Breaking down Microsoft and Yahoo's search deal

It will take months to play out, but who are the winners and losers in Yahoo's decision to offload its search business to Microsoft?

With a few strokes of a giant purple pen, Microsoft's Steve Ballmer and Yahoo's Carol Bartz finally signed a deal Wednesday that will turn Microsoft into the second-largest search company in the world, and turn Yahoo into a media-driven advertising broker.

Here's a breakdown of the deal from the perspectives of the key players:

Yahoo

What it gets: Yahoo is paying below market rate for an outsourced search engine: Microsoft will pay Yahoo 88 percent of future search revenue, a better ongoing deal than had been expected, according to IDC. It gets a guaranteed stream of search revenue for 18 months, and it gets to sell all the search ads on both Yahoo and Microsoft properties. And it gets to save money, one of the highest priorities for Bartz and new Yahoo CFO Tim Morse: the company estimated it will save $200 million in capital expenditures and see an overall benefit of $500 million in operating income.

What it loses: The ability to control its own destiny when it comes to search, still the most profitable sector of online advertising by a large margin. Yahoo's search revenue is now tied to the performance of Bing for 10 years, an eternity in the Internet world, and 88 percent of something is less than 100 percent of something.

What's next: Probably another reorganization , and another wave of departures as talented search engineers weigh their options among Microsoft, Google, Ask.com, and start-ups. Expect rosier earnings calls where Bartz can point to the cost savings from the deal, and the evolution of a long-term plan for the company that doesn't involve dumping businesses.

Microsoft

What it gets: Far more search market share in one day than it could have hoped to obtain from organic Bing growth--no matter how much people may like it--over several years. All of Yahoo's search technology is now available to Microsoft to pick and choose what it might want to use on Bing. And Microsoft also avoided having to make an upfront payment to take control of Yahoo search, as had been rumored for months leading up to the deal and hinted at by Bartz herself , claiming "boatloads of money" would be needed to pry Yahoo search away from the company.

What it loses: Relationships with advertisers on search ads, although it preserves its display ad sales operation...for now. Otherwise, Microsoft seems to have emerged from this deal pretty clean.

What's next: Heated search competition with Google, which only means the two companies have even more reason to detest each other.

Google

What it gets: Time. This deal will take months, if not years, to complete, and it will be a messy integration process. Google sales representatives likely called up all of their major clients this morning to remind those clients of the uncertainty that will accompany the integration process, and the notion that their ad dollars might be better spent with the more stable operation. Google also gets to deflect some of the antitrust scrutiny that has been directed its way by pointing out that a combined Yahoo-Microsoft search property has a very healthy share of the market.

What it loses: The ability to play Yahoo and Microsoft search off one another: fractured competition meant it would have been much harder for either company to make serious inroads against Google on their own. It also turns Microsoft into a credible technology threat with Microsoft's right to pick and choose the best of Yahoo's search technology developments and match them with the well-received Bing.

What's next: Business as usual, for now. Google never had any intention of ceding its search lead before this deal was announced, and while there's arguably more pressure now to live up to that promise over the next several years, it's not anything that wasn't expected in Mountain View.

Advertisers

What they get: A credible second option for their ad spending, assuming ad spending ever becomes trendy again amidst the current economic backdrop. They're also in store for a renewed pitch on the benefits of Internet display advertising, which probably still doesn't resonate on Madison Avenue but may one day start to make sense for the Internet advertiser.

What they lose: The relationships between advertisers and the two companies will likely grow very complicated over the next several months as those used to working with certain representatives transfer their business to new faces. Those problems aren't insurmountable, but they can be annoying.

What's next: If the ad market ever comes back, renewed competition in search advertising for keywords, placement, and reach.

Consumers

What they get: "Powered by Bing" search results on Yahoo pages.

What they lose: Usually, consolidation is seen as bad for consumers--take banks as an example--because it reduces choice.

What's next: The consumer impact of this deal is not obvious, especially not at this point with so many details left to be hammered out. One could argue that if Yahoo wasn't really committed to search, consumers would see better search results over time on Bing-powered Yahoo pages. And there are indirect benefits to consumers that come along with having advertisers that aren't chained to one search engine.

But this is really about freeing up Yahoo to focus more on its other businesses, and giving Microsoft more market share to force Google into playing defense on search, which could alleviate some of the pressure Google is putting on Microsoft with things like Google Apps and Android.

It will take some time for the impact of these decisions to filter down to the consumer: assuming the government gives the deal its blessing.

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About the author

    Tom Krazit writes about the ever-expanding world of Google, as the most prominent company on the Internet defends its search juggernaut while expanding into nearly anything it thinks possible. He has previously written about Apple, the traditional PC industry, and chip companies. E-mail Tom.

     

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