Last Updated Jul 29, 2009 11:39 AM EDT
According to a press releaseprepared statement, Microsoft CEO Steve Ballmer said:
"Through this agreement with Yahoo!, we will create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company," said Ballmer. "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. Microsoft and Yahoo! know there's so much more that search could be. This agreement gives us the scale and resources to create the future of search."But, honestly, it's not about "consumer choice," unless you take that to mean the choice to use something other than Google for a change. No, this is about market share, ego, and that perennial favorite topic, money.
The money immediately shows up in what Yahoo gets, which lets you understand why CEO Carol Bartz was able to swallow her ego and forgo the "who needs Microsoft" attitude:
- Yahoo gets 88 percent of search revenue in the first five years.
- Microsoft will guarantee search revenue baselines on a per-country basis for 18 months.
- Yahoo expects that, once up and running, the deal will add $500 million to annual operating income, reduce capital expenses by $200 million, and increase cash flow by $275 million.
So what does Microsoft get out of this?
- It pays a whole lot less than the $47.5 billion it offered to buy Yahoo last year.
- Microsoft gets to ride on Yahoo's coattails when it comes to sales, so it's no longer getting "leftover" money, so hopes for a more regular form of income.
- Offloading the ad sales work to Yahoo means that Microsoft can reduce expenses and headcount in its online division and possibly make it look like it's profitable.
- The two companies together get to make the argument that advertisers have a better chance of getting ads clicked on than with Google.
- False hope. Executives and employees might rah-rah themselves into seeing this as a way of tackling Google, but it's not.
- Distraction. If, indeed, the hope of Microsoft and Yahoo lies in getting Google out of the way, trying to take on the company is fine. However, what if search advertising is a profitable dead end? Instead of finding the next big thing, both companies are chasing a ten year old business model.
- Wasting time. False hope and distraction are bad enough when things aren't critical. But when a company such as Microsoft or Yahoo is now facing declining revenue and profit, no matter what the rationale, every moment spent strolling down the wrong path takes away from the time needed to craft a solution. Eventually they get the temporal equivalent of credit card poverty, where interest on the debt becomes so high that it's virtually impossible to catch up and get ahead.
Microsoft Wins, Yahoo Folds, Google Still Reigns in Search Game [Diane Mermigas, BNET Media]
Yahoo On Sunset Boulevard [Michael Hickins, BNET Technology]
[UPDATE: As I read the piece by my colleague, Michael Hickins, I suddenly wondered if we all weren't being a bit snookered by this deal. Although a number of commentators have sadly shaken their heads at the lack of upfront money to Yahoo and the potential for the company to be left with nothing if things go wrong, Bartz is no dummy. As I've always understood it, Yahoo's big claim to fame in advertising revenue has always been in display, which is explicitly left out of this deal. So maybe the big payoff is getting a return while unloading the expense of maintaining search and freeing itself up to focus on the big revenue driver.]
Image via Flickr user Caveman 92223, CC 2.0.