needed to help it along."

Microsoft is in the process of trying to ascertain whether the deal needs approval from Brussels or from individual European antitrust authorities. It also needs approval from U.S. regulators, who have asked for more information on the deal.

Representatives from Microsoft and Yahoo have filed paperwork for regulatory clearance in the U.S. for their proposed search deal but it remains unclear how to proceed in Europe, a Microsoft spokesman said on Wednesday.

The issue that remains in Europe is "determining whether or not the deal requires formal notice before the (European) Commission and if not, do we need to file notice" in individual countries that might have an interest in reviewing the deal, said Microsoft spokesman Jack Evans.

These jurisdictional issues are being discussed in ongoing talks Microsoft and Yahoo have been having with EC officials that were the subject of a Reuters report, according to Evans.

"We have had informal discussions in Europe about the agreement just as we indicated we would when the deal was announced," he said.

Yahoo representatives familiar with the matter did not immediately respond to an e-mail seeking comment.

Last week, the companies said the U.S. Department of Justice had asked for more information about their deal under which Microsoft would provide search for Yahoo's Web pages, thus bringing to a close Yahoo's tenure as a search provider.

The antitrust scrutiny is likely to be more intense in the U.S., where Google has about three quarters of the search market and Microsoft and Yahoo combined have about one fifth, than in Europe where Google's market share exceeds 90 percent.

Update 3:25 p.m. PDT: In a statement, a Yahoo spokesperson said "As we indicated at the time of announcement, the agreement is subject to regulatory approval and Yahoo and Microsoft are engaging in discussions with the regulators in Europe about the agreement. Yahoo and Microsoft are committed to engaging positively with the Commission about the agreement and firmly believe that the information we will be providing will confirm that this deal is not only good for both companies, but it is also good for advertisers, good for publishers, and good for consumers. As we have indicated previously, we're hopeful the agreement will close in early 2010."

Microsoft's new Bing search service is the fastest-growing U.S. search engine among the top 10, according to a Nielsen report released Monday.

The total amount of searches on Bing rang in at 1.1 billion for the month of August, a leap of 22.1 percent over July, winning Microsoft a 10.7 percent share of the search engine market.

Google remained in the top spot with a commanding 64.6 percent share, accounting for 7 billion searches in August, a gain of 2.6 percent over July. Yahoo saw its search results drop 4.2 percent for the month to 1.7 billion, earning it 16 percent of the market.

Other players in the top 10 included AOL Search in fourth place with 333 million searches and Ask.com Search in fifth with 186 million searches.

Similar studies have also seen a boost in Microsoft's search business. An August report from ComScore discovered that Microsoft's share of the global search engine market lept 41 percent from July 2008 to July 2009. Bing was introduced in May, taking the place of Microsoft's Live Search.

Earlier this week, Microsoft showed off a "visual search" feature for Bing that returns thumbnail images for at least some search results. Microsoft reportedly will be debuting a Bing 2.0 sometime soon sporting a variety of new features.

The U.S. Department of Justice has furthered its investigation into the proposed search engine deal between Microsoft and Yahoo by asking both companies to provide more information.

The two companies received an additional request for information earlier this week as expected, Microsoft spokesman Jack Evans told CNET News. He said he couldn't reveal the specifics of the request, citing it as a confidential inquiry from the Justice Department. But he said Microsoft is in the process of providing the requested information.

Yahoo spokesman Adam Grossberg also confirmed to CNET News the Justice Department's request. He couldn't comment on the specifics either but added that Yahoo is cooperating fully.

"We confidently believe the information we'll provide will confirm that the deal is not only good for Yahoo and Microsoft, but also good for advertisers, publishers, and, ultimately, consumers," said Grossberg.

The request for additional information doesn't come as a surprise to either Microsoft or Yahoo.

Under the Hart-Scott-Rodino Act, mergers or other business deals that meet certain requirements must be reviewed by the government before they can close. Companies have to file the necessary paperwork with the government and then wait 30 days before given clearance to move forward. In some cases, the government requests additional information before making a decision.

