Microsoft, Yahoo Deal 'Not Better Than the Last Deal,' Says Ballmer

Microsoft's partnership deal with Yahoo is a much more collaborative agreement than its attempted $44.6 billion buyout in 2008. Despite the relative success of Bing in the marketplace, the new deal suggests that Microsoft sees the best way to tackle archrival Google in online search is to forge an advertisingsearch deal with Yahoo, which has also been losing ground in certain key search areas to Google over the past year. Microsoft CEO Steve Ballmer said that this current deal "is not better than the last deal."

The online-partnership deal between Microsoft and Yahoo is far more collaborative than the one attempted by Microsoft in the summer of 2008, suggesting that both companies have reached a tipping point with regard to their mutual competition with Google.

The search ad deal, jointly announced by both companies on July 29, centers on Microsoft powering Yahoo's search engine, while Yahoo assumes exclusive worldwide sales duties for the companies' search advertisers. The deal will extend for 10 years; for the first five years of the agreement, Microsoft will pay traffic acquisition costs (TACs) to Yahoo at an initial rate of 88 percent of search revenue generated on Yahoo's O&O sites. The companies hope that the deal will be approved and closed by early 2010.

Microsoft's public statement about the deal suggests there was a mutual recognition, on the part of both it and Yahoo, that Google's lock on the search and online advertising market would not be overcome by rivals working separately.

"This deal will combine Yahoo and Microsoft search marketplaces so that advertisers no longer have to rely on one company that dominates more than 70 percent of all search," the statement read. "With the addition of Yahoo's search volume, Microsoft will achieve the size and scale required to unleash competition and innovation in the market, for consumers as well as advertisers."

Despite the more collaborative nature of the new deal, Microsoft CEO Steve Ballmer hinted during a July 29 conference call that he had few regrets about Microsoft's attempted takeover of Yahoo last summer.
That failed bid had Microsoft offering $44.6 billion to purchase Yahoo. Ballmer said that agreement had been tailored from the perspective of "an investor as opposed to an operator."

"This deal is not better than that last deal; it is different than that last deal," Ballmer told the assembled analysts and reporters. He seemed to implicitly defend Microsoft's previous tactics, saying that, no matter which deal structure eventually brought the two companies together, "you can create long-term shareholder value either way."

The current deal, he added, actually has downside for Microsoft with regard to a "higher tax rate and less money up front."

Carol Bartz, CEO of Yahoo, had her own commentary on the difference between the current bid and Microsoft's attempted 2008 buyout.

"The difference in that deal-or perceived deal-was that there was more of an upfront payment and a low TAC," Bartz said during the conference call. "That was not interesting to us because we're trying to run a long-term business here where we can invest."