Microsoft, Yahoo! Join Forces in Web Search Partnership

Jul 31, 2009

Two of the biggest names in the software industry, Microsoft and Yahoo!, have announced a 10-year partnership under which Microsoft's new Bing search engine will power Yahoo! online searches, and Microsoft's AdCenter ad sales platform will replace Yahoo!'s Panama. In return, Yahoo! will license its search technology to Microsoft and sell search ads on both Yahoo! and Bing.

The deal is designed to pool the two companies' resources and strengths in order to better compete with market leader Google. In short, Microsoft becomes the technology provider and Yahoo! sells the advertising space. Yahoo! stands to save millions of dollars in technology costs while still keeping 88% of its ad revenue-a significantly higher percentage than usual for such a deal.

IDC analysts Karsten Weide and Susan Feldman issued a statement in which they write: "On the face of it, this is a good deal for Yahoo!. To begin with, it would keep the majority of its search ad revenue, and pay only 12% of it for Microsoft's tech services. Two, it would save millions of dollars on data centers, servers, mass storage and telecommunications costs, as well as on an army of expensive search engineers. Most likely, the deal will boost profitability: only slightly lower revenue, but great cost savings. Thirdly, adding Microsoft Bing's search traffic market share to Yahoo!'s would increase its market share from 20% to a combined share of 28% (compared to Google's 65%), making it a mildly more attractive offer to advertising clients, especially for those that need massive amounts of inventory. Finally, this will allow Yahoo! to focus on what it is good at: media and advertising; and to drop what is not so good at, technology. More focus on sales and a more attractive search ad offer could increase the combined revenue, thereby improving both companies' top line and making them more competitive."

In addition to the long-term strategic concerns for Yahoo!, the deal is being investigated by Department of Justice on antitrust grounds. However, Competitive Enterprise Institute analyst Ryan Young thinks that the justice department "should leave the Microsoft-Yahoo search deal alone."

"What is there to investigate? Microsoft and Yahoo are trying to outcompete Google," Young says. "To succeed, they will need to put together the best search engine they can. The firms believe their announced partnership will help them achieve that goal. They should be allowed to try--their own money is at stake if they fail. Either way, Internet users stand to benefit."