Microsoft and Yahoo! form online search alliance to challenge Google dominance

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Microsoft and Yahoo! form online search alliance to challenge Google dominance

Mike Harvey, San Francisco


Yahoo! and Microsoft yesterday unveiled a long-awaited internet search partnership to try to take on the might of Google, the market leader.
The search partnership caps a convoluted and sometimes farcical courtship that has seen both companies fall farther behind Google in search market share, while Yahoo!’s stock has plunged in value.
Under the no-cash deal, Yahoo! will use Microsoft’s Bing search engine on its own sites and will act as the exclusive global sales force for the companies’ premium search advertisers.
The agreement between Yahoo!, the struggling internet portal company, and Microsoft, the software giant, is to run for ten years, which is longer than expected, giving them an opportunity to provide advertisers with a viable rival to Google’s money-making online advertising platform.


The deal, which will be subject to review by United States antitrust regulators, is expected to be completed early next year, the companies said. Under the agreement, Microsoft will acquire an exclusive ten-year licence to use Yahoo!’s core search technologies, and Microsoft will be able to integrate Yahoo! search technologies into its existing web search platforms.
Microsoft did not have to give Yahoo! an upfront payment to make it happen, as many Yahoo! investors had hoped. However, Yahoo! will keep 88 per cent of the revenue from all search ad sales on its site for the first five years of the deal, and will have the right to sell ads on some Microsoft sites. Each company is to maintain its own separate display advertising business and salesforce.
Carol Bartz, who replaced Jerry Yang as Yahoo!’s chief executive after he rejected a $47.5 billion takeover bid from Microsoft last year, said: “[This] creates a significant competitive alternative in search.”
Google said: “There has traditionally been a lot of competition online and our experience is that competition brings about great things for users. We are interested to learn more about the deal.”
Even with Yahoo!’s help, Microsoft still has its work cut out. Combined, Microsoft and Yahoo! have 28 per cent of the internet search market in the US, well behind Google’s 65 per cent, according to comScore, the online measurement company. Google is even more dominant in the rest of the world, with a global share of 67 per cent, against a combined 11 per cent for Microsoft and Yahoo!.
Ross Sandler, an analyst for RBC Capital Markets, said: “Overall, it’s a big positive for two companies that have been struggling to keep up with Google. This consolidates their resources and allows them to make a more concerted push as the No 2 entity.”
Yahoo! said that it stood to gain about $500 million in annual operating income and $200 million in capital expenditure savings from the deal. The company also estimated that the agreement would provide it with a $275 million benefit to annual operating cashflow because it will not have to invest in its own search technology. An unspecified number of Yahoo!’s engineers will lose their jobs.
Shares in Yahoo! slid 12 per cent to $15.17, as investors noted that it is not getting an upfront payment. Microsoft rose 1 per cent to $23.79, while Google was fractionally lower at $436.02.
The pact gives Yahoo! a chance to recoup some money forgone last year when it turned down a chance to sell itself to Microsoft for $47.5 billion. Its market value now is about $22 billion.