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Microsoft, Yahoo Finally Sign Search Deal


Thu, Jul 30, 2009 at 10:15 am

    The Microsoft and Yahoo search partnership announced Wednesday may have
    been years in the making, but underwhelmed investors and analysts
    dwelled on the fact that it will take at least two more years to

    That’s a veritable Internet eon that could give Google Inc. time to
    build on its online search lead and leave a struggling Yahoo without
    any immediate financial benefits. Shares of the Sunnyvale company
    dropped more than 12 percent Wednesday, closing at $15.14.

    The 10-year deal, which will require regulatory approval, forms a
    united front in what the companies suggest will be an intense assault
    on Google’s dominance in online search.

    Under the terms of the alliance, Microsoft’s Bing search tool will
    become the exclusive platform on Yahoo’s sites, funneling an enormous
    volume of queries through the Redmond, Wash., software titan’s
    increasingly popular algorithm.

    In turn, the Web portal will sell advertising tied to online search
    for both companies. Microsoft will pay Yahoo for the traffic it
    generates, providing what Yahoo hopes will be a windfall that helps
    reverse its fading fortunes.

    Yahoo estimates the agreement will add $500 million to its annual
    operating income and save $200 million in capital expenditures, though
    not until two years after the deal is approved.

    "By combining the scale and technology of both companies, we can
    offer a real viable alternative for users and advertisers, which is
    good for everyone," Yahoo CEO Carol Bartz said during a conference

    Talks began in 2005

    The deal, expected to close in early 2010, comes more than a year
    after Microsoft made an ill-fated $47.5 billion takeover bid for Yahoo.
    The two parties had entertained a partnership since 2005.

    Though Google isn’t mentioned by name in the news release outlining
    the partnership, the deal is a clear shot at gaining momentum against
    the search king, based in Mountain View. Microsoft CEO Steve Ballmer
    said the agreement will enable Bing to attract more users and
    advertisers, which will improve the relevance of its ad and search

    The deal provides "consumers and advertisers with greater
    transparency and choice and (creates) really a strong No. 2 player in
    search," he said on the call.

    Microsoft introduced its improved and newly named search service
    early last month, accompanied by a $100 million marketing campaign. It
    earned early praise from reviewers and helped nudge up Microsoft’s
    share of the search market by 0.4 percent in a month.

    Even together, however, Microsoft and Yahoo would rank a distant
    second in search. Google controls 65 percent of online searches,
    according to a June report by ComScore Inc. That compares with just 28
    percent for Yahoo and Microsoft combined.

    Ultimately, the partnership doesn’t shift search rankings, boost
    advertising rates or loosen Google’s stranglehold on the market, said
    Carl Howe, a director at research firm Yankee Group. "The amazing thing
    about this deal is how little has changed," he said.

    Several analyst reports released Wednesday echoed those criticisms.

    Aaron Kessler, a senior analyst with Kaufman Bros. LP, said the
    alliance does allow both companies to play to their core strengths and
    could represent at least a first step in turning around Yahoo.

    He attributed the Sunnyvale company’s stock decline to the absence
    of any immediate payments from Microsoft. The software company’s shares
    rose 1.4 percent on the news, closing at $23.80.

    Competition online

    Google continues to create services designed to compete with
    Microsoft and Yahoo. The company recently announced plans for a free
    operating system for personal computers, dubbed Google Chrome OS, which
    attacks the very core of Microsoft’s business.

    And Google’s popular search tool has been undermining Yahoo’s market share for years.

    Many investors saw Microsoft’s $47.5 billion bid last year as the
    best bet for a turnaround at Yahoo. But leaders, including Yahoo’s
    then-CEO and co-founder Jerry Yang, said the price significantly
    undervalued the company, and Microsoft eventually withdrew the offer.
    On Wednesday, Yahoo’s market capitalization was $21.4 billion.

    Yang stepped down in November and was replaced by Bartz, who set out
    to overhaul the company. It has proven no small feat amid the faltering
    economy. Earlier this month, Yahoo said second-quarter revenue dropped
    nearly 13 percent to $1.57 billion, as online ad sales continued to

    After Microsoft’s proposed acquisition fell apart, Google swept in
    with an advertising partnership offer for Yahoo. The plans fell apart
    under threat of a lawsuit by the Justice Department, which indicated
    that such a deal would hand Google too much control of the online
    advertising market.

    Scrutiny expected

    Microsoft and Yahoo clearly are bracing for regulatory scrutiny. The
    news release emphasized that the two companies will "continue to
    compete vigorously" in other areas, including e-mail, instant messaging
    and display advertising. It also stressed that the agreement restricts
    the sharing of search and other data.

    Consumer Watchdog in Washington, D.C., called on the Justice
    Department and Federal Trade Commission to probe the deal for potential
    antitrust violations and privacy concerns.

    Ballmer said during the conference call that he expects Google to be
    aggressive in lobbying against the deal, but expressed confidence that
    regulators would ultimately approve it.

    Google limited its comments on the alliance to a statement: "There
    has traditionally been a lot of competition online, and our experience
    is that competition brings about great things for users."

    The Associated Press contributed to this report. E-mail James Temple at

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