paidContent - Why Microsoft Appears To Have Gotten The Better End Of The Search Deal

This story was written by Joseph Tartakoff.

—Revenue: Yahoo gets unspecified revenue per search guarantees for 18 months—but there are no total revenue guarantees for Yahoo (NSDQ: YHOO). “Minimum guarantees are almost always part of these arrangements, though in the past they were total revenue guarantees,” writes Needham & Co.‘s Mark May in a report. “However, deals like Google/MySpace, Google/AOL (NYSE: TWX) and certainly others have failed financially largely, we believe, due to these arrangements. Microsoft (NSDQ: MSFT) learned this lesson and structured this guarantee not on total revenue but only for search pricing/RPS (revenue per search).”

—Sales: Yahoo’s sales force will sell ads to “premium search advertisers” across the new Bing network, but several analysts point out that that’s not so great, since the market for self-serve search advertising, which is much larger, is going to Microsoft’s AdCenter platform and not Yahoo’s platform. Yahoo does get to retain search data, which it can use to improve the display-ad side of its business.

—Display: By shedding its search technology, Yahoo presumably will now be able to concentrate on its display-advertising business. But it won’t be able to sell display advertising on Microsoft properties, which had also been rumored to be a possibility. And, of course, the display market overall isn’t exactly booming these days.

What Microsoft Got:

—No upfront payment: Microsoft doesn’t have to fork over anything upfront. Considering that the company was once willing to hand over more than $40 billion to purchase Yahoo (mostly in order to get access to its search business), that’s a coup.

—Distribution: Microsoft’s share of the search market will increase to 30 percent—that additional query volume Microsoft executives have contended will allow them to improve the relevance of search results and monetization. The Bing brand may be buried on Yahoo search results pages (for now) but it will still be exposed to a much larger audience.

—Google: Google (NSDQ: GOOG) is only saying that “we’re interested to learn more about the deal,” but it clearly puts the company under heavy pressure in its core business area. That’s particularly significant since Microsoft is threatened by Google in some of its own main businesses, including operating systems. Even if it is handing over most of its search revenues to Yahoo, it still may be protecting its real money-making operations.

—Options: The deal puts Microsoft in a position to eventually buy Yahoo—or reach a deal on better terms. May says that eventually “Yahoo may be at Microsoft’s mercy” since once the 10 years are up the company likely won’t be able to get search technology from anybody else, unless a new search player emerges.

Which company do you think made out better in the stick?

By Joseph Tartakoff