So now it is clear. After much haggling, quarreling and hateful words, there will be a Yahoo!/Microsoft deal. However, we are not talking about Microsoft taking over Yahoo! and its search engine anymore. We are talking about a search and search advertising partnership.
While the original plan could entail that Microsoft (NSDQ:MSFT) took over Yahoo! (NSDQ:YHOO) to acquire its search technology, now it is the other way round. Microsoft’s Bing search engine is to power Yahoo! search.
The end of the Yahoo! Search Engine
Seen in this light Microsoft’s large investments in Bing makes even more sense. Microsoft turned Live Search into Bing not only to win the hearts and minds of the masses, but to convince Yahoo! that they have the technology needed to deliver decent search results.
It seems Yahoo! CEO Carol Bartz has come to the conclusion that Yahoo! cannot out-compete Microsoft in search. Microsoft has a much stronger financial stamina, and has proved that it is willing to invest a lot in search. Bartz cannot do that. Instead she will — to use her own expression — “ride their [i.e. Microsoft's] coattales”.
Yahoo! originally wanted its own search technology
This means the end of the Yahoo! search engine, and also of a history that began with Yahoo! switching to Google (NSDQ:GOOG) as their search provider in 2002. To their dismay they found that the Powered by Google logo helped Google gain a larger following.
Yahoo! therefore decided to acquire its own search technology. First they bought Inktomi, then Overture (including AlltheWeb and AltaVista). In 2004 they developed the Yahoo! Search Engine on the basis of the Alltheweb, AltaVista and Inktomi search engines .
Although the Yahoo! Search Engine is decent enough, the company never managed to beat Google’s frenzied pace of innovation. Moreover, it costs a lot to develop new search technology — and to run it — and Yahoo! has faced economical difficulties for a long time now. This is one way to cut their losses.
Yahoo will keep 88% of the search revenue generated off the sites it owns or operates. Microsoft gets the remaining 12%. That’s not such a bad deal, considering that Yahoo! no longer have to invest in this kind of search technology.
Bartz puts it this way:
“In essence, we can get virtually all of our search revenue at no cost because Microsoft wants to make the investment and wants to win. That just frees me up to invest in a better portal, better display, better advertising.”
Focus on ads and content
This means that Yahoo! will focus on two business areas:
The first is content delivery. Yahoo! is very good at delivering content, from serious news to celebrity gossip. Let’s not forget that Yahoo! as a complete portal is more popular that Google.
The second is advertising. Yahoo! will sell pay per click text ads for Yahoo! and Bing search and for the Yahoo! and Microsoft portals. This turns Yahoo! search marketing into a force to be reckoned with. Instead of covering some 20 percent of the US market, they now have 30 percent.
It should be noted, though, that the underlying technology for “self-serve ads” (i.e ads that are sold through an web-based sales system) will be Microsoft’s AdCenter platform, not the inferior Panama system of Yahoo. Yahoo! will focus on “the premium search advertisers”, i.e. those who need personal attention.
Microsoft benefits as well
For Microsoft this may look like a good deal for several reasons.
Having decided to challenge Google head on in the search engine race, Microsoft Bing will now be able to double in size while at the same time getting rid of a major competitor, namely Yahoo.
Secondly: Even if Microsoft does not gain control over Yahoo! this way, it saves a lot of money by not buying the company
High risks involved for both parties
Even if the deal makes economic sense for both parties, there are huge risks involved.
Since the two remain independent companies, there is always the danger that one of them may abandon ship.
For Yahoo! that would mean that they would have to get another search provider. There are not that many alternatives left, although Ask could be a possible contender.
Since the web-based text ad sales system will be based on Microsoft’s technology, a breakup may leave Yahoo! with no direct web based sales system. It’s present Panama system is not good enough, and there is no way they can afford to keep that one on a “just in case” back burner.
Yahoo! also risk going into the Google trap once more.
This time there will be a Powered by Bing logo on the search result pages. That could draw searchers over to Bing, although we admit that Bing is not the same threat as Google was in 2002. Google’s technology was revolutionary. The one of Bing isn’t.
Risks for Microsoft
The risk is much lower for Microsoft, who will have both a search engine and its own AdCenter technology to fall back on.
On the other hand, Microsoft will now be helping Yahoo! survive as a portal or content provider. Microsoft has it’s own journalistic sites, like for instance MSN. Microsoft is now strengthening a competitor in that area.
Bing results should be appearing on the Yahoo! sites in the second half of 2010. This applies to web, image, video, news, shopping and local search. The Yahoo Directory, Yahoo Answers, Flickr and Delicious will probably survive.
Yahoo’s pay per click text ads will appear on the sites of Microsoft the year after.
The term of the agreement is 10 years.
What will it mean for searchers?
There used to be three big players in the search engine field: Yahoo!, Google and Microsoft Live/Bing. They have been competing fiercely, an competition is normally a strong driver of innovation.
So even if the regular searcher may not miss the Yahoo! Search Technology — he or she is normally using only one search engine anyway — the searchers may suffer due to less intense innovation.
Both American politicians and the European Commission are bound to look at this from a competition view point. This deal could be construed as anti-competitive.
The recent Google/Yahoo deal was killed this way, although another portal site, AOL, which is powered by another search engine (Google), has not faced this problem. Google will probably play the antitrust card, though, trying to kill the deal.
On the other hand, the death of Yahoo! Search may make it easier for other search engines to get a foothold in the market, being that old timers like Ask or newcomers like Cuil and Yebol.
Furthermore, Yahoo! are allowed to improve the search interface of its Bing based search results. There may be innovation in that too.
The agreement does not, Microsoft says, cover “each company’s web properties and products, email, instant messaging, display advertising, or any other aspect of the companies’ businesses. ”
Yahoo! Mail and Hotmail will continue to compete.
What does it means for search engine marketers?
People involved in optimizing sites for the search engines and running paid search campaigns for companies will probably find that this deal makes their lives easier.
They can now develop a methodology for optimizing for one search engine instead of two, and they need only to keep track of two pay per click campaigns (Google and Yahoo) instead of three.
Now, ask you're self that question and think about it.