Both Microsoft and Yahoo were anticipating a close review of the deal given its scope, said Evans. At a press conference when the deal was announced, the companies said the review would be a matter of months, not weeks, taking it through the fall.

Despite the Justice Department's request for more details, both Microsoft and Yahoo are hopeful the deal will close as expected in early 2010.

Still, the Justice Department is only one battle. The agreement may also require regulatory clearance by the European Commission, which has been tough in its current probe of Oracle-Sun and in past probes of both Intel and Microsoft. Microsoft is currently trying to determine what formal notification, if any, needs to occur in Europe.

But a Microsoft-Yahoo search combination may be seen as less of a competitive threat in Europe where Google enjoys a 90 percent share of the search engine market versus its U.S. share, which ranges anywhere from 63 percent to 72 percent based on recent estimates.

Yahoo and Microsoft announced the deal in July, under which Bing's search engine technology would power Yahoo Search, and Yahoo would sell ad space next to search results, with the two companies splitting the sales.

It'll probably still be a long time before people start saying things like "I'd spend some time binging that guy before I go on a date with him," but in the U.S. things are looking up for Microsoft's new search engine, Bing, which was unveiled in May.

Web analytics firm StatCounter released analysis Monday stating that Bing slightly increased Microsoft's share of the U.S. search market in July. It now claims 9.41 percent, up from 8.23 percent in June.

The combined market share of both Microsoft and Yahoo in July was 20.36 percent, up slightly from 19.27 percent in June. The commanding lead Google currently has on the market shrank slightly to 77.54 percent in July from 78.48 percent in June.

Microsoft and Yahoo reached a deal last week, with Microsoft powering Yahoo search while Yahoo becomes the exclusive worldwide relationship sales force for both companies' premium search advertisers.

And according to StatCounter analysis, worldwide is the place where the two companies face an even bigger challenge in the search market. In July, Microsoft and Yahoo combined had just 8.77 percent of the global search market, down from 8.45 percent in June. On the other hand, Google still dominates the search market globally with 89.23 percent in July (slightly down from 89.8 percent in June).

StatCounter's data was based on an analysis of 1 billion search engine referring clicks (of which 258 million were from the U.S.) that were collected in June and July from the company's network of more than 3 million Web sites.

REDMOND, Wash.--In the wake of Microsoft's search deal with Yahoo, online chief Qi Lu outlined why the business is so important to Microsoft and how the company hopes to make headway.

For one thing, he promised the crowd of financial analysts, it can be a huge money maker.

"When you are at scale it can be a hugely profitable business," Lu said.

The problem is that many of the costs are the same even if you are not operating at scale, which is the place Microsoft has found itself. "Even if you have one user you have to crawl the whole Web."

But the challenge goes further, he said, noting that smaller players, by their nature, have fewer ads to show, meaning those ads are less relevant and the search experience is not only less profitable, but less desirable for users.

The Yahoo deal will help Microsoft in the scale arena. Combined, the two companies would have more than triple the search share that Microsoft has on its own. That said, the combined entity still has less than half of Google's share.

"With larger scales there are several important advantages," Lu said. "There is an almost immediate lift in the quality of user experience."

For example, suggested searches are based on a fairly simple algorithm, but one that gets much better the more queries a search provider sees.

But, even beyond the scale issues, Lu acknowledged that Microsoft also faces a brand challenge. He said that studies show that given a choice between Google's brand with another provider's results and Google's results with another provider's brand--users will choose the Google name, which has become synonymous with search.

"People will prefer the Google brand because of the strength it has," said Lu, who joined Microsoft from Yahoo at the end of last year.

Answering those challenges won't happen overnight, he said.

"We want to be brutally honest about where we are," he said. "It's going to take time."

Microsoft relaunched its search engine as Bing in June and has seen a slight bump in market share, though it remains to be seen whether it can hold onto and build on that initial interest.

"Overall the early feedback from the market has been encouraging," Lu said. "It's a good step, but it's the first step in a long, long journey."

After months of Microhoo maneuvering, the two companies sign the dotted line on a deal that puts Yahoo search in Microsoft's hands.

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Yahoo, Microsoft reach search, ad deal

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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'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.

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.

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.

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."