After months and months of merger and acquisition talks with Microsoft and Google, Yahoo has finally reached a deal to merge their search and search advertising functions with someone – Microsoft! The deal will last 10 years, and “Microsoft will now power Yahoo search while Yahoo will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers,” according to the companies. Further, Yahoo will get 88% of the search revenue for the first five years, which is higher than the 60% or so that is typically given in these types of deals.
To some Yahoo supporters, the deal may be disappointing, because it is much less lucrative than the $44 Billion buyout of Yahoo that Microsoft attempted last year. The companies announced that the new deal will likely lower Yahoo’s costs and increase their profitability, but it may not have a huge impact on their revenue. The cost reductions are due to the fact that Microsoft will absorb all of the search technology development and infrastructure costs. However, Yahoo will lose the chance of having a distinctive competence in search, the most lucrative area in internet advertising.
Yahoo will now be able to focus on the portal content and display ads areas, which they are a leader in now. However, this has not been a recent growth area for the industry. AOL has focused on these areas in recent times, and the results have not been pretty.
For Microsoft, this deal will allow Bing to gain market share, and it will possibly cause Bing to become more prominent in the eyes of users. Further, the deal eliminates one of their main search rivals. As Bing receives more traffic, it will also allow Microsoft’s engineers to improve its engine at a faster rate.
The deal will need to pass regulators, who did not look favorably on the recent potential Google/Yahoo deal. However, even combined, Microsoft and Yahoo will have a share in the search market that is less than half of what Google has. The companies hope that the deal will be quickly approved and that the merger will start in early 2010.
The next exciting step will be to see the reaction of the industry leader, Google. They may try to step up their search offering, and they may try to influence the decision of the regulators. More on this to come…