News that Microsoft and Yahoo have finally agreed a formula for their collaboration comes almost as a relief after what seems like years of tiresome on-off negotiations. The headline of the press release is “Microsoft, Yahoo! Change Search Landscape”, and that's certainly true:
Yahoo! and Microsoft announced an agreement that will improve the Web search experience for users and advertisers, and deliver sustained innovation to the industry. In simple terms, Microsoft will now power Yahoo! search while Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers.
At a stroke, then, Microsoft's Bing search engine becomes number two, and its market share is no longer risible compared to Google's. That's clearly hugely important, but what interests me here is what effects this deal will have on open source.
I think it's necessary to distinguish between short-term and long-term effects. For the former, the following terms of the agreement are key:
Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!’s network of both owned and operated (O&O) and affiliate sites.
Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88% of search revenue generated on Yahoo!’s O&O sites during the first 5 years of the agreement.
Yahoo! will continue to syndicate its existing search affiliate partnerships.
Microsoft will guarantee Yahoo!’s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country.
At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.
It seems to me that taken together, all of those mean that in the short term, the agreement will be costly for Microsoft. That matters for precisely the same reasons I mentioned a couple of days ago in the context of Microsoft's concessions to the EU: basically, the company is getting short of cash – relatively speaking, at least. That means it has far less room for manoeuvre when it comes to cocking snooks at powerful pan-governmental organisations.
This, in its turn, means that the EU is going to be in a very strong position over the next few years - let's hope they exploit it. A corollary is that open source will have a, er, window of opportunity to push Microsoft for much more openness, and for level playing fields in the domains where it competes directly.
But longer term, I think the situation is more worrying. By providing Yahoo with its Bing search technology, Microsoft gains huge credibility for the latter. It also acquires valuable data in terms of what people are searching for and what they click, both of which can be fed back into the Bing machine to improve it.
I would also expect to see more Microsoft technologies rolled out across Yahoo sites – in particular, Silverlight. That's definitely bad news for open source, since it is patent-encumbered and very closely tied to Microsoft's other products. There may well be other more subtle biases introduced as a result of the Microsoft empire growing, albeit in a complicated way.
However, there could be a balancing plus side to this increase in Microsoft's weight in the search sector. Clearly, Google will be under pressure from this move, which attacks it in its heartland. That might mean, for example, that Google puts even more weight behind its own attempt to move the battle to the enemy's home turf, the open source Chrome OS.
In any case, Google is going to need to draw on the key differentiating factor of all of its products: the fact that they are based on free software. That doesn't always translate into huge code contributions, as has been pointed out many times; but it can only be for the good of the open source ecosystem if the main counterpoise to Microsoft becomes ever-more dependent on the richness and breadth of that world for its own health and survival.
How these positives and negatives work out in practice will emerge in due course. Meanwhile, one thing is certain: the big loser in this deal is neither Microsoft nor open source, but Yahoo, which has effectively become a media company, leaving the Internet technology side in Microsoft's hands. In that respect, it's a sad day for everyone that cares about the past, present and future of the online world.