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By Bob Blandeburgo
After months of negotiations, Yahoo Inc. (Nasdaq: YHOO) and Microsoft Corp. (Nasdaq: MSFT) finally formed a search partnership, which could give Microsoft's newly launched Bing the lift it needs to compete with market leader Google Inc. (Nasdaq: GOOG).
"IT) analyst Neil MacDonald told The Associated Press. "I think it put pressure on Yahoo, as well as Yahoo not being able to turn around on its own."," Gartner Inc. (NYSE:
Bing will more than triple its current market share if the deal gets the nod from regulators.
Bing, which as of June held an 8.4% market share to Yahoo's 19.6% according to market research firm comScore (Nasdaq: SCOR), will provide the results for all search queries as a part of the 10-year deal (e.g. "Search Powered by Bing"). The combined 28% is still a far cry from the current champion of search, Google, which holds a commanding 65% market share.
The early June launch of Bing generated much buzz and favorable reviews, and for the moment at least, more market share for Microsoft. The company's June share represented a 0.2% increase from May, mostly at the expense of Yahoo, which held a 20.4% share in May.
There were indicators that Microsoft's share would continue to eat away at Yahoo's share. Microsoft's Internet Explorer web browser, which has a 70% market share, uses Bing as its default search engine. The default home page for Internet Explorer is MSN.com, which also uses Bing as its default search engine.
Other terms of the deal include:
- Revenue: Yahoo will get to keep 88% of the sales from all ads that appear in search results on its site for the first five years of the deal. Yahoo salespeople will sell the premium ads for both companies. Missing are the "several billions of dollars" upfront reported earlier this month by the The Wall Street Journal that Yahoo investors were hoping for.
- Self-serve ads: Ads that users (usually small businesses) buy themselves for both companies' Web sites will be fulfilled by Microsoft's AdCenter, and prices for all search ads will continue to be set by AdCenter's automated auction process.
- Display ads: The companies will remain competitors for the pretty banner and sometimes multimedia ads that appear on their flagship Web portals, the newly redesigned Yahoo main page and MSN.com.
The deal will also make Yahoo much leaner in a tough economic environment that has seen ad spending dwindle. Yahoo expects its partnership with Microsoft to increase its annual operating income by roughly $500 million and savings by $200 million. Yahoo also sees its yearly cash flow growing by $275 million as a result of the deal. The downside is none of this will be fully realized until two years after the deal takes effect.
Microsoft expects to begin seeking antitrust approval for the deal starting next week, Bloomberg News reported, citing a conference call from the company's general counsel Brad Smith. Not only will regulators in Washington be questioning every facet of the deal, but it's likely Google lobbyists will campaign vehemently against it.
Google's huge market share will make it difficult for it to convince regulators the partnership is anti-competitive, especially with its plans to tackle Microsoft in the operating system arena with its Chrome OS, which will likely funnel users to its lucrative search ads. Microsoft is already doing this with its Windows operating system – the default search takes users to Bing.
Still, a more stringent regulatory policy in the Obama administration will have lawmakers looking at the deal closer than they may have Bush era.
"I think this deal would be really easy to get through in the Bush administration. They wouldn't even look twice at it," antitrust attorney John Briggs of Axinn, Veltrop and Harkrider LLP told Reuters. "This administration is going to look twice at it, and probably in the end let it through."
Microsoft Chief Executive Officer Steve Ballmer says the deal will give consumers a legitimate choice over Google.
"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," he said in a prepared statement.
Yahoo tried to ink a similar deal with Google last year, but was stung when Google walked away from the table when regulators from the Justice Department tried to block it.
Microsoft's stock posted modest gains on the news yesterday, closing at $23.80, up 1.41% or 33 cents. Shares of Yahoo Inc. closed at $15.14, down 12.08% or $2.08.
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