August 4, 2009

Microsoft gets to play, Yahoo gets cash

Going truly offline for a week was very nice, especially as the time was spent sailing in Croatia. And obviously it was the week when Microsoft and Yahoo finally came to an agreement about search.

A few years back I spent far more time thinking about search, so please add your thoughts in the comment section!

In terms of revenue it is one of the largest Internet deals done. Given the deal complexities and the lack of a huge upfront cash payment, it seems like many are underestimating the importance of the deal. In short: This is Microsoft's play to actually create a real Google competitor.

Yahoo has been struggling to compete with Google in search technology and advertising since the company acquired Inktomi, FAST and Overture back in December 2002 and July 2003. Before that Yahoo licensed search technology (from Google and others before that) and used Overture for search advertising. It has had issues with developing a stronger search platform of its own (Panama et al).

At least since 2004 Microsoft has invested significant capital into developing search technology and the accompanying data centers needed to try and catchup with Google.

Obviously neither company has managed to effectively compete with Google, who really turned out to be this decade's Microsoft.

The 10-year deal between Microsoft and Yahoo is somewhat complex and there are several implementation risks, but it seems to make a lot of sense to both parties.


* Yahoo doesn't have to spend significant amounts of capital and additional management attention on getting search development right and instead get 88 cents on each search dollar.
* Yahoo gets a cash flow boost of $275 million if the press release is to be believed. With Yahoo's weak profitability that is a significant amount of cash.
* Yahoo is doing the sales to large clients (which makes sense in the US, but less so in Europe), so Yahoo keeps its relationships with large search advertisers.
* Yahoo can focus on building other web and media properties well instead of trying, against all odds, trying to catch Google.


* Bing's search technology get more searches and becomes the serious contender instead of being number three.
* AdCenter (search ads) goes from being a small number three to a solid number two (especially in the US). It should attract more advertisers (who think current volumes are too small) and more bidding (higher bids on popular search words and better coverage).
* The result should be better organic search, higher revenue and a better chance to get a positive feedback loop going.
* It is a statement that Microsoft is serious about search. Steve Ballmer might have said it many times, but actions speak louder than words.

So what do you think? Will this matter? Will advertisers make more of an effort and spend with both Google and Microhoo? Please comment below.


ville said...

In all honesty, this is game is over for the Yahoo we have come to know. There's no coming back to Search after giving it away for 10 years (or even 5 when the deal terms are renegotiated).

The new Yahoo will be a sales organization in content creation business. It's a harsh simplification, but at the end of the day that's what it really will be. And we all know how bullish other giants in content creation business feel. The economies of scale in content creation business have been seriously questioned.

On the other hand, this is the first time that I take Microsoft seriously and will start following it more closely when it comes to search. I have never been much of a fan of the company, but I believe the deal might be one of the best things that could have happened to Search.

It's a too horse race from here on and I hope it will get to be a close one.

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Technology Slice said...

If Yahoo and Microsoft together can't beat Google no one has a chance.