03/08/2009
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News
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Yahoo! and MSN
Partnership FAQ
What is the deal all about?
On Wednesday, Yahoo! and Microsoft reached a global agreement to combine their respective search and search advertising businesses. Simply put, Microsoft will power search and Yahoo! will become the exclusive worldwide relationship sales force for both companies’. Instead of a full merger, the companies will share search revenue, with Yahoo! getting 88% of the revenue generated from its sites in the first five years of the agreement.
What does this mean for Yahoo!, MSN and Google?
Yahoo! search has been in decline for a while, and this would appear to be a good deal for them. However, the cost savings to Yahoo! are unclear as yet. There is disagreement in the industry as to the impact on Yahoo! earnings. The estimated $700m boost to Yahoo! earnings is viewed as excellent business by some. Others feel that with no upfront payment; net annual savings of $275m; without 100% of search revenue; this is bad business. Certainly, the timing could have been better. The advertising market in general is feeling the impact of the recession and Yahoo! have just re-entered a new investment phase.
The deal is a clear win for Microsoft. For a fraction of the proposed full acquisition price they receive the search volume needed, without the risk and expense. Through great expense, Microsoft bought and built a good technology offering. Arguably, Bing is the best advance in search technology in the past few years. It integrates comparison engine, partner content and booking into the search page. The problem is that while the technology is great they have small market share. This lack of search volume is the basic flaw that is preventing financial return success.
While the deal is not going to send the Google into a spin, Eric Schmidt has previously said the deal would have an “inappropriate influence” over the internet. His concern being, “preserving the underlying principles of the Internet: openness and innovation.” The internet is a realm they have long dominated and this deal may distract them from other priority projects. On the plus side, this deal could help Google by proving to the federal governenment that they don’t hold a monopoly over the internet. Moreover, the merger will take up to 2 years and the practicality of how this will operate is to be seen.
What impact will this have on the Search landscape in the UK?
This will have a positive impact on the Search landscape globally, with a lesser impact in the UK than some other countries. Google has roughly a 70% user reach in the US and the merger would lead to 28% for Yahoo! and MSN. However, in the UK Google dominate with an approximate 90% reach.
Google’s UK revenue totalled $715m, representing 13% of revenues in the second quarter of 2009. Whilst this was a 1% year-on-year decrease, the UK is still dominated by this border-line monopoly and they will clearly look to retain this position in future years.
How does this impact advertisers?
The bottom line is that this deal is good for the marketplace. Microsoft can create the market scale required to offer advertisers a more competitive alternative. Whilst it will not greatly impact UK advertisers in the short term, this merger and the introduction of new innovative search technologies will open up the search landscape and call for greater expertise in this field.
Uniquedigital will continue to keep close tabs on events and relay them as we progress. You will shortly be able to keep on top of this activity on our company blog. Please add your own feedback to these current affairs.
Comments:
2
Cool site, love the info.
I agree, to a level, that the deal will be of benefit. I do believe that it has been good timing in promoting Bing and reminding advertisers that there is an alternative to Google. Also more market share (albeit predominantly in the States) means Google must take the competition more seriously. Let’s face it, in these times, competition can only be a good thing. However, it’s been reported that Google are not happy because the competition is being reduced to one rival from two. So it could easily be argued that by these Search kids clubbing together they've not changed much. And as this merger will take months/years, Google should move streets ahead. It remains to be seen what impact Bing can have using Yahoo! Search technology. Search behaviours are changing and if they can create and properly market the best fit to users then they will gain further market share. I wouldn’t say Google will run away with it all forever. Those of us who have been in this industry for some time have seen enough to know that a colossus 5 years ago is today’s minnow or afterthought.
Clearly, this deal has been a revelation for Bing. When they tried to buy Yahoo! this time last year, they were prepared to pay $8bn and another $1bn for the Search technology. Now they’re getting the business for $4bn and paying nothing for the Search technology. Partly for these reasons, you would have to say the deal has been a disaster for Yahoo!. They argue that they’ve saved $700m in staff wages in the first year and $200m per annum thereafter. They also argue that an 88% but of sales is amazing and they can make bigger in-roads in a partnership. That may be the case, but leaving aside all the talented people that are losing their jobs, this isn’t even a great financial reward in my eyes. If you look back pre-2003 there were plenty of Engines using other Engines Search Technology, however these all seemed to get consolidated that year. After that consolidation you were left with only a few big hitters with Search Technology in place and no one was bigger than Yahoo! Today, Google developed their own; Bing created theirs from scratch (a long way behind); and Yahoo! were the only large enough Search technology contender to Google. Therefore, these short-term gains have come at great sacrifice to the long-term in my opinion. Admittedly, it would have been a very long road and, under the new guidance of Carol Bartz, they see themselves as a Content provider.
All-in-all, this deal gets very complicated when you scratch the surface, however it has the potential to be beneficial to advertisers and the industry. The winners are Bing and potentially the advertisers. Losers are Yahoo!, although I wouldn’t rule them coming back in another form. And Google will carry on developing in the same manner it has been in recent years. If Microhoo want to catch up they’ll need some major catalyst. Microsoft’s Ballmer once said himself that MSN were 5 years behind Google (a century in internet years!), and that gap is only going to grow while this merger takes place. That said, I’m rooting for them!
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