Microsoft could benefit financially in the long run from its July 29 partnership agreement with Yahoo, but CEO Steve Ballmer acknowledges that a collaboration between the two companies will bring technological challenges. Microsoft's new search engine, Bing, could also benefit immensely from access to extra data from Yahoo's sites. A number of analysts suggest the deal will ultimately prove beneficial to Microsoft's long-term operations.Microsoft
has painted its newly minted Yahoo partnership as the perfect vehicle for
driving search and advertising revenue, while saving the company cash in the
long term. However, Microsoft has also indicated that the transition will
present challenges from a technical perspective.
During a July 29 conference call announcing the partnership, Microsoft CEO
Steve Ballmer suggested that transition costs would run into the "couple
hundreds of million in the first couple years. ... We're sort of betting into
the future."
Under the
terms of the 10-year agreement, Microsoft will power Yahoo's search engine
with Bing, which it launched on June 3, while Yahoo assumes exclusive worldwide
sales duties for the companies' search advertisers. For the first five years of
the agreement, Microsoft will pay TACs (traffic acquisition costs) to Yahoo at
an initial rate of 88 percent of search revenue generated on Yahoo's sites. Unlike
Microsoft's failed 2008 bid to purchase Yahoo for $44.6 billion, the new deal
involves no cash up front.
Ballmer suggested that the partnership would increase the relevancy of
Bing's search results, as the search engine fed off the extra data produced by
being the new search platform for Yahoo sites.
"Because ads are a part of being relevant," Ballmer said,
"[this could] increase the monetization on both the Yahoo and the
Microsoft sites."
He added, "Our upside comes as execution really builds," but noted
that the technological aspect of the partnership, particularly with regard to
data-sharing, represented as complex a challenge as the financial principles.
"You have to say what data gets shared and how it gets shared from a
privacy perspective, what APIs need to be equally open and visible,"
Ballmer said. "There's a lot of engineering know-how; we haven't looked at
Yahoo's code, but we wanted to make sure we could put together the integrative
experience and code."
Nonetheless, analysts seemed generally approving of the deal's implications
for Microsoft.
Microsoft "can now focus on technology rather than on media and
advertising, which is a more natural fit with its corporate culture, while
still benefiting from the very scalable and promising new media business,"
wrote IDC analysts Karsten Weide and Susan
Feldman in a July 29 research note.
"It will be interesting to see Microsoft's next moves with regard to
its (considerable) display ad business" they wrote, "which will allow
us to see whether the company will de-emphasize the media side of the business
even more."
Others suggested that Microsoft had dodged a bullet by agreeing to a partnership
as opposed to acquiring Yahoo outright in 2008.
"The deal is a clear win for Microsoft, which receives the search
volume it needs, without the risk and expense of a full acquisition of Yahoo,
all for a fraction of the proposed acquisition price," Allan Krans, an
analyst with Technology Business Research, wrote in a July 29 research note.
"In hindsight, the failed $45 billion bid for Yahoo may seem like a
blessing, as Microsoft avoided both a large financial outlay [and] the myriad
of issues that would have been faced [in] integrating a purchase of that
scale."
"Taking the operating income benefits estimated by Yahoo, this deal
will cost Microsoft between $500 million to $1 billion annually," Krans
noted, "which pales in comparison to the proposed acquisition price, and
is not significant given the spend rate in Online Services is already
approaching $6 billion per year."
