Hello Godot: Microsoft, Yahoo finally hook up

One of the most on again, off again technology partnerships in recent memory has finally been consummated. How did we get here, and why now?

Has it really been 18 months since the tech world first started talking about the possibility of a Microsoft-Yahoo deal?

Well, you could look it up. Since February 1, 2008, when Microsoft made a $44.6 billion unsolicited bid for the Internet pioneer, Yahoo has gone through dozens of high-profile executives, added three new directors, suffered through two reorgs, and replaced its CEO. According to reports, their flirtation began even earlier in private quarters.

And throughout all the drama--involving everyone from Carl Icahn to the Department of Justice--the flirting toward some kind of deal continued, fueled by the pressure both companies felt in competing with the 800-pound tech gorilla of the 21st century: Google.

And then this morning, Microsoft and Yahoo at long last announced a search deal. In a nutshell, Microsoft's technology will power Yahoo's search results, while Yahoo will handle ad-selling duties for both companies' search sites. For more details, see the breaking-news story from my colleague Ina Fried, " Yahoo, Microsoft reach search, ad deal ."

The news finally puts an end to one of the biggest will-they-or-won't-they tech stories since Apple was believed to be developing a mobile phone. It also marks the end of an era for Yahoo as an independent search company, allowing it to further cut costs and rebrand itself as a digital media company. And it transforms Microsoft, which recently unleashed its new Bing search tool, into a clear No. 2 behind Google in search technology, with what should be a steady stream of Internet-derived revenue.

After all this time, how did we get here? For one thing, it's taken a different cast of characters in Sunnyvale to perform this version of "Waiting for Godot."

Jerry Yang's determination to fend off Microsoft last year led shareholder Carl Icahn to gain three seats worth of influence over Yahoo management after he and two associates joined Yahoo's board. Later in 2008, Yang stepped down as CEO and Carol Bartz was brought over from Autodesk with a clear mandate to shake up the company.

Bartz has shown far more pragmatism about the future of Yahoo search and Microsoft's money, compared with how co-founder Yang felt compelled to defend his baby against Microsoft's entreaties. In appearances throughout the year, she has talked of a Yahoo that newcomers to Planet Earth would not realize includes a search team; during last week's earnings call, Bartz followed her usual playbook by focusing instead on the sheer reach of Yahoo's network of Web sites and its relationships with top-tier advertisers.

There's a simple reason why talks continued: Microsoft has cash and needs scale. Yahoo has scale--an enormous network of Web sites--but needs simplicity, cost savings, and focus. It also needs to maintain its hold on its current advertisers in hopes of shifting them over to display ads.

Bartz has downplayed the importance of search competition to Yahoo's future but has hedged her bets by casting doubts on the magnitude of the cost savings--at one point, one of the primary reasons for Yahoo and Microsoft to cut a search deal--that would accompany the move to Bing-ify Yahoo search.

In an interview earlier this year , Bartz estimated that Yahoo could save around $500 million a year by outsourcing search--and lo and behold, in this morning's announcement, the company said it expects the done deal will boost its annual operating income by about $500 million. That's a far cry from what some people had thought could be saved in 2008, but that impact on Yahoo's operating income should satisfy those looking for the company to generate higher profits.

Why now?
So, after all the machinations of the past few years, why is this happening now, other than the fact that Yahoo has a new leader shepherding the deal?

For one thing, both Yahoo and Microsoft might be more comfortable with the quality of Bing, which has been well-received since it made its debut a few months ago. At one point a year ago, Yahoo could have looked at Bing's predecessor, Live Search, and wondered why it made sense to force that experience down the throats of its users.

But if Bing is seen as providing a similar or better experience compared with Yahoo's own search technology, Yahoo has less to lose by making the deal. Yahoo isn't really a search destination in its own right: the vast majority of Yahoo searches come from people who are already on a particular Yahoo site. As long as the search experience isn't terrible, those people will likely use whatever search provider is plugged into the box above their stocks on Yahoo Finance or the home page of their fantasy sports team, and stay within the Yahoo network.

Internally, however, the deal represents a big cultural change for Yahoo. Outsourcing the search technology team would be a dramatic reversal for a company that has also spent the past 18 months improving the quality of its search results and quietly leading the charge toward semantic search , which both Google and Microsoft have embraced of late.

Where does that leave us? For one thing, hopefully the term "Microhoo" will be successfully banished to the dustbin. But with this deal, we're entering a new era for Yahoo, Microsoft, and the search market in general.

Yahoo appears to be betting its future on its ability to maintain the 300 million unique users that visit its newly redesigned home page every month and the hope that display ads will finally do for the Web what they did for television 50 years ago. Microsoft is giving up the right to sell its own search ads--still easily the most effective form of online advertising--in hopes of putting a real dent in Google's operation.

Those are both decisions that, understandably, might have taken some time.

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Software
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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