Technology

Details Of Microsoft (MSFT) Deal With Yahoo! (YHOO) Released: Too Complex To Work

balllmerThe partnership between Yahoo! (YHOO) and Microsoft (MSFT) to integrate their search operations is even more complicated than was rumored. It is so complicated, as a matter of fact, that the execution risks will be tremendous for two companies with radically different cultures. The transaction is made more obtuse by the fact that Yahoo! and Microsoft will continue to compete aggressively in businesses including internet content, e-mail, and instant messaging, which muddies the waters and raises the question of each company’s motives to make the deal a success going forward.

The description of the partnership laid out by the two firms appears to be based on negotiations to close a transaction because of shareholder and management pressure and not one based on a careful weighing of the long term benefits of taking over nearly 30% of the US search market. If the execution of the new agreement meets even modest resistance within one or both of the companies or is challenged by the federal government, it is likely to be stillborn.

Here are the details:

The term of the agreement is 10 years;

Microsoft will acquire an exclusive 10 year license to Yahoo!’s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing Web search platforms;

Microsoft’s Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites. Yahoo! will continue to use its technology and data in other areas of its business such as enhancing display advertising technology;

Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers. Self-serve advertising for both companies will be fulfilled by Microsoft’s AdCenter platform, and prices for all search ads will continue to be set by AdCenter’s automated auction process;

Each company will maintain its own separate display advertising business and sales force;

Yahoo! will innovate and “own” the user experience on Yahoo! properties, including the user experience for search, even though it will be powered by Microsoft technology;

Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!’s network of both owned and operated (O&O) and affiliate sites;

Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88 percent of search revenue generated on Yahoo!’s O&O sites during the first five years of the agreement; and

Yahoo! will continue to syndicate its existing search affiliate partnerships.

Microsoft will guarantee Yahoo!’s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country;

At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million; and

The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies. The agreement maintains the industry-leading privacy practices that each company follows today.

Douglas A. McIntyre